In August 2018, one of the Bank of England’s leading policymakers predicted that interest rates would remain low for the next two decades. Therefore, investing money in shares or private pension schemes no longer provides a solid path to long-term financial security (unless you are prepared to take substantial risks). One way to turn low-interest rates to your advantage is to purchase a buy to let property and become a landlord.
Whether you purchase one or two rental properties or commit to building a portfolio, entering the buy to let market takes planning, knowledge, and an ability to deal with people who may act in an unreasonable manner. If you are handy with a hammer and can fix a blocked sink, all the better.
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What is a buy to let?
A ‘buy to let’ property is one which is purchased with the specific intent of being rented out to tenants rather than being lived in by the owner. Since 2017, the government has stripped back on many of the tax advantages associated with buy to lets – but only if you own the property in your personal name. Those same tax advantages are still available if your buy to let is owned by your company.
Regardless of that, for those looking for a long-term investment which can ride out economic highs and lows, purchasing rental properties is still likely to prove a sound decision.
What are the risks involved with a buy to let property?
There are no investments that are free from risk. Although the risk of being hit by a rise in interest rates seems unlikely, there is no guarantee things will not change in the future. Therefore, when you are calculating your figures, make sure you factor in a 2-3% increase in interest rates to ensure you can financially cope with such an event.
Fluctuations in the property market also pose a risk to buy to let owners. If you are investing for the purpose of providing an income in your retirement, this risk is mitigated by time. For example, in November 1980, the average price of a UK house was £20,897. Thirty-nine years later, the price has increased to £234,370. So, if you are in for the long haul, you conclude that it is a safe bet that your capital gain will increase. However, if you are looking for a property that you can buy cheap, do up, and quickly sell for a profit, your vulnerability to the highs and lows of the housing market are far greater.
Then there are the tenants. Most private tenants are fantastic. But some are, to put it bluntly, so horrid you may wonder if they have been sent to punish you for something terrible you did in a previous life. We talk about how you can protect yourself against a tenant from hell further down.
What are the advantages of a buy to let property?
There are two main advantages to investing in a buy to let – rental yield and capital gains. You need to work out which one of those is most important to you before you start looking for a property.
1. We have huge experience – in the last 20 years, our team of solicitors and licensed conveyancers have helped well over 10,000 people just like you buy property.
2. We are one of just 3 Progressive Approved Solicitors nationwide, formally recommended by Progressive Property – the UK’s largest property investment education company.
3. We really understand property investors. Senior Partner, Tim Bishop, and other members of the property investment team, are developers and investors themselves.
4. We are not just conveyancing solicitors. We can help you with all aspects of building a buy to let portfolio. our commercial solicitors can help you with loan agreements and setting up companies and joint ventures. Our dispute resolution team can help you with the disputes or litigation. If you are buying flats – then you may well need to extend short leases or consider buying the freehold. Our 5 strong leasehold team deal with this work all the time – they are one of the most specialist and largest specialist teams nationwide.
Click here to read more about our Commercial Solicitors, our Dispute Resolution, Lease Extension and Leasehold Enfranchisement teams.
5. We can act for you wherever you property is based in England and Wales – by phone or email and video call.
Click here to read more about our Property Investment Solicitors
What is rental yield – and why is it important?
Let’s look at rental yield. This is the income generated from the property expressed as a percentage of the property value. If passive income is important to you, it makes more sense to purchase a property in a less expensive area. You may not make as much money if you sell it, but the mortgage payments may be low enough that you can overpay through the rent alone and clear the mortgage faster. Once you are debt-free, the entire rent is passive income for you.
A solid rental yield is around 5% per year; however, Houses in Multiple Occupation (HMO) can provide a yield of 12-15% per annum.
How does capital gain work?
A capital gain is the increase in the value of a property over time. For example, if you bought a buy to let for £205,000 in 2011 and sold it nine years later for £330,000, the capital gain is £125,000. If capital gain is your goal, location is king. You will need to pay more for the property, so thorough research into the potential of the area is essential to limit your risk.
Should I buy a flat or house?
There’s no right or wrong to this one. It depends on the area, local demand and your preferences. But you do need to know about the difference between freehold houses and leasehold flats – click here to read more about should I buy a leasehold flat
What are my legal responsibilities as a landlord?
As a landlord, your responsibilities do not end when you hand over the keys to a tenant. You have legal duties regarding the following:
Right to rent checks
Since 2016, all landlords and letting agents are legally responsible for checking that tenants who live in the property they own or manage have a legal right to live in the UK. If you know or have reason to believe a migrant is residing in your property illegally, you can be criminally liable.
To conduct a compliant Right to Rent check, you must:
· Ask to see documents which show the prospective tenant has a right to live in the UK. This could be a passport or visa. If it is the latter, make sure you check the valid to and valid from dates. People from countries in the European Economic Area (EEA) benefit from freedom of movement and do not require a visa. This will change if the UK formally leaves the European Union.
· Check the documents for genuineness, preferably in the presence of the prospective tenant.
· Keep a copy of the documents and record when the check was made.
To mitigate the risk of a discrimination claim being brought against you, make sure you conduct a Right to Rent check on every potential tenant, regardless of their nationality.
