Buy to Let Basics

Buying a property to let is a business rather than an extension of owning a home. The money is made over years through rent and capital growth, and it is lost through voids, surprise repair bills and borrowing that does not fit the plan. Work the numbers before you view anything, because a property that looks cheap can still be a poor letting.

Run the numbers first

Start with the gross yield: annual rent divided by the purchase price plus purchase costs. Then subtract the mortgage interest, letting agent fees, insurance, service charges and ground rent where they apply, maintenance, safety inspections, licensing fees and an allowance for empty months.

Leave a real margin for the periods when nobody pays. One month empty a year is a small hit on paper and a large one in cash flow. Stress the figures against an interest rate rise and against one large repair, such as a boiler or a roof, since both will arrive eventually and neither waits for a convenient month.

An agent's fee is usually a percentage of the rent plus a charge for finding a tenant, and both come off the yield before the mortgage is paid. Work out the return on the cash you actually put in rather than on the purchase price, because a large deposit changes the picture considerably and a headline yield can flatter a deal that performs badly once borrowing is counted.

Borrowing for a letting

Buy-to-let mortgages are usually priced above residential ones and are assessed partly on the rent the property will achieve. The lender sets a minimum rental cover and normally requires the property to be let on a standard tenancy rather than occupied rent free by a relative or used as a short-term holiday let.

Most residential mortgages forbid letting. If you are converting a home you already own, ask the lender for consent to let before the first tenant moves in, and expect either a fee or a change of rate. Letting without consent risks the loan being called in.

Tax, structure and paperwork

Rental income is taxable in most places, and the rules on what you can offset, how the property is held and what happens when you sell differ by jurisdiction. Take advice from an accountant who deals with property, including on whether to buy personally, through a company or jointly with someone else, because the choice is hard to reverse later.

Expect registration and reporting duties from the start: declaring the letting, filing returns on time and telling the local authority where licensing applies. Penalties for late filing usually cost more than the advice that would have prevented them.

Local rules and licensing

Check with the local authority before you buy. Some areas license every rented home, others only larger shared houses, and conditions can cover room sizes, fire safety, waste storage and management arrangements. Student areas, conservation areas and new estates often carry extra restrictions that a standard search will not reveal.

Confirm what the property may lawfully be used for. A short-term let may need planning permission, and a leasehold flat may forbid letting or require the freeholder's written consent, which can be refused or charged for.

• Selective licensing - A local authority licence required for some or all rented homes.
• Shared house licence - Needed where the number of occupiers passes a set threshold.
• Freeholder consent - Leasehold flats often need written permission to sublet.
• Planning use - Confirms the property may be used as a home to let.

Choosing the property

Tenant demand drives returns more than anything else. Look at transport links, large employers, schools and how much rental stock is already advertised. A cheap property in a place nobody wants to rent is not a bargain; it is a monthly cost with no income.

Prefer a home that needs cosmetic work over one that needs a new roof, unless the price reflects the work and you hold the cash to do it. Read the survey carefully for damp, subsidence and drainage, because those three are the costs that drain a letting business quietly. Check how long homes in the area take to let and what they fetch when they are re-advertised, since a history of quick lets says more than a single hopeful asking price.

Managing the property

Decide early whether to self-manage or use an agent. Self-managing saves a fee and costs time: viewings, referencing, repairs, deposit rules, safety certificates and the legal paperwork that follows every tenancy. An agent handles those and charges a percentage of the rent, plus a fee for finding a tenant.

Whichever you choose, keep your own records, your own copies of every certificate and your own file on each tenancy. Agents change and landlords remain responsible for the legal duties, so the file has to exist somewhere you control. Read the agency agreement before signing it, and check what it says about renewal charges, how much an agent may spend on repairs without asking you first, and how quickly they must report arrears.