An In-depth Understanding Of Buy To Let Investment (2024)

What Is Buy-To-Let? An Introduction

Buy-to-let means buying a property with an intent to let out or rent it out. Mostly these are residential properties but are not limited to just that and also include student accommodations and hotel rooms. Initially, in the UK only professional landlords could buy a property to rent because of how much financial health this business required. However, buy to let mortgages have now opened this option for the common public; but with some restrictions.

Different Types Of Buy-To-Let

Buy to let properties are not restricted to only residential properties. Let’s have a glance at others too. The type of property one chooses to buy has its rates and return. The Following are different categories of properties.

1. Vanilla Buy To Let Properties

Properties of this type are two to three-bed houses that have a terrace and belong to the old Victorian era. Flats are also in this category, but many lenders avoid considering apartments in high rise blocks. Investment in this buy to let is generally viewed as a pension plan strategy. The end goal of this scheme is to get rental income from tenants and earn gain on holding property.

Why Should I Invest In Vanilla To Buy Properties?

• It is a great start to invest in this kind of buy to let those who are just stepping into buy to let investments.
• About 60% of the houses are terraced, giving you greater negotiating power to choose from many.
• Mortgages are easily available for it, and one can have more choices.
• Fewer regulations are involved in vanilla mortgages contrary to HMOs.
• It is easier to manage a single-family rather than dealing with many unrelated tenants.

Increased Demand and Profitability

HMOs are very profitable for landlords, as demand for HMO property is always quite high. The market is putting pressure on the landlords to meet its growing demand. Students and professionals prefer HMOs as they are more affordable and fit their lifestyles. Individuals of this consumer market are compelled to find a shared house because of the initial large deposit and living cost. On the other hand, landlords find it an opportunity to rent out bedrooms to different individuals rather than rent a whole house to a single-family.

Management Complications

HMOs are attractive for their high rental yield, but one should be ready to face its complications.

• Since in HMOs you are dealing with a higher number of tenants of unrelated backgrounds, it is hard to operate an HMO.
• Finding the right blend of people for your property is the main concern when renting HMOs. So fewer chances of disputes and clashes are expected.
• When unrelated people share accommodation and live together, there are higher chances of disputes among them. In case of any conflict among your tenants, you would be required to settle the issue whether professionally or legally.
• Owning HMOs also brings greater legal duties and responsibilities such as you must ensure fire safety by setting smoke alarms, and fire extinguishers.
• Since HMOs have the highest turnover so re advertising, screening, and finally letting out the space to the tenants makes life very complicated and uncomfortable.
• HMO self-management is both time and energy-consuming. You have to keep it filled with tenants. Also, ensure the cleanliness of the communal areas and visit regularly to solve daily issues.

HMOs Location

If you are thinking of investing in HMOs, we suggest you find an area for HMO property based on the following things.

• Rental yield
• Demand for HMOs in that locality
• Supply available in the market
• Competition in the market

It is suggested to invest in buy to let near you, so it will be easy to manage. Or you will have to incur an additional cost of hiring an agent.

Rental Yield

Rental yield by an HMO is more significant than another buy to let properties, and sometimes it is even double. One can easily gain 10% – 15% of gross return. It takes more of your energy and time because of its nature. You might need an agent if you have many HMOs operating.

3. Multi-Unit House

It is a single building block consisting of many flats, each rented out separately. But the title owner for the whole building is one. It can be called a multi-unit house, multi-unit building or block of flats. It can have many configurations, i.e. apartments can be above one another or beside each other. A multi-unit house is different from HMO where separate rooms are rented out, while in multi-unit, a single flat is allotted to the tenant. There can be consent on sharing some part of the building like hallway or building garden.

Investment in a Multi-Unit Property

Renting out different flats to different families is much more beneficial than renting out a whole house to a single-family. It brings more rental yield if managed successfully. Financing for this type of buy to let requires a high deposit amount. Only a few lenders provide mortgages for it, and its rates are higher than other properties. Thus its mortgage is not easily available.

Some of the advantages and disadvantages are described below.

Advantages

• Multi-unit is a good investment if one thinks of investing in property as it brings a high rental yield.
• Also, the demand is high, and tenants looking for cheaper accommodation prefers a multi-unit instead of a separate house.

Disadvantages

• A higher deposit is required.
• Only specialist lenders offer to finance this kind of property.
• Higher mortgage rates and maintenance costs are expected.

4. Multi-Lets

Multi-lets are houses that are rented out to multiple tenants. HMO and multi-let are similar because they share some features. But the difference is that it does not require any license for its operation as it is essential for HMO. Also, HMO has specific rules that vary from area to area. In this type of property, a lender can base the rental income on single or one family AST or multiple ASTs for each tenant.

