Key things you need to know if you’re thinking of becoming a landlord.

Thinking of buying a property to rent out? The buy-to-let market is currently healthy. According to the website, Buy Association, the average rent on a newly let property was 4.4 per cent higher in March than a year ago.

Buying a property to rent out can be a good way to build an asset and also generate an additional regular income stream.

However, buy-to-let mortgages are different to residential mortgages, and you will need a larger deposit. Here’s some key things to think about if you are going to buy a property to rent out.

1. Does it stack up financially?

Will the rental income you receive be sufficient to cover your mortgage payments? The majority of buy-to-let lenders will ignore your personal earnings and focus solely on the anticipated rental income. They will perform a specific calculation that can vary from one lender to the next, and which will also vary based on whether you will be a basic rate or higher rate taxpayer and will also depend on which product you select.

However, some lenders will choose to simply perform a full affordability assessment, where they will factor in your income and outgoings. This can benefit higher earners with lower commitments looking to purchase a property where the rental income might not stack up against the traditional rental income calculations.

2. Can you afford the deposit?

Unlike residential mortgages, where you could potentially get a mortgage with a deposit of around five per cent or more, with a buy-to-let mortgage, you need to have a deposit of at least 25 per cent of the property price. The more you can put down as a deposit, the more likely you are to get a better deal.

3. Choose the right location

Make sure you choose a location where there is demand for properties in that area. Good transport links will benefit commuters, so if you are choosing a flat to rent out to young professionals then this could be hugely important. Good local amenities such as easy access to shops and restaurants could also be appealing. A property in an area where there is a college or university could generate a lot of interest among students. However, be aware that some lenders may impose restrictions on mortgages for Houses In Multiple Occupation (HMOs). This means three tenants or more where a toilet, bathroom and kitchen are shared.

4. Know the area well

Choosing an area you are familiar with means you’ll know the best and worst places to buy. Buying a property near to where you live means you might be better placed to deal with any issues promptly. MB Associates’ mortgage adviser James Watson rents out a property in the area where he grew up and still lives and says: ‘If I were to go further afield I might be able to get a better rental yield, but I wouldn’t be able to deal with property problems if they arose. I chose this area because I live here.’

5. Be prepared to maintain the property

You must keep the property you rent out in good condition. You will have to carry out a gas safety inspection every year and look after the needs of your tenants. If the boiler breaks down or the heating packs up, the onus will be on you to get them fixed. You also need to install and maintain smoke alarms. You may choose to take out a homecare scheme so that a qualified tradesperson can come in and carry out repairs promptly, but again, this cost needs to be factored into your budget.

6. Make sure you’re financially prepared

Think about whether you could cope financially if you had a gap between tenants and no rent coming in. Although it’s a pessimistic and hopefully unlikely scenario, could you comfortably afford the mortgage if you didn’t have renters for six months? Having a contingency fund to tide you over could save you a lot of worry.

7. Factor in other costs

If you buy a leasehold property such as a flat then you’ll be responsible for ground rent and service charges. You’ll also need to be responsible for decorating costs, maintenance and repairs, and landlord’s insurance.

8. Decide what’s included in the rental

Will you be renting the property unfurnished and will you include white goods such as a freezer, cooker and washing machine? If not, this needs to be made clear to any potential new tenants.

9. Think about the property type

Some properties can be difficult to get a mortgage approved on, such as former council houses and new developments. Seek advice from a reputable mortgage broker to ensure you find the right lender.

10. Seek specialist advice

A mortgage broker can advise you on the right type of mortgage to suit you, but it’s also important to understand the tax implications of buy-to-let mortgages. In April 2020, the rules changed so that you are no longer able to deduct mortgage expenses from rental income to pay less tax. You will receive a tax credit instead, which is based on 20 per cent of your mortgage interest payments. It’s important to seek specialist financial advice to ensure you understand the tax implications.

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