Buy to Let Mini Guide

Transcription

1 Buy to Let Mini Guide One major difference between investing in buy to let and putting your money in other financial investments is: no-one reports to you on how well your investment is performing or not. You don t get quarterly, bi-annual or annual updates from a fund manager or financial advisor. There s also no financial advisor to help review your portfolio to decide whether you should sell some of your properties to invest in others, or perhaps other assets that would deliver better against your objectives. As nobody else will look after the investment returns of your buy to let asset, you have to.

2 How successful is your buy to let investment? Working out how successful your buy to let is, depends on why you chose to invest in the first place. There are three key questions to ask yourself: 1. What did you expect to get from your buy to let? 2. What else could your invested money have achieved? 3. Are you maximising your returns versus the risk you are taking? Whether you invested your cash in one property or a hundred, there must have been a reason for doing it. Most buy to let investors will say things such as: boost my pension buy a property for my kids help fund my kids through university achieve financial freedom While those are all good reasons, none of them can be regularly measured, from a financial investment perspective. You need to turn these desires into specific financial objectives, for example: I want to boost my pension. To achieve this, you need to know how much your pension is going to be and be clear about the level of pension you want. You can then work out by how much you re going to have to increase it. Will you need an extra 500 per month? An extra 3,000 a year? Then you need to have an idea of how you re going to create that additional pension income. Will you take net income from renting the property, sell the property and re-invest the capital or keep the asset and just draw down on the capital/equity?

3 To help you decide which route to go down, you need to be able to estimate how much the rent will grow in value each year and what capital growth you can expect from the property. I want to buy a property for my kids. If you re looking to invest in a property so your kids always have somewhere to live, are you going to buy in the area where they re likely to end up living? Or are you happy to buy any property and then sell it to raise the funds for when they find somewhere themselves? What you need to measure on an annual basis in a case like this is: Is your property going to cover its costs including the cost of your time throughout the investment? If you have any excess income, are you going to use it to pay off some of the mortgage to boost the property s equity? Is the capital growth of the property you invest in keeping up with the rise in property prices in an area where your kids do want to buy? More importantly, have you worked out how much you ll receive if you sell the property, after any tax you might pay? And is this money going to be enough to fund the deposit for your kids to buy another property, or at least enough to make a significant contribution towards one? Once you have an idea of what actual income and capital growth you want and need from your investment, then you can start to calculate whether your property is delivering against the financial objectives you ve set.

4 How do you estimate what your property portfolio will deliver over time? There are two key factors you need to consider when checking what your property will deliver: timescale and inflation. Firstly, how long do you want or need to invest for? Most investors have a specific deadline by which their investment has to achieve their objectives, such as when children go to university or when they hit retirement age. So, for example, if you want to boost your pension, how long is it before you ll need that money? If it s 20 years and you know you ll want/need an extra 500 per month, then work out whether you already have 500 net per month now. If you don t, then look at what your rent and costs will need to be to secure that much net income. You may be able to achieve it by increasing rent and/or reducing costs, or you may need to look for another property investment that will give the returns you need. To work out what your rent will be moving forward, you need to look at how much it has increased over the time you ve owned your property. If you haven t owned for very long, then talk to local letting agents to find out how much rents have gone up or down - by over the last five to ten years. Once you have an estimated annual rate of increase of rents for the last five to ten years, apply that forward. For example, if rents have gone up by 2% on average every year, apply that increase over the next 20 years. The same estimate also works for capital growth. Find out how much your particular property type (e.g. flat, terraced, detached, etc.) has increased by over time. You can find sold property prices in the House Price Index on the Land Registry website (landregistry.gov.uk), which holds data for your local area from as far back as If the average capital growth is, say, 5% per year, then use this as your estimate moving forward.

