Basic steps to making money out of bricks and mortar
1. Unless you have lots of money, then investing in property you’re not going to live in yourself means taking out a mortgage and getting tenants in to pay rent. This is called buy to let.
2. There are special buy to let mortgages; you can’t have an ordinary mortgage on a home you’re going to put tenants in. Rates are a bit higher than on residential ones.
3. After the credit crunch, it became harder to get a buy to let mortgage. It's still difficult if you don’t have a good credit record and don’t already own your own home. The best advice on getting a buy to let mortgage is to seek the advice of a good mortgage broker.
4. Being a landlord is neither easy nor necessarily remunerative. See here for your legal responsibilities. Remember too that there will be agents’ fees for finding tenants and managing your property (if you’re not doing it yourself). If you do manage it yourself, be prepared for the hassle of tenants phoning you every time the boiler won’t work.
5. The rent you charge will have to cover the mortgage easily and how much you can get will depend on many factors out of your control such as market forces. And if you don’t pay the mortgage, you risk losing the property.
6. There will be other costs for landlords – such as insurance. You will also need to make sure you’re covered for void periods when you don’t have a tenant. And property prices don’t always go up so you could even up with a buy to let mortgage for more than the value of the property it is secured on.
7. The income you receive from a buy to let will be taxable. In addition, changes to the stamp duty regime (since 1 April 2016 there’s an extra 3% stamp duty paid on additional homes and buy to lets: see the link above for details on stamp duty) make it less attractive to be a buy to let investor. Mortgage interest relief – where landlords can offset the mortgage costs against expenses – is being phased out.
8. In its favour, buy to let offers the chance of an investment which pays an income (from rent) and gives you a capital gain (from hopefully an increase in property prices). And owning an tangible asset such as a property can appeal, compared with intangible assets (such as shares).
9. The downside of property as an investment is that it’s illiquid. This means you can’t get at your money quickly or easily because it takes time to sell the property. It’s not a substitute for a savings account or even an investment.
10. Buy to let is a serious commitment. You'll need good legal and tax advice because the income from rent is taxable and, when you sell up, you might end up paying capital gains tax. You might also need to change your will to include the property. Finally, you should probably ask an accountant or research yourself whether it's more cost-effective for your to own the property in your name or through a company.
- Find out more about the nuts and bolts of buy to let with Zoopla here.
- Get the lowdown on stamp duty tax from the government here.
- Latest updates on buy to let from Which? here.
Last updated 14 March 2018.