Deposit Protection Schemes
You or your letting agent must put the deposit you receive from the tenant into a government-backed tenancy deposit scheme. Failure to do so can lead to a fine. You can choose either an insurance of custodial scheme. An insurance scheme means that you will keep the deposit and pay interest to the insurer providing the cover for it. Under a custodial scheme, you pay the deposit directly to the scheme operator who will keep it for you free of charge.
The deposit must be placed in a scheme within 30 days of receipt.
As a landlord, you must ensure there is a working fire alarm on every floor of your property. If there is a room with a solid fuel burning appliance (e.g. a wood burning stove), a carbon monoxide alarm must also be placed in the room.
Furthermore, any furniture you provide must be fire safe and appliances must have a PAT (Portable appliance test) annually. If the house is an HMO, fire alarms and fire extinguishers must be provided.
Also, make sure you follow building and fire regulations if you are refurnishing or altering the property prior to letting it.
Heating and water system maintenance
No one today should be expected to live with leaks, lack of running water, or poor heating. As such, landlords are required to ensure their property has facilities for running water such as sinks, toilets, showers, water tanks etc and that the plumbing, water pipes, drainage, and sewage are kept in good order.
You will need to keep all heating and hot water systems working and in good condition. If the heating system is powered by gas it must be checked every year by a Gas Safe engineer. Electric systems should be inspected at a minimum every five years.
Repairs and maintenance
Disputes regarding repairs and maintenance of a property are extremely common. As a landlord, you need to ensure that the property is free from leaks, mould, secure, and structurally sound. However, you do not have to rush every time your tenant has a blocked loo. Common sense prevails regarding repairs – if the tenant has caused the damage or blockage then it is their responsibility to fix it.
What should be included in the tenancy agreement?
A tenancy agreement is a legal contract between you and the tenant. It sets out the rights and responsibilities of both parties.
A tenancy agreement in England and Wales can be written or verbal. Yes, you read that correctly. Under English law, verbal contracts are just as binding as written agreements. However, the terms of a verbal contract are usually incredibly hard to prove. If you want to bring a whole lot of stress and expense upon yourself, then, by all means, have a verbal tenancy agreement. But if you value your sanity, have a written contract in place from the beginning of the tenancy.
If you choose to have your property managed by a letting agency, they will have a standard tenancy agreement which they will give to the tenant.
Tenancy agreements comprise of express terms (terms specifically stated in the agreement) and implied terms (those set by law and custom).
Express terms include:
· the names of the landlord and tenant and the address of the landlord
· the date the tenancy begins and when it ends
· the rent amount, when it is to be paid and by what method
· what the rent includes – for example, council tax, water, electric
· responsibilities for maintenance – e.g. who maintains the gardens
· the notice periods required by either the landlord or tenant to end the tenancy
Implied terms include:
· the right of the tenant to quiet enjoyment of the property (e.g. without harassment from the landlord)
· the duty of the landlord to carry out basic repairs
· the duty of the tenant to look after the property and any furniture or appliances included in the tenancy
· the tenant’s obligation to allow the landlord or repair people to enter the property to do the required work
If an express term and an implied term are at odds with each other, disputes can develop. For example, most tenancy agreements will contain a clause stating that the landlord has a right to show prospective new tenants around the property from 28 days before the existing tenant quits the tenancy. However, a tenant has a statutory right to the quiet enjoyment of their property and a landlord cannot enter without the tenant’s permission unless it is a matter of life and death. In this type of situation, negotiation and compromise are the key to success, for example, offering the tenant a small financial incentive for allowing viewings.
What insurance cover must I have as a private landlord?
Private landlords should have building insurance, contents insurance for any appliances and landlord liability insurance. The latter provides cover if the tenant or a visitor to the property is injured or dies.
What are the top tips for purchasing a buy to let?
After many years advising clients on buy to let purchases, here are our best tips on being a successful landlord:
1. A reliable tenant is gold – if you have a tenant that takes care of the property and pays their rent on time, look after them. It is better to charge them a slightly lower rent than risk them looking elsewhere.
2. Redecorate after the end of each tenancy – the fastest way to devalue your investment is to let your property run to rack and ruin. Redecorate and repair at the end of every tenancy. If you have a very long-term tenant in place, build a trusted relationship with them so you can negotiate to freshen up the décor at least every five years.
3. Buy a modern property – they rent faster and are less expensive to maintain.
4. Get financial advice – buy to let mortgages tend to be harder to secure than a mortgage for your own home. You will need a larger deposit – some lenders require 40%, the fees are higher, as are the interest rates. The reason for this is risk – the lender must account for the fact the property may be untenanted for periods and you may struggle to pay the mortgage out of your own pocket. A good mortgage advisor is essential in ensuring you receive the best deal from prospective lenders. We regular work with a variety of good mortgage advisers – call us if you want a recommendation.
5. More unusual properties can sometimes provide a better bargain. However they come with risks. And that includes property bought at auction or repossessed property.
Click here to read more about buying a property at auction.
Click here to read more about buying a repossession.
Entering the buy to let market can be personally satisfying and financially rewarding if you instruct the right conveyancing solicitors and keep your wits sharp.