5 Once you ve estimated what your rent and capital growth will be over the time of your investment, you need to apply the effect of inflation to your calculations. Inflation can easily eat away at your property investment returns, so it s vital you factor it in. For example, if you want 500 net income in the future and are currently achieving that, your net rent needs to keep up with inflation in order for that 500 to have the same purchasing power in 25 years time. If it doesn t increase, although you may still be achieving 500 net return, it s unlikely to buy you what you actually want/need as costs will continue to increase over time. Example of the effect of inflation on a net gain of 500: Assuming inflation is 3% per year and you re investing for the next 20 years, your 500 net will need to be: Year One: 500 Year Two: 500 x 3% = 515 Year Three: 515 x 3% = etc To keep up with 3% annual inflation, your 500 needs to increase in cash terms to 877 by year 20, to ensure it buys you the goods and services you need long term. The same needs to be applied to capital growth returns as well. To help you with this, you can use the Bank of England Inflation calculator:

6 Comparing your buy to let investment returns versus other investments Once you know how well your portfolio is performing on an annual basis and whether it s on track to deliver the income and/or capital growth you re hoping for, then you can compare how well it s performing against other investments. You can either compare performance directly versus other financial investments you have, such as your pension or stocks and shares you may hold, or you could spend some money with a financial advisor. They can look at whether they could make your investment work better for you on-going with perhaps less risk attached. Some financial investments may deliver better than property in the long term, as they have tax breaks, which you don t benefit from when investing in property.

7 Is your portfolio legally correct? Too many buy to let investors don t look into the different ways they can legally own a property. It s especially the case if they re now letting a property they d previously lived in themselves. If you don t spend time checking the legals of owning a property and the implications, you could end up paying more tax than you should. And, if you die, your share of the property might not go to the person you intended! If you used to live in the property Firstly, you need to work out how long you lived there for, because you re entitled to some tax relief for it having been your only or main residence. You ll need to seek expert property tax advice but, as a general rule, if it was the only home you owned and lived in, you won t have to pay up to 3 years of capital gain on the property. Secondly, if you move out of your home, let it and move into a second property, you need to declare the new property to the Inland Revenue within two years, then agree which will be your main residence. If you re married or living with a partner, you need to nominate one property jointly; you can t claim a main residence each. It s important to get this right because if you move from a more expensive property to a cheaper one and don t inform the Inland Revenue of which is now your main residence, you may not end up with as much capital gains relief as you could have.

8 If you buy with another person Whether you buy with a spouse or business partner, it s better to own property under tenants in common, rather than joint tenancy. As tenants in common, each of you can choose to leave your share of the property to whomever you like. Under joint tenancy, when one partner dies, their share automatically passes to the other partner, regardless of what s in their Will. If you don t know how you legally own a property, then it s worth checking and adjusting, if necessary. For example, if you buy a property with a spouse under the normal home ownership of joint tenancy, when you die your share of the property will pass to your spouse, tax free. But if you plan to leave the property to your children, then it may well be better to put the property - or a portion of it - into a trust. To do this, you ll need specialist property inheritance tax advice to help mitigate tax as far as possible. If you re buying with a business partner, friend or other family member, owning under tenants in common is vital. If you re joint tenants, not only will they automatically inherit your share, but they re likely to have to pay the full inheritance tax cost when they receive it, which may force them into having to sell the property. The other thing to bear in mind if you re buying with a partner is that you may be on different tax regimes. This means it might be more tax efficient for one of you to have a higher share in the property than the other. For example, if you re a higher rate tax payer and the person investing with you is on a lower rate, it may be worth adjusting the ownership from 50/50. It could save you tens of thousands of pounds in tax. However, do seek independent, expert legal and tax advice for your own personal and tax situation. Just doing what someone else has done is unlikely to work for you.

9 Are you looking after your wealth? Buy to let property owners often don t see themselves as wealthy. But if you have more than one property, your financial and tax situation is a lot more complicated than most people s. The main reason for this is that property has its own set of rules and regulations from a financial and tax perspective. There isn t a specialist tax regime for buy to let investors and you may be classed as a property investor ; property developer or property trader, depending on whether you ve bought the properties and let them out, built the properties to let or just intended to buy them and sell it on, but let them out due to market conditions. To further complicate matters, any income or wealth secured from buy to let is added to your existing earnings and wealth, it s not taxed separately. In some cases you can offset any losses against other income, but in most cases you can t. In short, managing tax when property is involved and making sure you not only maximise your returns from buy to let, but hold on to them, is a specialist area. So seek help from a wealth advisor or independent financial advisor who understands buy to let. They ll be able to best advise you on what to do to maximise your wealth and minimise your tax bill which might also dictate the type of property you buy. Get this advice when you first decide to invest, so you can make sure your financial affairs are set up correctly from the start of your investment journey. Getting the right support for your buy to let portfolio Buy to let is a complex investment, which requires a lot of support. Some of the tasks involved are easy to do yourself but you ll definitely need specialist help for other things. These are the top five services you need, to make sure you maximise your returns: Lettings legal expertise You must ensure you own your buy to let property in the correct way, have an up-to-date tenancy agreement and know how to manage any legal situation that might arise, such as evicting a tenant. You can either use a legal company that specialises in buy to let and landlord legals, or your lettings agent may have access to their own legal company and offer their advice as part of their service.