Key Points When Considering Multi-Lets

• If you are thinking of stepping into multi-lets, it is attractive for its higher returns. But be prepared for higher deposit, additional costs and legal fees.
• Since there is a thin line differentiating multi-lets and HMO, so look for counsel if your property needs an HMO license. You might need it if your property has more than two stories and five tenants. So you need to budget for the license fees.
• Since this kind of accommodation is suitable for students and young professionals, so invest in a buy-to-let that is in close proximity to universities or public transport as it favours their lifestyle. Look for the type of property, seeing its demand in that area.
• Also, consider time management; multi-lets take more time than single lets. It also depends on how far it is from your residence. Or you might need an agent to run it, which is an additional cost.
• You must know that turnover by tenants in multi-lets is higher than those rented out to a single-family. Because students can leave once they are done with their studies, professionals can also cancel the contract once they switch jobs or are fired.

5. Semi-Commercial

As the name depicts, semi-commercial properties consist of residential and commercial elements. An example can be Flats or residential blocks that are structured above the shops and offices. Buildings where the ground floor is specified for commercial use and above floors for residential use fall into this category. Businesses where employees are required to stay on the site qualify for this sort of property type such as pubs with self accommodation.

You will have to get a semi-commercial mortgage whenever you buy to let a property that has both the residential and commercial aspects. The yield depends on the occupier strength of the commercial block of the property. In contrast, the residential section of the property yield depends on residential values in the area.

Lenders commonly offer up to 75% loan to property value. It is still considered a commercial mortgage, and lenders will ask for the business plan for the commercial section of the property. Or if you are not using it for commercial purposes, you have to state the expected returns from rental income.

Is It Still Worth Buying?

Investors need to know the new rules before they go to buy to let investment and expect money to fill its bags. It can be said that initially buy to let was very profitable for the less cost but taxes associated while new laws have brought more complications than reliefs. Let us dive deep into what you should be aware of before investing in buy to let.

3% Stamp Duty

Since 2016, the new legislation has made landlords pay an extra 3% stamp duty bill on purchasing a second home. For example, an investor buying a second home worth £500000 will be paying an extra amount of £15000 compared to someone who buys their own home.

Changes In Mortgage Interest Relief

Before 2020, investors could deduct mortgage expenses before paying tax on rental income to reduce their tax bills. However, according to new rules, investors will be receiving 20% tax credit against their mortgage interest payments. The tax credit is 50% less than what higher taxpayers were originally benefitting from, that is 40% mortgage interest tax relief on mortgage payments. The new rules were not suddenly imposed but have been gradually introduced and implemented since 2017.

Video: All you Should Know About The New Buy-To-Let Tax Rules For Landlords

Fees And Costs Associated With Buy To Let

Buying-to-let has some legal fees and operating costs. Some are one-time payments, while some are periodic. A mortgage is not the only cost associated with it; you need to include the below-mentioned costs to calculate the actual return.

• Initial deposit
• 3% stamp duty
• Gas safety certificate
• Energy performance certificate
• Property management fees
• Costs for screening applications/tenants
• Periods of Vacancy
• Essential maintenance costs
• Legal fees
• Emergency expenses
• Landlords’ insurance
  

Expected Returns And Rental Yield

Buy to let market consists of many property types respective to its buyer audience. Thus, its demand, costs, revenue and profitability differ. Here is the average rental yield by area in the UK that might dictate you choose the investment location.

Property prices, rents, and costs all differ from place to place. But trends of the past few years show that north and north-west cities of the United Kingdom are good for property investment. Thus, buying in the top 15 cities is a good decision. It will not only cover the costs but give good returns.

Buy To Let Mortgages

Taxes

There are certain taxes you pay on your buy to let investment. We have covered it all.

1. Tax on rental income

It is one of the first things you must be aware of before investing in buy to let. You will have to pay a tax on your rental income. Some costs can be deducted before you pay rental tax. It includes agent fees, building structure and its contents insurance and bills if you pay for the tenant.

2. Capital gains tax

Property gains some appreciation in value with time, so you get profit when it’s time to sell. You will have to pay capital gain tax on the gains you get on holding and selling the property. There are some allowances people can enjoy in this case; the first £12,300 is profit is free of tax. It means investors only pay on profit that exceeds the said amount for the tax year 2021/2022. In case you own property along with your spouse, the allowance will be doubled to £24,600.

3. Stamp Duty

An additional 3% stamp duty is incurred on properties other than the home you are living in. It is implied on the investment property that exceeds £40,000 and levied on the full price.

