Buy to Let beginners Guide

If you are new to Buy to Let, you will want to know what costs you might expect to face. There are three main categories:

  1. Purchase costs
  2. Finance costs
  3. Running costs

Property investment is a business. And like any good business should, we recommend that you develop a business plan. You may of already done this, or you at least have the idea of what you want to accomplish in your head. Whatever the case, the team at Harvey Bowes are here to help you with your plan as well as advising on raising a mortgage for your Buy to Let purchases. It is also important to understand your exit route from the start – even if this changes over the years, it is still a sound business idea to plan what you are going to do with your BTL property, or properties, longer term. There is also planning for income tax, potential capital gains tax and other longer term charges you may face. Again, if you require, Harvey Bowes can help you with this all important part of your planning as well.mortgage broker cardiff harvey bowes

Purchase, Finance & Running costs

Deposit

If you are looking to raise a mortgage for the purchase of your Buy to Let property, you are going to need to place a deposit with the mortgage. Typically, in the BTL mortgage market, a greater choice of loans are available at 75% loan to value. While there are some mortgages available at higher loan to value levels, many of these are reserved only for experienced landlords and as such someone new to property investment should ideally be looking apply for a 75% loan. Many of the lenders in the BTL mortgage market are happy for the deposit to be raised from a remortgage on your own home, meaning that you can release equity that way to make up the deposit. Or, in the same way by remortgaging other BTL’s if you have a portfolio. You can of course use savings or other sources of personal cash. An increasing number of lenders are looking for proof of deposit as part of the mortgage application, so it is useful to get it ready. It may also be required to comply with Money Laundering Laws.

Mortgage Fees

Besides the monthly payments for the loan while in place, there are fees to set up the mortgage. Fees on Buy to Let mortgages are generally higher than those of residential mortgages. It is not unusual for a fee to be as much as 3.5% of the balance you borrow. In many circumstances this fee can be added to the balance of the loan; and while that may save you finding this fee from your reserves, it does mean you’ll pay interest on the fee throughout the term. There are usually deals available with a smaller arrangement fee, it is important to compare the overall cost of the mortgage for the period you intend to keep it. Your broker can help you with this and will provide a Key Facts Illustration which highlights all important material facts, including fees and charges. You will also be likely to be required to pay a valuation fee, which varys from lender to lender and on property value. It is important to keep a clear record of the fees you have paid, as these can be offset against any tax liability. Harvey Bowes will also charge a fee for arranging your mortgage. Typically on BTL this fee will be no more than £600. You will be advised of the exact amount of this fee up front.

mortgage broker cardiffOther Fees

You will also need to pay a solicitor for the conveyancing work they undertake in connection with the purchase. Plus the cost of stamp duty where applicable. It may be advisable if you are purchasing an older property, or one that needs rennovation, that you instruct a Home Buyers or Building Survey instead of a basic valuation for mortgage purchases.

Finance Costs

Once you have paid all of the above costs and completed on the property purchase, you’ll be paying interest on your mortgage. You can find information the latest rates from our best buy table on the main mortgage page. It is important to note that even if you do not get paid rent by your tenant, or face unexpected repairs on the property, you are the one with a mortgage and as such, you need to make sure you are committed to paying the mortgage. You should also plan for any void periods.

Running costs

You will also need to take insurance to at least cover the Building, but it is advisable to also protect any contents, such as white goods and we therefore recommend taking Landlords Building and Contents cover. The Buildings insurance must be in place from the day of exchange of contracts as you are liable for the property from this point. You can also take insurance to protect you from the non payment of rent. Please ask one of the team at Harvey Bowes if you require further details. If you decide to let through a Lettings Agent, factor in the cost they charge to find a tenant. And if they are managing it for you, there is a monthly charge for this service to build in as well. We find this is typically between 7-12% of the monthly rental charge. It may also be subject to VAT. Maintenance costs should also be budgeted for as well as any service charge or ground rent for leasehold properties.

Inventory Report

An inventory report is the key document that will provide details of the contents and condition of the property in the event of a dispute between the landlord and tenant. Many Landlords do not issue an Inventory Report when a new tenant moves into the property and this is a big mistake. In the event of a dispute about the condition of the property or what contents were present, the Inventory Report can act of a vital means of proof. It is also not wise for a Landlord to undertake the inventory report themselves. An independent report is much more powerful if a dispute reaches Court and comes at a relatively low cost.  A landlord can expect the property to be left at the end of the tenancy in the same condition as the start, less fair wear and tear. If it is not, the inventory will provide valuable evidence for any claim the landlord wishes to make against the tenants deposit.

Tenancy agreement

The tenancy agreement is a contract that protects both the Landlord and Tenant. Be sure that the contract you use is up to date with current legislation. If you are using a letting agent, they shoould be able to provide you with a suitable tenancy agreement. Even then, it is advisable to do your own research and check the tenancy agreement, especially if you choose to use a letting agent who is not a member of a professional association. The tenancy agreement states a number of important details, including (but not limited to) the start date of the tenancy, duration, tenant obligations in respect of the property and more. It can also contain certain conditions that you wish to apply to the contract, such as whether pets are permitted.

Deposit protection schemes

Be absolutely sure the deposit is correctly registered with a deposit protection scheme and the tenant notified as such within the correct time frame and in the correct way. Legislation is very specific on this and the penalties for not complying are costly. A landlord can be forced to repay the deposit, plus three times the amount as compensation, plus interest and if the tenant takes the landlord to court, the court fees will be covered by the landlord if found guilty. Do not assume your letting agent will do this for you, it is the landlord responsibility and the landlord is accountable.

Attracting the right tenant

The rental market is continuing to develop and in many instances tenants expectations are increasing. If your property is in good condition and well presented you may stand a better chance of attracting a good tenant. The key to finding the right tenant is to reference them thoroughly. It is wise to find a good Letting Agent to do this for you, however, make sure you undertake due diligence on the Letting Agent themselves. Are they members of ARLA or a similar association which provides guidelines for the quality of service and professionalism? Also, find out what the tenant ‘find’ and referencing process involves, as it is different from one Letting Agent to another. Letting Agents should be undertaking a credit check on prospective tenants, an employers reference and a Landlord reference to make sure they are looking after and paying rent on the property they are leaving. We also recommend referencing the previous Landlord to the current Landlord as well wherever possible. This is because the current Landlord may of had issues with the tenant and might therefore have a ‘conflict of interests’ – in other words if they give a poor reference the tenants may end staying with them, and that may not be what the Landlords wants!

It is also useful to find out if the Letting Agents requests Bank Statements from the potential tenants. 3, 6 or 12 months statements are a very good indication of how a tenant handles their accounts. Are there Direct Debits returned unpaid or is the tenant on, or over, account and overdraft limits. This may be an indication that risk of having trouble collecting rent on time, or even at all.

Making sure you get paid rent

There is no absolute guarantee of rent, but there are actions you can put in place to minimise your risk of not being paid rent. Besides thorough referencing as described above, there are also policies that can be taken out to cover the non payment of rent. Such ‘Rent Guarantee’ schemes can provide some peace of mind in the event that rent goes unpaid. It is also important to minimise rental voids and plan for them by keeping contingency funds in place to pay the mortgage and any repairs on the property in the event that a tenant has not paid rent, or that the property remains vacant.

To find out more, please contact Harvey Bowes today on 02921754150

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: