Taking your first step towards becoming a buy-to-let landlord is as exciting, but also isn’t always straight forward. This page is dedicated to giving you our best buy-to-let advice to help you get started on your journey to buy-to-let property investment in the West Midlands.
Whether being a landlord is your main job or is simply a source of passive income, there are the same fundamental steps to acing buying a buy-to-let property; the first being securing the right mortgage.
What mortgage do I need?
You will need a buy-to-let mortgage to buy the property. The minimum deposit you are required to have is 15%, but some lenders will ask for up to 25%. As with residential mortgages, the bigger the deposit, the lower the interest rate you will pay.
The difference with buy-to-let mortgages is that they are usually interest-only, meaning you’ll only pay the interest on the borrowing amount and will owe your mortgage lender the original cost of the property when you sell.
Lenders will always apply an ‘interest cover ratio’ ranging from 125% to 145%, so the monthly rent you charge tenants has to be 25%-45% higher than your mortgage repayments. This is non-negotiable for lenders, so make sure to tell your chosen letting agent so they can price your buy-to-let property investment correctly.
The only exception to needing a buy-to-let mortgage is if you are a cash buyer.
What other costs do I have as a landlord?
Buying a buy-to-let property comes with a number of extra costs, including:
- Letting agency fees
- Landlord insurance
- Conveyancing and solicitor fees
- Energy Performance Certificate prices
- Mortgage broker fees
- Maintenance and repair costs
- Contents and accidental damage insurance (optional)
Like a regular purchase, you may have to pay stamp duty – which is charged between 0% to 12% –depending on the price of the property. If you are British and already own another property, you will have to pay an extra 3%, and foreign nationals a further 2%. Landlords also have to apply for a number of certificates, such as an annual gas safety certificate and electrical installation condition report. Portable appliance testing (PAT) should also be a consideration.
How do I handle deposits?
All rental deposits from tenants must be kept in one of the government-backed Tenancy Deposit Protection (TDP) schemes within 30 days of. At the end of a tenancy, the deposit has to be returned to the tenant within 10 days of keys being handed back, or after any disputes have been resolved. If you work with a letting agent for the check-out process, they will help facilitate all monies transfers.
Void periods are any amount of time when your buy-to-let property investment is vacant – when no tenant is living in the property. The immediate problem with void periods is that you will not be bringing in any income, but you will also still have to pay your monthly mortgage payments.
Do rental properties need an Energy Performance Certificate (EPC)?
In short, yes. The ratings are scaled from ‘A’ (excellent energy efficiency) to ‘G’ (very poor), and you are not legally allowed to let it out until the property has a rating of at least ‘E’.
The government is, however, considering implementing new rules which would see all buy-to-let properties have a minimum rating of ‘C’ by 2025. For existing tenancies, this can wait until 2028.
A brilliant benefit of choosing a new-build home when buying a buy-to-let property is that they almost always have an EPC rating of ‘B’, meaning you won’t have to spend anything on meeting regulations. Another plus is that if you buy a property that has an EPC rating of A, B or C, you could be eligible for a green mortgage, for which you may be offered lower interest rates.
What taxes do landlords pay?
Tax is a big consideration for every landlord, and rightly so. You’ll pay tax when buying a buy-to-let property, when you let out your investment, and you will pay capital gains tax when you sell. You also have to pay income tax on any profits made, which is added to any other income you have. This can turn into a big amount if your letting profit tips you over the 20% tax rate and into the 40% or 45% tax rate.
A lot of landlords have been setting up limited companies to hold their investments in, for which you must pay stamp duty tax on due to ownership changing. In a limited company, you don’t pay income tax because you will pay corporation tax instead. This is currently set at 19% but its due to increase to 25% in April 2023.
With the demand for rental property rising, now is a great time to invest in buy-to-let property. Contact us to see how our letting experts can help you today.