10 Getting the right support for your buy to let portfolio Buy to let is a complex investment, which requires a lot of support. Some of the tasks involved are easy to do yourself but you ll definitely need specialist help for other things. These are the top five services you need, to make sure you maximise your returns: Lettings legal expertise You must ensure you own your buy to let property in the correct way, have an up-to-date tenancy agreement and know how to manage any legal situation that might arise, such as evicting a tenant. You can either use a legal company that specialises in buy to let and landlord legals, or your lettings agent may have access to their own legal company and offer their advice as part of their service. Expert referencing Referencing tenants isn t just about doing a credit check. There are so many different ways tenants can steal someone else s identity or even entirely make one up. They can also give you false documents and if you don t know how to properly check their validity, you may not realise. Other problems can occur if you only reference one person when several live in the property. You need to make sure you reference check all adult tenants thoroughly and, if one can t pay up for any reason, understand how the other person will afford the rent in the future. Most professional lettings agencies will have an expert referencing service, but make sure you ask to see what work they do prior to appointing them or before saying yes to a tenant they recommend.

11 Professional Inventories Carrying out an inventory and recording everything accurately is a major job. Unless you have excellent attention to detail and understand exactly what information you need to record, and how, it s best to appoint an inventory clerk that s a member of This way, if there are any problems or queries over the inventory, then there s an independent third party to deal with the complaint. They also have personal and public liability insurance and have agreed to abide by a professional code of conduct. Finance and Tax The financial world and that of tax is constantly changing, particularly since the credit crunch. Trying to keep up with the best mortgage deal or knowing how to mitigate your buy to let tax isn t a do it yourself job, so you must take expert advice and support. Look for finance and tax experts that have invested in a buy to let portfolio themselves, as they ll be that much more motivated to keep up to speed with everything that can maximise your wealth. Specialist Insurance As with any investment, there are risks attached to buy to let, but there are ways of reducing some of these via insurance. Landlord insurance is different to standard home buildings and contents insurance and there are additional areas to consider. You ll probably require specialist insurance in order to secure a buy to let mortgage and then you should also look at taking out things such as rent guarantee insurance, loss of earnings insurance and alternative accommodation insurance. Do shop around and don t just take the one offered to you by the lender, as other companies may offer better deals.

12 Regular buy to let checks As a landlord, whether you re paying an agent or not, you should inspect your property at least every six months or after prolonged bad weather, such as snow, lots of rain or high winds. If you don t repair any damage, it could take tens of thousands of pounds off the value of your property asset and will make it less attractive to tenants. Leaks, resulting in water damage, are one of the key things you need to keep on top of, especially if the property was built pre-war. Check for: 1. Missing tiles in the roof 2. Flashing coming away from the brickwork 3. Water collecting on a flat roof 4. Guttering that has dislodged from the house 5. Split or broken drains or pipes Also check the exterior of the property for cracked or broken windows and windows or facias that might need re-decorating. Internally, make sure: Showers and taps are working properly Flooring and walls are still in good condition Kitchen is in good working order Any accidents the tenant has had, resulting in stains or other damage, has been reported and dealt with The area outside the property is being well looked after If you have full management from an NALS or ARLA member agent, they ll carry out a periodic check for you but they won t necessarily check the whole property for leaks and maintenance requirements, so it s vital to make these checks yourself.

