For some, letting a property is an appealing investment opportunity. For others, it can provide an economical solution to filling a room or property that is not currently in use. Either way, a number of considerations need to be made when preparing to let a property:
Whether you are purchasing your first buy-to-let investment or expanding an existing portfolio there are many aspects to consider, to ensure you maximise the potential return on your investment. You may wish to seek guidance from a letting agent when choosing the location of your investment, deciding on the right market to target, fully understanding UK legislation and how to protect your investment.
Arranging a second mortgage for a rental property is often more expensive than a typical residential mortgage. These mortgages are called buy-to-let mortgages.
Buy-to-let mortgage products require different criteria than a typical residential home mortgage. If the property you intend to let is a second property and you are not buying it outright, you will require a buy-to-let mortgage.
Lenders usually charge higher administration fees and the interest is also generally higher. Buy-to-let mortgages also typically require a larger deposit, often around 40%.
For more information on buy-to-let mortgages, see our guide or talk to a mortgage and protection adviser.
If you are looking to buy a second home to live in, and let the one you move out of, a residential mortgage will be required for your new home, and your previous home’s mortgage will need to be changed to a buy-to-let mortgage, unless you are buying the properties outright.
Talk to a KFH mortgage and protection adviser or your bank manager for more information.
Buying a property as an investment
The property market moves at a fast pace and there are generally intermittent periods where prices rise or fall. When you buy a property and it appreciates in value, the profit is referred to as the capital growth. If the money received in rent is greater than the cost of owning and managing the property, a profit can also be made through rental income. Rental income is subject to income tax, and any profit from capital growth made on the sale of a second property may be subject to capital gains tax.
More information can be found in our guide to understanding rental yield and capital growth.
The ratio of property value to rental value is inconsistent and the highest valued properties do not necessarily command the highest rental yields, so you should speak to a property investment expert to get suitable recommendations based on whether you hope to get a high rental income, a high capital growth, or a balance of both.
For more information on rental valuations, see our guide to valuing your property.
From 1 April 2016 anyone purchasing an additional residential property such as a buy to let or second home will be charged a 3% surcharge on each of the stamp duty threshold bands. To find out more and see how much stamp duty you might have to pay, use our stamp duty calculator.
Choosing the right property and finding a tenant
Letting and managing a residential investment property requires knowledge, time and maintenance in order to maximise its full market potential and ultimately attract a healthy return. So, if you are intending to manage your own property and tenants, you may need to consider the proximity of your rental property. This is important, as you will need to make yourself easily available to your tenants and be able to quickly and efficiently deal with any necessary maintenance and upkeep that may be required to your property. However, if you engage a letting agent to manage your property it will not be essential for you to live nearby - your managing agent will take care of the maintenance works, rent collect, carry out twice yearly property inspections and handle all the administration surrounding the property and tenancy.
Different properties appeal to different tenants, so if you are buying to let, you may want to begin a search for a property with your ideal tenant in mind. Whether the property is furnished or not will help determine the rental value and if furnished, the quality of furniture and fittings should reflect the expectations of the target tenant.
Once the property is ready for occupancy and the rental value has been determined, it is ready to be marketed to a suitable audience, and any prospective tenants should be vetted. This is another area where a letting agent will be able to help.
More information can be found in our guide to finding the right tenants.
Collecting rent and taking a deposit
Once a suitable tenant has been found, your letting agent will draw up a tenancy agreement denoting the size and frequency of the rent, the deposit details, length of tenancy, inventory as well as the landlord and tenant obligations. The tenancy agreement will also need to include the required length of notice for either party to terminate the contract, key contact details and details of the utility suppliers.
The deposit that is handed over from the tenant when they move in usually amounts to between one month and six weeks’. Generally, it is recommended the funds paid prior to the start of tenancy, should be no less than six weeks. This covers the last month’s rent if the tenant does not pay and the deposit will cover any dilapidation. This deposit needs to be protected by a government approved Deposit Protection Scheme within 30 days of its receipt. For more information, see our guide to taking the deposit and moving tenants in.
Other considerations for landlords
As a landlord you will need to consider the following when you let your property:
- Landlord insurance - general home and contents insurance will not be sufficient
- An Energy Performance Certificate (EPC) will be required before the property can be remarketed. EPCs need to be carried out by an accredited assessor and each certificate lasts for ten years. If the property is to be let under an assured shorthold tenancy then the energy efficiency rating for the property must be between A-E, unless an exemption applies and the property is listed on the PRS Exemption Register. From 1st April 2020, this will apply to all privately rented properties let on assured shorthold tenancies at that time. Many lenders will not loan money for a property with an energy efficiency rating or F or G.
- Putting aside some of the collected rent for contingencies can help cover the costs of any unforeseen repairs, which are a landlord’s responsibility to resolve or for vacant periods in the property
- If the rental property is a leasehold property, you should seek the permission of the freeholder before letting. You should also inform HMRC of your new revenue stream
- Becoming accredited by the National Landlords Association (NLA) offers a number of products and services designed to help private landlords. If your letting agent belongs to Association of Residential Letting Agents (ARLA) and London Rental Standard (LRS) this will give prospective tenants peace of mind when choosing your property over other potential properties
- If the property is mortgaged, you will need to inform your lender. The lender may increase the interest rate payable if the loan is not buy-to-let
- An inventory – this must be carried out by a professional, independent inventory clerk. Without a check in report at the start of tenancy and check out at the end, it will not be possible to claim against the deposit for loss or damage to or within the property
- A 12 month gas safety check must be carried out by a qualified and registered engineer to ensure you are compliant with safety regulations. A copy of this safety certificate must be supplied to the new tenant before the tenancy term begins and within 28 days of any annual test during the tenancy
- You have an obligation to ensure all the electrical equipment is safe and some circumstances this will involve testing
- If you used to live in the property you are planning to let, you should arrange for mail to be redirected to your new address through the Post Office
For more information about compliance for landlords, click here.
Kinleigh Financial Services undertakes credit brokering and is not a lender.
We do not charge for our advice. Instead, we simply charge a fee for arranging your mortgage of up to 1.5% of the mortgage amount. A typical fee is £399. We will not charge a fee to existing clients for arranging a residential re-mortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.