Becoming a landlord
Buy to let properties can boost your monthly income and if the property price increases they are a good investment. 
However, there are some important considerations whether you're buying a single rental property or want to build a property portfolio 

Buy to let 

Buying property to rent to tenants is a good way to use your capital or to build a portfolio using purpose designed mortgages. Even if you work with a letting agent you’ll become a landlord when you buy property to rent. You’re also responsible for ongoing maintenance costs for your property 

Buy to let mortgages 

Buy to let mortgages are specifically designed for landlords with stricter conditions than a mortgage for your own home. You will still borrow a certain amount and make monthly repayments but you’ll usually need a minimum 25% deposit. 
 
To obtain a buy to let mortgage you must normally own your own home and earn at least £25,000 per year. The amount you can borrow is typically based on the rental income you expect to receive. Sometimes you can repay the interest on the loan each month and pay back the loan amount at the end. However, if your property price falls the sale price might not cover your loan repayment. 
 
You’ll pay 3% stamp duty on the entire price of second or additional homes including buy to let properties. This applies to all investment property over £40,000 

How much can you borrow? 

Generally, the maximum you can borrow is based on the rental income of the property rather than its value. Overall, the rent you receive should exceed the monthly mortgage repayment by 25% to 45%. 
 
For example, if your monthly rental income is £1,250 your mortgage repayments shouldn’t be more than £1,000 per month. Your lender wants to know you can still make your repayments if your property is empty between tenants. 
 
There’s often a trade-off between low interest rates and initial set up fees for a buy to let mortgage. Sometimes a higher interest rate might be the better option for you. 

The financial case for rental properties 

With higher interest rates, slow growth in property prices and fewer tax benefits for landlords it’s a fine balance. 
 
There are two top considerations when deciding if buy to let is a good option for you. First, you’ll need to look carefully at the amount of regular income you can receive. Second, you’ll need to take a view on whether you can sell the property for more than the purchase price. 
 
The profitability of your rental property, or rental yield, is the rental income you receive as a percentage of the property’s value. For example, a property worth £200,000 that’s rented for £1,000 per month gives a gross yield of 6% (£12,000/£200,000 x 100). Usually, a good rental yield is about 5%. However, you’ll also need to allow for the costs of purchase, renovations, managing tenants and ongoing maintenance. 
 
You have a property allowance of £1,000 and must complete a Self Assessment Tax return (SATR) if your income is over £2,500 after expenses. Expenses can include letting agent fees, buildings and contents insurance, utility bills paid for tenants and essential maintenance. You’re no longer allowed to deduct mortgage expenses from your rental income to reduce your tax bill. Instead, you receive a tax-credit, based on 20% of your mortgage interest payments. It’s important to keep good records of all your income and expenses, so you could benefit from the support of a good bookkeeper. 
 
You’ll pay Capital Gains Tax (CGT) when you sell your property. You can offset the cost of stamp duty, solicitors’ and estate agents' fees against your CGT bill. CGT is based on the profit you make rather than the sale price. You have an annual CGT exemption of £3,000. After this you pay 18% or 24% on your profits, depending on your tax code. You can use the HMRC’s CGT calculator to work out what this could mean for you. 
 
Before you can rent your property it must have an Energy Performance Certificate (EPC) rating of E. However, there’s a cap of £3,500 (including VAT) on how much you must spend on energy efficiency improvements. 
 
You’ll also need to take out specialist landlord’s insurance for your property. 
 
Please get in touch if you would like to take a closer look at the financial pros and cons of a buy to let property. 
 
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