Buy to Let
A guide to buying a property for investment
The Buy to Let scheme was devised by mortgage lenders alongside the Association of Residential Letting Agents (ARLA) and enables private individuals to invest in properties for the purpose of renting them out to tenants without having to pay commercial interest rates or surcharges on their mortgage. Traditionally mortgages on properties bought in order to be leased out were charged at a higher rate than mortgages on properties bought to occupy. When arranging a mortgage on a buy to let property you will need to show you have consulted with an ARLA registered agent – at Robert Oulsnam and Company we can handle all stages of the lettings process for you from marketing to ongoing property management.
Buy-to-Let is a joint initiative by the Association of Residential Letting Agents (ARLA), and the mortgage lenders. The scheme is designed to help private individuals to invest in property to let without being penalised by mortgage surcharges or paying commercial rates of interest. Mortgage lenders in the Buy-to Let scheme will take account of rental income likely to be achieved from a property.
What's so different?
Historically, borrowing on income-producing property has been viewed by lenders as a commercial proposition. So, mortgages on property to let, even for private individuals, have attracted higher rates of interest than the standard mortgages offered to owner-occupiers.
In addition, until now, rental income has usually been disallowed when assessing a borrower's ability to meet mortgage payments.
Now, the view of many lenders and all other housing professionals is that growth in the private rented sector must be encouraged. Not only does it lag well behind the private rental sectors of all the other advanced economies, the lack of choice between renting and buying is, in fact, bad for the economy and a contributory factor to the 'booms and busts' of the housing market over the last decades.
But, the change in lending criteria and the lowering of interest rates for private investors has only been made possible by the strong presence of professional, bonded letting agents in the lettings market.
What are the returns from letting property?
Gross returns - the rent received before taking account of the cost of letting - such as management fees, maintenance, service charges ground rents and insurance varies between 5% and 10%. This can be less for very expensive properties.
The average rental return in this area today hovers around the 5-7% mark, and capital appreciation is likely to match inflation for the foreseeable future over a period of years.
As a rule of thumb, the gross rents should be between 130% and 150% of the monthly mortgage payments.
What difference does a Letting Agent make?
Buying a property to let is not the same as buying your own home. Mortgage lenders will want to know that an ARLA member agent has been advising on the selection of properties suitable for letting.
The experienced agent will know the local market, whether there is a demand for say, two-bedroomed flats, or four bedroomed houses, or for properties close to schools or transport links or secluded properties with gardens. Also the agent will know the standard of decoration, furnishing, fixtures and fittings required.
Then there is the selection of well-covenanted tenants who will pay their rent on time and leave the property on time and in a proper state; and there is the management of the tenancy. Knowing that the management of any inherent risk is in the hands of a professional agent enhances the creditworthiness of Buy to Let propositions put to mortgage lenders. Robert Oulsnam & Company are members of ARLA and specialise in this area.
How to Buy-to-Let
Armed with suitable advice, Buy-to-Let investors can start on a property search; or a letting agent may do this for them, instruct their own sales department or work regularly with the best estate agents in their area.
Once a property has been found, the letting agent will confirm whether or not it has letting potential, the range of the likely rent that can be achieved in current local market conditions and advise on the need - or otherwise for re-decoration and new fixtures and fittings to attract good tenants and to reduce the risk of lengthy void (empty) periods.
For some years now, residential property has been seen to be a first class investment, offering good returns, steady capital growth and security. Other types of investment have proved much more volatile including shares although the latter is still the favoured route for pensions.
How are mortgages arranged through the Buy-to-Let initiative?
Broadly, there is little difference between arranging a Buy-to-Let mortgage for investor landlords and a standard mortgage for owner-occupation. Buy-to-Let mortgages are subject to the usual status checks. Loans can be arranged for terms of between five and 45 years and for up to 80% of the value of the property.
Through the Buy-to-Let initiative, rents achievable from an investment property can be taken into account, provided an ARLA member agent is to be responsible for letting and managing the property.
The Do’s and Don't’s of Buying to Let
DO Think of buying to let as a medium to long term investment
DO Seek advice from Robert Oulsnam & Company on local market demands
DO Get your sums right. Will the rent cover borrowings and costs, after allowing for void periods?
DO Decorate, fit out and furnish to high quality standards, especially kitchens and bathrooms to attract the best tenants and let quickly every time.
DO Use Robert Oulsnam & Company as your letting agent. They are bonded, hold Professional Indemnity Insurance to required standards, have staff trained to ARLA's competency standards and are kept up to date with the latest legal and regulatory requirements.
DON'T let personal taste cloud your judgement. Be sure the property you choose meets market requirements.
DON'T Purchase anything with potential maintenance problems like a lot of woodwork or large gardens. It will add nothing to the rental value and cost a lot to keep up.
DON'T Think that the running of an investment property to let can be left to friends or relatives in your absence. Tenants require a full management service.
DON'T Use off-the-shelf tenancy agreements from HMSO or law stationers, or forget to issue the right notices or fail to have a proper inventory and condition report made before a tenant moves in. Leave all documentation to a professional agent.
DON'T Furnish with second hand furniture or cast-off soft furnishings. These will probably contravene the Furniture and Furnishing Regulations.
DO HAVE Professional Indemnity Insurance to required standards, have staff trained to ARLA's competency standards and are kept up to date with the latest legal and regulatory requirements.
What happens after Buying to Let?
We will introduce and vet prospective tenants; prepare the tenancy agreements; advise on and arrange inventory and condition reports and changes to utility accounts and Council Tax; collect the rent and pay the balances to the landlord's account.
We can also pay bills on behalf of the landlord and regularly inspect the property, recommending, overseeing and accounting for necessary maintenance, repair and re-decoration.
Are there any special conditions?
Generally, lenders will expect landlords to use an ARLA member, such as Robert Oulsnam & Company to let and manage the property and for rental agreements to be drawn up as Assured Shorthold Tenancies or other contracts as appropriate.
Can a Buy-to-Let investment be protected?
Insurance cover is now available for rental protection, in the event of a defaulting tenant, and for legal expenses in addition to the normal building and contents insurance.
What other costs should be taken into account?
Our commission and management fees, Insurance (Building/Contents/Rental and Legal Expenses Cover), the costs of keeping the property in a marketable condition, service charges and ground rents - if a leasehold. (The tenant is responsible for such items as utility accounts, Council Tax and TV licence fee etc.)
It is very important to receive professional advice in all property matters. Robert Oulsnam & Company was established in 1971 and enjoys a widespread reputation for quality service. As well as being members of ARLA we are also members of the Royal Institution of Chartered Surveyors (RICS) and the National Association of Estate Agents (NAEA).
Tax and allowances
Deductions against tax on rents received may be claimed for the costs of maintenance, such as insurance, cleaning, gardening, agent's commission and other reasonable management expenses (but not improvements).
The initial cost of furniture fittings and fixtures is not allowable, but the actual cost of subsequent replacement may be claimed; or, alternatively, a wear and tear allowance of 10% of the rents received may be deductible.
Note: This section is for guidance only. The responsibility for the financial decision to Buy-to-Let can only rest with the investor. Most letting agents will not accept responsibility for the validity of investments, costs incurred or for mortgage arrangements made, although those who are also registered as financial advisers may do otherwise. It should be noted that as with any investment, returns and capital values can go down as well as up; and the investor should be fully aware of the terms and conditions applied by the chosen mortgage lender. Letting agents must present their own written terms of business for letting and managing properties.