13 Managing key buy to let issues Some of the many issues that ll crop up while you own buy to let property are predictable, some will come out of the blue, and you need to be prepared for both. Here are the top 10 things that are likely to happen and what you need to do to manage your way through them: Tenant asks to redecorate the property Some tenants are pretty proactive when it comes to living in rented accommodation. If they ask to redecorate, then you need to agree: a. Who s paying for it b. What areas will be redecorated c. What paints and colours can be used d. The quality of paint to be used e. How able the tenant is to carry out the job, or whether tradesmen will be needed If the tenant is doing it themselves, you need to make sure they are capable of doing a good job and one which adds value. For example, if they want to paint everything black, orange or blue, that might be a problem, but if they re sticking to a fairly neutral colour scheme, or matching your existing colours, that s fine. Let the tenant know they ll need to give you receipts for any paint or other supplies they purchase so you can claim them against your property expenses. It s also a good idea to have before and after photos so you know the work has been done well.

14 Tenant complains about the property Some tenants simply seem to enjoy complaining and think everything in the property is your responsibility. Others are quite good and are happy to make some of the changes they need themselves. Your tenancy agreement should make it perfectly clear who s responsible for what. For example, unless you re servicing a property fully, it s likely the tenant will need to change their own light bulbs. But if the carpet or flooring needs changing due to wear and tear, rather than because of any damage the tenant has caused, then this is probably your responsibility. What you re legally obliged to do is a complicated issue, so it s worth seeking advice on whether you have to replace or repair appliances or other items in the property. You can ask our buy to let expert, Kate Faulkner, via enquiries@designsonproperty.co.uk, or ask a legal lettings expert. Tenant stops paying their rent If you re self-managing, take action the first day your tenant is late with their rent. Call or requesting a read receipt to find out why they haven t paid. There may simply have been a problem with the bank, but it may be a sign that something has changed and the tenant(s) is going to struggle to pay rent on-going. If you re using a letting agent, then do the same and chase them if the rent hasn t arrived on the normal day. It s also important to check with the letting agent when you first engage them how long it should take from the day they re due to receive rent from the tenant to the money arriving in your account. As with a tenant missing a rent payment, if the letting agent does, it might be a sign of financial problems at their end. Always know when rent should be paid and always check it comes in on the right day. If you can t get hold of the tenant or letting agent, visit them or, if you can t get to the area, ask someone else to do it for you. If they don t give you a valid reason for not paying the rent, you ll need to seek legal advice on the next steps. See our information on Evicting a Tenant for more help.

15 Tenant causes damage to your property There are two types of damage a tenant can cause: accidental damage and malicious damage (i.e. they did it on purpose). The first thing you need to identify is who caused the damage and why. Then it s a matter of working out whether it s worth claiming on your insurance, whether the tenant should pay to fix it or if you need to fund the repair yourself and perhaps think about getting a new tenant! You don t think you re getting the help you need from your letting agent Some letting agents do a great job; others just seem to pass messages and let you deal with problems. The level of help they re obliged to give depends on what service you re paying for, so be very clear when you engage them what support you ll have. For example, if you only asked the agent to let the property or to let it and move people in, they won t deal with any problems you have with the tenant after check in. If, on the other hand, you re paying them for full management, they should help with all issues, even if it s simply to give advice on what to do rather than carry it out themselves. If you took out buy to let insurance, this is another source of help. If you re having real problems with your letting agent, check your contract with them which will be a document called terms of business. This will explain how you complain and what to do if you want to terminate the contract. If you ve found another agent you d like to move to, they may handle the changeover for you and deal with the first agent themselves. Just make sure any agent you work with is a paid-up member of NALS or ARLA. Find out more about choosing a letting agent, See our Choosing a letting agent checklist.

16 Mortgage or other costs increase Unfortunately, not all of the costs associated with buy to let are within your control. Once interest rates go back to their longer term average (from 2000, around 5%), mortgage rates could hit 7% or more. You should review all of your costs on an annual basis, but, as your mortgage is likely to be the biggest of those costs, it s worth reviewing it every six months or so, particularly as new buy to let deals come out on a regular basis. If your costs do go up, then you might have to review the rent, but don t forget you can only charge as much rent as the local market will bear. Your rent doesn t cover your costs If your costs rise so much that your rent doesn t cover them, you have to make a judgement call. How long is it going to go on for? Does the capital growth you re gaining offset any monies you may have to put in on a monthly basis? Are there any costs you can look at reducing, for example your mortgage? Are you losing rent because the property is empty for too many months and a reduction in rent may actually be helpful in covering more costs? If you re still struggling, it s worth talking to an independent financial advisor about the viability of your investment. Is property still working for you, or would you be better off cashing in your buy to let investment and putting your money elsewhere? Need to evict the tenant If you haven t evicted a tenant before, you should seek legal advice, because the process and the legislation is complicated. You have to serve the right notice, abide by the specific eviction laws and follow the legal process to the letter. If you don t, the tenant may be able to stay in the property, rent free, for some months. For more help understanding the eviction process, read our article, Dealing with Problem Tenants and the Eviction Process and our Evict a Tenant Checklist

