Investors are attracted to low house prices, rising rents, and better mortgage deals, causing a boom in the buy-to-let industry.
With property prices increasing sharply, and rental returns rising, it is becoming popular for landlords to take advantage of high tenant demand and low supply.
Record high rents, and cheaper mortgages are tempting investors to the sector; however, those considering buying in the industry should consider the obligations of being a landlord.
First time buyers are still having difficulty getting onto the property ladder, meaning that more people have to rent in the custom known as generation rent. With short supply in this area, landlords are pushing up rents, and lenders are keen to get involved in this market.
Mortgage lending to buy-to-let investors leapt to £4.2bn in the first quarter (Q1) of 2013, across 33,500 loans, says the Council of Mortgage Lenders (CML).1 By the end of March, this market made up 13.4% of all mortgages in the UK, up from 13% in Q4 2012.1 Interest rates are also performing well, with lenders Leeds, and Virgin offering reduced rates on their buy-to-let products.
The market looks to be favouring landlords currently, but this does not mean that prospective investors will experience an easy time of their new roles. Similarly to any business, landlords will need a thorough plan and a strict budget for the costs they will face.
Investors must research to find the right property in the right location. It is also vital to determine which type of tenant landlords want renting their property. This will affect the property type and area that is most suitable.
For example, students will want to be close to their university, families could need a home near a school, and young professionals will look for good transport links.
Boom Time for Buy-to-Let Property Market
Buy-to-let landlords have many financial responsibilities, with agency, legal, mortgage, and insurance fees. Other requirements include property inventories, an Energy Performance Certificate (EPC), gas certificates, fire safety, and Portable Appliance Tests (PATs).
Stamp Duty is also required for property worth more than £125,000. Charges start at 1% for homes worth between £125,001 and £250,000.
Landlords also have responsibilities toward their tenants, predominantly to ensure that their rental properties are in an appropriate condition, with all plumbing and electrics approved by qualified tradespeople.
Tenant deposits must be placed into a Government-approved protection scheme.
Investors may also want to consider using a letting agent, who can do some of the tasks involved in renting out a property. However, they should be regulated by an appropriate organisation, such as the Association of Residential Letting Agents (ARLA).
Agency fees can vary from company to company, however, typical fees for a let-only service are a minimum of 10% of the rental income. This deal includes the agency advertising the property, finding and vetting tenants, and collecting rent.
A fully managed service, including daily overseeing of the property, repair work, maintenance, and demanding rent will cost upwards of 15%.
Some agencies are known to charge hidden fees, so it is crucial to request a full list of charges that are included in the service. Online letting agents, such as Upad and the Happy Tenant Company, could save landlords and tenants money.
Depending on how much work is involved, and location, legal fees could cost £1,000. Mortgages will differ from lender to lender, but buy-to-let mortgages continue to be pricier than residential offers, and arrangement fees can be steep.
Mortgage providers will require investors to have strong savings; however, the amount available for borrowing will hugely depend on the rental income received by the property. Local letting agents and property websites, for example Zoopla, can offer an estimate of how much rent the property will take.
Once they have determined the value of the property, lenders will require the rental income to be 125% of an interest-only mortgage repayment. For example, Abbey/Santander offer a two-year fixed rate at a 2.59% to 60% loan-to-value ratio, with a 2.5% fee. The rental calculation uses a rate of 6%, so a property would need to make at least £938 a month for a £150,000 loan.1
If a homeowner has decided to rent out their home and move to another property, they will need a buy-to-let mortgage on their previous house, and a residential loan on the new home, which requires two deposits.
It may be possible to keep the old mortgage for some time; however, the lender could charge a fee or increase the interest rate. Renting out a property without informing the bank could breach the terms of the mortgage and buildings insurance.
Investors should also take into account of possibility of rent arrears and void periods. Recent research from the CML found that one in five repossessions are on buy-to-let properties.1 An emergency fund would help protect against any of these issues.