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Buy to let September 2004
Buying
an investment property is very different to buying a home for yourself.
There are several things you need to do to ensure you become a successful
landlord
Step
one
Buying a property to let is not something to rush into
– you need to do your research. Even if you borrow a substantial
part of the purchase price of the house, it is likely to cost you
a considerable amount to set yourself up as a landlord. Speak to
letting agents in the area where you want to buy to find out if
there is demand for rental properties, and how much income to expect.
The agent should be able to tell you about the most popular properties
and areas for tenants.
Step two
Once you have an idea of the kind of rents you can achieve
you can work out how much you can afford to spend. Most lenders
will ask that rental income is at least 130 per cent of your monthly
mortgage repayments. This means you can borrow around 77 per cent
of the expected income. Once you have an idea of this from an agent
you can work out how much you can afford to borrow.
Step three
When you have an idea of how much you can afford to repay
each month you can start looking at mortgages. Many lenders will
offer mortgages of up to 75 per cent loan to value (LTV) for buy-to-let
purchases, but it is possible to borrow as much as 85 per cent LTV.
There are lots of special offers around, so you can take advantage
of a fixed rate or discount in the early years. Bear in mind the
rental income may not rise quickly from year to year, so if you
choose a discount you need to be sure you can still make the repayments
after the special offer has ended, or if rates increase.
Step four
Together with a good idea of how much you can spend you’ll
also need to be aware of what types of property – and what
locations – are popular with tenants, so you can start looking
for somewhere to buy. Remember that you’re not buying a house
to live in yourself so it doesn’t matter if the property isn’t
the type of place you would choose to live in. It is a good idea
to look for a place that’s easy – and cheap –
to maintain.
Step five
Having found the property you want to buy, you need to
apply for a mortgage. This process will be much the same as when
you apply for a standard mortgage, but on top of the usual paperwork
you may be asked to provide a letter from a letting agent, detailing
the kind of rental income you can expect. You may also have to agree
to use an agent to manage the property.
Step six
Some lenders insist you use an agent to manage the property;
others leave it up to you. For a fee of up to 15 per cent of the
gross rental income you can employ an agent to find tenants, check
out their references and collect the rent.
The agent should also be able to help you draw up an appropriate
tenancy agreement and will help you draw up an inventory before
you let the property.
Step seven
As a landlord you will need buildings insurance to cover
the structure of the property. Make sure the policy covers buy-to-let
properties. If you are providing furniture or white goods you may
want to buy some contents cover. Legal expenses cover is another
one to consider – it will cover your costs should you need
to take a tenant to court.
Step eight
Rental income is taxable – it will be added to your
other earnings and is subject to income tax. However, there are
a number of expenses that can be offset against the rent you receive
to reduce your tax bill, including letting agency fees, mortgage
interest costs and, where the property is furnished, a 10 per cent
allowance for wear and tear.
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