Top Tips for UK First-Time Buy-to-Let Investors

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Real estate frequently stands out as a top investment option, supported by countless success stories, dedicated TV shows, and seemingly endless market growth. Nevertheless, believing that entering the realm of buy-to-let landlords guarantees effortless wealth is a surefire way to disappointment.

Successfully navigating the complexities of a buy-to-let mortgage and, in turn, addressing the demands of being a landlord necessitates thorough planning, unwavering effort, and a generous helping of practical knowledge. Fortunately, we possess the latter and are fully prepared to share our expertise, ensuring your triumph in this endeavor.

The best buy-to-let mortgages

Lenders have notably increased buy-to-let mortgage rates due to a swifter-than-anticipated rise in the base rate this year.

As of early March 2023, the average two-year fixed buy-to-let mortgage interest rate stood at 5.81 per cent, irrespective of deposit size.

Although this is a slight dip from February’s 5.95 per cent, it represents a substantial climb from two years ago when it stood at 3.05 per cent.

Furthermore, it marks a more significant leap from five years ago when the typical landlord mortgage rate was 2.96 per cent.

The buy-to-let mortgage offer you receive hinges on your individual circumstances and the lender’s specific criteria. Ideally, lenders prefer larger deposits, robust rental income coverage for mortgage payments, and sound earnings from other sources.

To effectively compare the most suitable deal based on your loan size and property value, make use of our buy-to-let mortgage finder tool, powered by the London & Country brokerage.

Why invest in buy-to-let?

The era of low interest rates previously enhanced the allure of buy-to-let investments. With savings generating meager returns and affordable mortgages, it appeared to compensate for the 3 percent stamp duty surcharge on buy-to-lets and second homes, which substantially ate into profits, along with the reduction in full mortgage interest tax relief that dampened returns.

However, the landscape has evolved. The Bank of England has raised the base rate significantly, soaring from 0.1 percent in December 2022 to 4.25 percent by March 2023, resulting in notably higher buy-to-let mortgage rates.

So, is it still a lucrative venture? Many remain optimistic but have adopted a more cautious approach, as evidenced by our recent visit to the National Landlord Investment Show.

Buy-to-let continues to appear attractive as an income investment, particularly for those with substantial funds to secure a sizeable deposit. This attractiveness persists in contrast to the dismal savings rates and volatility of the stock market.

However, mortgage rates have substantially risen from their historical lows, rendering it more challenging for buy-to-let investors to secure favorable deals.

Tips for First-Time Buy-to-Let Investors:

1. Understand the Expenses

Your interest-only mortgage is just the beginning of the financial commitments when managing a rental property. Overlooking other costs can significantly impact your investment’s true profitability. Assuming that a £400 monthly mortgage necessitates only an additional £500 in rent to cover all expenses is a risky approach.

Consider these additional expenses:

Property maintenance and repairs
Renovation and interior design
Exterior upkeep, gardening, and window care
Cleaning between tenant turnovers
Fees for letting agent management
Finder fees for letting agents
Advertising expenses for property listings
Landlord’s insurance
Buildings insurance

2. Compute Your Taxes

Prepare for the taxman! HMRC is interested in a slice of your earnings, so it’s crucial to assess the tax implications of being a landlord.

Stamp Duty Land Tax: When purchasing a property, you’ll face a substantial stamp duty expense, amounting to thousands of pounds. Although it’s a one-off payment, it significantly affects your investment.

Income Tax and Mortgage Interest Tax Relief: Changes to mortgage interest tax relief in 2017 have led to higher income tax on rental properties, impacting your overall profit. However, you can make significant tax savings by incorporating your landlord business. Check our guide on mortgage interest tax relief for insights into these changes and potential savings.

3. Anticipate Monthly Tenant Needs

While a smoothly operating property with punctual, respectful tenants is an excellent investment scenario, it’s essential to recognise that this ideal situation may not persist. Dry months, characterized by tenant turnover or, even more troublesome, non-paying and troublesome tenants, are a distinct possibility. During these periods, your property will generate no income, but your expenses will persist.

To navigate this challenge, prepare for potential tenant vacancies and be ready to adapt your approach. Consider modifying agency fees and adjusting advertising efforts to minimize the duration of property vacancy.

4. Choose the Ideal Location

Numerous buy-to-let landlords opt for acquiring a second property in their current town, assuming that proximity will simplify property management. While this can be true, especially if you intend to forego a management agency entirely, for many, physical closeness to the investment property isn’t a critical factor. In fact, you may achieve a higher yield by considering the entire UK and selecting a more profitable location to become a landlord.

Prime locations often include areas with a significant student population, thriving inner-city areas with strong demand, or properties situated along burgeoning commuter routes to major cities. Evaluating potential locations based on these factors can lead to a more rewarding investment.

5. Plan for Property Renovation

Profit from a buy-to-let property can be found in two key areas: the monthly rental income and the property’s overall appreciation in value. When you purchase a property that can significantly benefit from renovation, you place a strong emphasis on the latter while gaining some flexibility with the former.

Property renovation is an investment in itself. If you have extensive renovations in mind, it’s crucial to ensure that your mortgage covers these costs. Feel free to consult with us at The Mortgage Hut for guidance on securing a mortgage with renovation in mind.

Effective renovations can inject substantial equity into the property. This not only increases its value for a future sale but also enhances its desirability in the interim, expanding your rental prospects.

6. Negotiate Wisely

When purchasing a property for your own residence, emotions often come into play as you seek a place to love. This emotional connection can lead you to stretch your budget to secure the home of your dreams.

However, when buying for a buy-to-let investment, your perspective should shift. Rather than assessing the property based on your personal affection, focus on its potential to generate income. If the property doesn’t align with this financial objective, it’s best to move on and find another investment opportunity where the numbers make sense.

In this scenario, you can adopt a more assertive stance in negotiations. Remember, as a buy-to-let investor, you are not part of a property chain, giving you a favourable position for negotiation.

Furthermore, try to gather information about why the seller is parting with the property. If the property has been on the market for a significant period, the seller might be open to accepting a lower price for a swift sale. While there’s no guarantee the deal will succeed, your diligence in negotiation can lead to substantial savings if it does.

7. Consider Property Auctions

Having a mortgage in principle provides you with the financial capability to attend property auctions and make informed, swift decisions. Property auctions frequently offer substantial savings compared to traditional agent-mediated purchases.

However, it’s essential to exercise restraint and not get caught up in the excitement of the auction. Determine your maximum bid in advance and stick to it, resisting the temptation to exceed your budget regardless of the circumstances.