What landlords should know about buy-to-let properties

Are you thinking of becoming a landlord? Buying property is a great investment, particularly if you opt for a buy-to-let home. Not only can this boost your monthly income but it can also cover your mortgage repayments. When you eventually come to sell the property, you’re likely to make a profit as well.

But like with any large investment, there are several risks and factors to consider with buy-to-let properties to ensure everything goes smoothly. Here we discuss some of the most important things to think about, including your responsibilities as a landlord.

What type of mortgage do I need for a buy-to-let property?

Unless you have enough in savings, you’re probably going to need a mortgage to purchase the property. Buy-to-let properties require a specific mortgage and there are different rules about what sort of repayments can be made.

What sets buy-to-let mortgages apart from your standard home mortgage is that lenders tend to focus on the potential rental income of the property when deciding how much to lend to you. This means landlords who use these mortgages tend to go for an interest-only product. Essentially, you just pay for the interest on the mortgage every month rather than the loan itself.

Once you reach the end of the mortgage term, you’ll then have the option to repay the loan using your savings or the money from the sale of the property.

How can I make money from a buy-to-let property?

To make money from your investment, you’ll have to make a profit from the regular rental income and eventually sell the home for a higher price than what you paid for it. The best way to assess the profitability of a rental is to calculate the rental yield.

A decent rental yield should sit at around 5% but this can be even higher, particularly for a house in multiple occupation (HMO). When coming up with a monthly cost for rent, it’s important to consider things like maintenance costs.

There are also various taxes that you must pay on your property, including Capital Gains Tax (CGT), stamp duty, and council tax.

How can you protect yourself as a buy-to-let property?

When starting out as a landlord, there are three different types of insurance that you’ll need. This includes specialist landlord insurance, contents insurance, and buildings insurance.

Landlord insurance can provide financial security in the case of accidental damage, liability, and loss of rent. It can cover other areas too, depending on the policy. While optional, it’s important to consider having it in place, as regular home cover may not offer the protection that you need.

Contents insurance is what will cover the fixtures and furniture in the property. Regardless of whether the home is furnished or not, getting some form of cover is good to protect white goods, carpets, flooring, etc.

You must take out buildings insurance in order to secure a mortgage on the property. This covers you if the property is destroyed or damaged and requires building work to be carried out.

What are my responsibilities as a buy-to-let landlord?

When renting out your property to people, you have certain legal responsibilities that you must adhere to. First of all, you must create a tenancy contract, which should outline how much rent tenants are expected to pay, who is responsible for repairs, and the notice period for eviction.

The most popular type of contract is called an assured shorthold tenancy (AST). This gives renters a legal right to live in the property for a rolling term or fixed duration, which is typically six or 12 months. An AST should also include details regarding when rent can be increased and the deposit protection scheme.

As with any property, you must ensure it is safe for habitation, and that any structural and exterior repairs are done before the tenancy begins. Additionally, the heating and water systems need to be maintained and all gas and electrics should be safe.

A new regulation that has come about over the last few years is to make sure the property is at a certain energy-efficiency level. If your property has an Energy Performance Certificate (EPC) rating of below E, then you must improve it before you are allowed to rent it out. 

There’s a maximum amount you need to spend but bear in mind that the more energy-efficient the property is, the cheaper it will be to run.