Buy to Let

As working patterns change and people become more mobile, demand is high for rented property and short-term lets. In the last few years this gap in the market has been filled increasingly not by big landlords, but by individuals buying one or more properties, in addition to their home, as an investment and letting them out to cover the cost of the loan.

Many lenders now offer tailor-made packages for just this market. You can now get a buy-to-let mortgage at interest rates to suit almost any circumstances. These include fixed rate mortgages, discount mortgages and tracker mortgage deals - and are often highly flexible. The big difference compared to a standard home loan is that most lenders won't just take your salary into account when assessing eligibility. Potential rental income from the property is often also included in their assessment.

Please note that Buy to Let mortgages are not currently regulated by the FSA.

Why buy to let?
Choosing a property
What will it cost?
What are the risks?
Buying to let as part of your portfolio

Why buy to let?

Property is an excellent long-term investment, with the potential to offer good income and good growth. Capital growth in property in the past 25 years has exceeded just about any other field, particularly in the south east of the United Kingdom.

Although this cannot be taken as an absolute indication of the future of the property market, which is highly unlikely to continue to rise so dramatically, property values are still on the increase in most areas.

However, fluctuations in the market and the delays inevitable in selling a property make it an unsuitable choice for anyone needing short-term returns, or who might need to access the money tied up in a house quickly.

Many people invest in a buy-to-let property as a pension - the rent each month can be used to supplement your retirement income, or the property can be sold and the proceeds used as a nest-egg.

Choosing a property

Location, type and state of the property are the three most important factors to look at - good research is vital. Is the property close to transport links? Is there parking? Is it close to amenities, such as the shops and leisure facilities? Don't just be guided by your own preferences - ask a local agent for advice on what's in demand in the area. In some places family homes are in demand, but in others a one-bedroom flat may be more easily let.

Most tenants have high standards these days - modern bathrooms and fitted kitchens are essential. There is a demand for unfurnished property, but showers, fridges and washing machines are now expected as standard. It is worth paying extra for a property in good condition, unless you have the time and resources to refurbish it.

You might choose a fantastic location for your immaculate property but still be unable to let it due to unfavourable market conditions, or just lack of demand. To cover your mortgage payments and make buying to let a successful investment you need to keep your property rented as consistently as possible. Make sure your research covers local demand for rental properties and an assessment of future demand, to be as certain as possible that you will be able to let your property.

The Association of Residential Letting Agents produces a booklet giving you tips on what to look out for when choosing a buy to let property. Their site also has guidance and advice for both first time and experienced landlords.

What will it cost?

Mortgage rates are not the same as in the residential market - lenders consider buy to let a greater risk and demand a greater return, so their buy to let rates can be up to one percentage point higher than residential rates. The deposit required is also higher. Most lenders ask for at least 20% of the value of the property, and this can rise to 50% on properties valued at £1 million or over.

You will also have to pay for the survey and legal fees, as with any property purchase.

There may also be service charges to consider in a leasehold property. If you plan to let furnished, you will have to allow for the cost of buying reasonable quality basics - strict fire regulations prevent you using cheap second-hand furniture.

If you plan to use a letting agent, you will have to factor in that cost as well - fees can be between 15 and 20% of the rent.

Don't forget to add on the cost of insurance - not just for buildings and contents, but also against loss of rental income if the property stands empty, possible damage by tenants or for legal fees if you need to evict a tenant.

Any rise in the value of a rental property, unlike your home, is liable for capital gains tax. Each individual is allowed £8,200 income taxfree per annum - £16,400 if you are married (you should check these allowances as they change each year). This constitutes your total Capital Gains Tax allowance for the tax year and assumes that you have not used up the allowance on other capital gains.

However, you will be able to set some of the maintenance and running costs off against tax. Mortgage interest payments, for example, can be set against rental income.

What are the risks?

As with all investments, the value of a property can go down as well as up - and unforeseen structural problems prove expensive. However, if you pick the right area and are realistic about returns, you can reduce the risks.

Rental income too can vary: if the market is saturated with rental properties, your annual income may remain static or even fall. You need to build leeway into the rent to allow for periods when the property might be empty between lets (it takes on average four weeks to let a property), and to cover maintenance costs.

The more cautious investor might prefer to borrow less - you should aim for a rental income of between 1.3 and 1.5 times the monthly mortgage payments.

Many people are put off buying to let by the thought that they will have to spend a lot of time sorting out problems such as broken washing machines or tenants who default on payments. A good agent can take care of everything, from finding tenants and checking references to managing an inventory and dealing with unexpected problems like burst pipes.

Agents can also advise on tenancy agreements. Most lenders require you to have a six-month, assured shorthold tenancy agreement with your tenants. You may also find it more difficult to arrange finance if you are planning on letting to students or for more irregular tenancy periods, such as "holiday lets" or "company lets". You may also have difficulties should you be planning on letting to a DSS tenant.

Buying to let as part of your portfolio

A buy to let property can work well as a component of your investment portfolio. As a long-term investment, it's important to balance your buy to let property carefully against your other investments - both short and long-term.

Whether you will receive both an income and a final lump sum from your investment depends on the size of your initial deposit and the level of your mortgage payments. If the market is over-supplied or mortgage rates rise, you could even find yourself having to take a loss on your property - hence the importance of a longer term view.

If you already have an extensive investment portfolio, it is often best to speak to an mortgage adviser about how a buy to let property might fit into this portfolio. If you've already invested in a buy to let property as part of your investment strategy, the adviser can also check that you are paying a competitive rate of interest. With fluctuations in the Bank Base Rate you could be paying more than you should - and your rents could be too high as a result, making your property less appealing to potential tenants.

The key point to remember is that buy to let is a long-term investment - you shouldn't get into property investment looking for short-term gain.