17 The Inland Revenue sends you a letter about tax payments The Government are increasing their efforts to identify who s renting property out so they can check you re paying the right amount of tax. If you have a letter from the Inland Revenue and it s not asking about very much money, call them to discuss your circumstances. Depending on how much information they re asking for and how far back the claim might extend, speak to a property tax expert, as they might be able to help negotiate a settlement, if required. Your current accountant or bookkeeper may or may not be able to help you, depending on how experienced they are. The property s value falls so you have less than 25% equity In today s credit crunch world, you should aim to have 25% or more equity in your buy to let property. That will act as a cushion against further market falls and it also attracts better mortgage rates, meaning your monthly outgoings are less. If your equity does fall below this amount, it s advisable to seek specialist financial advice. You may be better off cutting your losses and selling up, but you might be able to negotiate an on-going agreement with your current lender or re-mortgage with a company willing to lend on properties with less than 25% equity.

18 Keeping up to date with landlord issues Trying to keep on top of the latest rules and regulations of letting a property is very complicated. The rules now are different depending on whether your property is in Scotland, Northern Ireland or England and Wales. Different rules can also apply depending on the local authority your buy to let property is in and the type of let. You can devolve much of the responsibility of the legal side of lettings by using a letting agent that s a paid up member of NALS or ARLA, or you can join a local landlord accreditation scheme or association and keep up to date yourself. Keeping up to date via a letting agent Not all letting agents stay right up to date with lettings rules and regulations. Members of NALS and ARLA will, but they don t always know lettings legals for all types of property lettings. For example, letting a licenced home in multiple occupation (HMO) comes with very different and very strict rules and regulations, depending on where your property is located. Not all lettings companies deal with licenced HMOs. As far as letting a property under a standard assured shorthold tenancy (AST) is concerned, NALS and ARLA member agents should be up to date, but they won t always handle the legals of evicting a tenant, nor will they necessarily have knowledge of how landlords are taxed. So it s important to make sure you know exactly what your letting agent is responsible for and what you still need to stay on top of yourself. Keeping up to date via Landlord Accreditation Schemes If your local authority or student accommodation agency runs a landlord accreditation scheme, then it s definitely worth joining. This shows them you re a good landlord and you ll hear about local authority changes from the people who are implementing them at a local level. It s unlikely an accreditation scheme will be able to help you tax-wise, or with buying or selling a buy to let property, so make sure you seek specialist advice for these areas.

19 Planning your exit strategy Most buy to let investors simply aim to hold their property until there s a reason not to. However, it s important when you own one or more buy to let properties to make sure you review their performance regularly. And part of that assessment should involve having a good idea of when it s right to expand or exit from your property portfolio. This may mean selling, or it may mean planning to pay off the mortgage on the property so your rent comes in mostly as income for your retirement. If you re looking at eventually selling your property, then you should have an idea of the amount each property will need to be worth before you exit. For example, you might have bought it at 100,000 and decide you ll sell if it reaches 135,000. It might be that it s better for you to sell you portfolio over a long period of time to keep down capital gains tax. This will need to be compared to cashing everything in at once and what you could do with the money in the future to meet the capital and income returns you want and/or need. However, to be able to make these decisions, you need specialist tax and wealth advice. Without this, you won t know your likely tax liability, what you ll need to do with the property once you are taking an income, or what to do with the money once you ve sold the property. Download our free property investment objective PDF and business plan to help you prepare to meet with legal and tax advisors. We hope this guide has been useful in highlighting some of the things you need to do as a landlord when running your portfolio. There s a wealth of advice in our Landlord Resource Centre, so please browse and use all the free information we ve provided to support you and your buy to let portfolio.