Investing In Buy To Let Through A Limited Company – Is It Good?

Thinking of buying to let property through a limited company has different complications than buying as an individual. There are pros and cons of purchasing a buy to let property in the business’s name.
Let us be clear on a private limited company; it is a separate entity with its own assets and liabilities. The shareholders and directors are not liable for any loss if the business faces bankruptcy for its limited liability nature. you can avail multiple tax reliefs if you decide on buying property through a limited company.

Tax Relief

You only pay income tax on rental profits if you are personally owning the property. The rental income will be considered your personal income and will be added to the total income amount pushing you over to a higher income threshold. A higher-income threshold means a higher tax band that you can avoid if you own a buy to let through a limited company.
If you own property through a limited company, you will only be liable to pay corporation tax that itself stands at 19%, way below the tax you may owe otherwise.

Assets Protection

Buying through a limited company is a better option if you want to protect your personal assets in case of any mishap in the market or bankruptcy. If something bad happens to the business, your finances and all assets outside the company won’t be at risk as you will not be liable to compensate for any losses.

Disadvantages Of Owning Property Through A Limited Company

Corporate Costs: Are You Ready For That?

Just like having advantages, you should be ready to pay extra costs in the limited company structure. It includes but is not limited to starting a limited company, corporation tax, legal fees, consultancy costs, and recruitment costs.

No More Capital Gains Tax

Transferring your property to a limited company means you will not be able to get the CGT tax allowance if you sell the property. Limited companies are not allowed to claim the capital gains tax allowance of £12,300 and will have to pay tax on total profit.

Higher Mortgages Rates

Lenders find lending money to a company riskier than lending to an individual for the company’s limited liability. Thus for providing mortgages for higher-risk properties, companies are charged higher interest rates.

What Are The Risks Involved In Buy-To-Let Investments?

There is no such investment that is risk-free. Likewise, the buy to let property also bears some risks.

• Buy to let can face a fall in its value, and even this can happen within a few months. It is understandable that in the long run it will provide you with the profit, but sometimes it faces a fall in the prices for the short term that can be damaging for some landlords.
• Landlords need to be ready to handle tenants for collecting rental payments from them. It requires skill to calculate rental collection and manage risk associated with it. Also, consider that tenants can cause property damage while some avoid paying rents.
• Government policies can bring a greater change in the whole industry. It may reduce your income like mortgage interest tax relief, which has recently been changed and reduced profits on property investments.
• Besides being responsible to their tenants, buy-to-let property landlords have some regulatory obligations. Investors need to get some licenses like HMOs license to operate and bear other compliance costs.

Buy To Let Investments Tips And Advice

Buying property has become a popular investment for its less volatility and high returns in the long run. Purchasing to let is a cost-intensive decision that requires research and cost-benefit analysis. Before buying to let, go through our most important tips and advice.

1- Choosing A Property

Try to look for the property based on the prospective tenant. It is recommended to buy a modern or fresh property. It is not only attractive to prospective tenants but has fewer maintenance costs. You might need to look for any shared accommodation for students and a two-three bed flat for a couple or family.

2- Where Should I Buy The Property?

Look for a flat or multi-let that is attractive to the tenants. Remember, you are buying the property to let it to others, so it does not necessarily need to be near you but should be easily accessible in case of emergency. If you are not near the rental property, you would be required to have an agent to manage your property.

Also, look for the type of people residing in any tenancy, see if those are professionals, students or families. It would help you to choose the type of property. To make it easier for you, decide based on the idea that it is not the property for your personal use. So, find and buy property accordingly.

3- Insurance For Your Property

As a landlord, you must secure the property and its contents by insurance. For most lenders, It is a must thing when getting a mortgage deal. Moreover, it can cover your loss or damage made by the tenants or any unpleasant event such as fire or flood. It is suggested to look for any expert insurance agent who can buy you a better policy based on your circ*mstances. You can also look for plans to cover the rental payment if the tenant does not pay.

4- About Tenants

FAQs

Conclusion

Investing in buy to let property can be profitable but also holds risks in some aspects. This comprehensive guide will let you have complete insight on buy-to-let investment, tax implications, costs, tax reliefs, and mortgages. Only you can decide whether you want to opt for this investment option or not. It might involve risks but you can easily mitigate them with the right guidance. If in doubt, consulting your accountant and letting agents in the area will help you understand all possibilities.

Jibran Qureshi

Managing Director

+44 (0)207 117 2639

info@chacc.co.uk

chacc.co.uk

Author Bio

Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.

Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.

Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.

Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.

Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for its clients. He is of the firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.

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