At a time when the buy-to-let sector is changing immensely, if you are considering becoming a landlord, there are many things you must think about before taking the leap.
Ultimately, buy-to-let is an investment, so it is vital to understand and mitigate risk, as the value of your asset could go down as well as up.
Here, we give you a run down of the eight things you must do before buying your first buy-to-let property:
- Set your goals
You may just be starting out on your buy-to-let journey, but as you begin, you must have the end in mind. This way, you can create a plan to achieve your aims.
Ask yourself whether you’re investing in property for the rental income, capital growth, as a pension pot or to pass down to your children. Once you have determined this, ask what sort of income and/or capital growth you will need to achieve this goal.
This will help you create a bespoke investment strategy that suits you. Property investment is different for everyone, so your plan needs to be right for you in order for your own goals to be realised. This way, you will avoid making poor choices.
It is recommended that buy-to-let investors consider the long-term, rather than short-term – a minimum of 15 to 20 years.
- Use a mortgage broker
If you’re not a cash buyer, you will need to look to borrow up to 75% of a buy-to-let property’s value from a mortgage lender.
As buy-to-let lending criteria are becoming stricter, it is advised that you use a mortgage broker to find out which products you qualify for.
It is also useful to be pre-approved for lending, so that when you come to put an offer in on a property, you can use your status of having finance in place to make your offer more attractive and even secure a better deal, as you can complete quickly.
- Find an accountant
It is crucial that you own your buy-to-let property in the most tax efficient manner possible. As landlord taxes are changing in the near future, you must consider whether you purchase the investment in your own name or as a limited company, which many landlords are now looking into.
There are pros and cons to either structure, but these will depend on your financial position.
A reputable accountant will help you determine the best acquisition structure for you.
This useful article gives a run down of the forthcoming changes to buy-to-let finances.
- Determine tenant demand
As a landlord, you will risk the tenant not paying their rent or being unable to find tenants to fill your property.
That’s why you must choose an area with strong tenant demand. You must assess the tenant demand in the area you are considering investing in and find a property that will suit the tenants you are targeting. This will ensure that you generate income from the onset of buying your investment property.
For example, in some areas there are too many flats and a shortage of houses, so it would be a good idea to invest in a house.
There are also two different types of tenant to consider – private tenants and those in receipt of Local Housing Allowance (LHA). Many landlords prefer to rent to private tenants, but there are ways to let to housing benefit tenants.
- Find the best mortgage
Buy-to-let mortgage lending is based on how much you borrow in relation to how much the rent will cover. Lenders generally look for the rent to cover 125% of the mortgage, however, changes may soon come into effect that will increase this to 135% coverage.
And while there are very attractive interest rates on offer at the moment, you must factor in interest rate rises. Calculate your finances with a mortgage interest rate of 5% to be on the safe side.
Once you have done this and deducted all running costs – such as your mortgage, letting agent fees, landlord insurance, void periods, maintenance, etc. – look at whether your property still delivers a positive net cash flow each month.
If your property does not have a positive net cash flow per month after all costs, it will not be an asset – it will be a burden.
- Consider a letting agent
Being a landlord may not be as simple as you think it is. There are over 100 laws and regulations that you must adhere to, to ensure that you offer a safe and compliant home for tenants.
As many landlords are also in full-time employment, you may not have time to fully manage your property and keep up to date with all the rules you must comply with. If you think you are too busy, a letting agent will be able to help you run your lettings business.
Choose an accredited letting agent and ensure both parties understand their obligations before passing responsibilities onto them.
- Get up to date with your responsibilities
The housing market is ever changing, as is landlord law. That’s why you must use a reliable source of information for your lettings business.
- Protect your investment
There is no point investing so much money and time into becoming a landlord if you do not properly protect your buy-to-let property. Just Landlords has a range of insurance products to do the job.
Our Landlord Property Insurance is rated 5-star by Defaqto and provides a host of essential covers.
If you are worried about rent arrears, our Rent Guarantee & Legal Expenses Cover ensures that you still get paid, even if your tenants default – it provides the ultimate peace of mind.
You may suffer from void periods, and Unoccupied Property Insurance is the best way to look after your investment when you cannot find tenants, need to make repairs or you are waiting to move into the home yourself.
If you are soon to become a buy-to-let landlord, follow these tips and invest wisely – good luck!