What level should I set my rent at?

This is a good reason why a local letting agent can be extremely useful. It is essential to fix rates realistically: in line with other properties in the area of a similar type and value. One factor is always worth remembering: it is better to have a low rental yield than none at all. One of the greatest potential pitfalls of buying to let is periods when your property is vacant, although at some points (such as between tenants and during periods of refurbishment) these may be necessary.

Rental rates can also be subject to fluctuations depending on the time of year. For instance, the end of the summer is traditionally a peak period as graduates move into new dwellings, families settle before sending children to school and students look for accommodation.

What could go wrong with my buy to let investment?

When making any kind of investment, it is always a good idea to consider the worst-case scenario. When it comes to a buy-to-let property, a bad situation would occur if it proved impossible to find a tenant for an indeterminate period. In this instance, the landlord would be paying not only the loan but also the agency fees and maintenance costs, without seeing any return on the investment.

However, if you budget carefully, have chosen a property wisely and set the rent at an appropriate rate, there is no reason at all why this should be a problem. Buying a property to let opens up a considerable number of costs, including legal fees, survey costs, and stamp duty. Maintenance, utility contracts and refurbishment can soon add to these. It is worth totalling up all potential costs and deciding in advance whether you have the budget to cover them, also factoring in a rise in mortgage rates.

How important is a tenancy agreement on a buy to let property?

Potential problems with tenants are manifold. Some will refuse to pay rent, and others will refuse to move out at the end of their tenancy. For this reason, ensuring that you have a legally binding contract in the form of a tenancy agreement is vital. A solicitor or a managing agent may prepare these. Writing in a six-month break clause can be a good idea, after which either you or the tenant can give between one and two months notice.

Some experienced property investors prefer to run their properties on shorter tenancies, although these are more common in large cities and financial centres. Although this can provide higher rents, it can also leave the landlord at a greater risk.

Does buying to let put me in a different tax situation?

When it comes to letting a property, it is classed as a business asset and you are required to pay tax on the income. Brokers generally advise borrowers looking to buy to let to take out interest-only loans as opposed to repayment loans, because all interest on your buy to let mortgage can be offset against tax. How you handle the purchase of your buy to let property depends on how you perceive the investment. If you are looking for an income, it may be worth putting down a larger deposit on your mortgage in order for mortgage payments to take up a smaller part of the monthly rent.

As a buy to let landlord, you can also offset some of your costs against your tax. The standard rule is that anything that is not classed as improvements to the property can qualify for tax relief. This can include insurance, cleaning and gardening services, commission for letting agents, and various other management expenses. You cannot claim for the initial cost of furnishing a property, but when you do furnish somewhere yourself you are entitled to a wear and tear allowance of approximately 10 per cent of annual rent.

As a private landlord, it is up to you to keep accurate records of what rent you have received and when. All income from your property must be included in your self-assessment tax return. This can be recorded in Land & Property supplementary pages, available from your tax office.

In terms of tax on capital gains as opposed to income, when you come to sell a buy to let property any profits that you make are subject to Capital Gains Tax (CGT) at your highest level of income tax. There are possible ways in which to mitigate this liability. Buy to let landlords should be aware that the property will be included in their estate when they die, potentially leaving it susceptible to inheritance tax.

What tax laws apply if I sell my buy to let property?

Should you come to sell your buy to let property, you may be liable to pay Capital Gains Tax (CGT.) However, you are not charged CGT on the £10,600 of annual profit. Furthermore, if you are married and the property is in joint names, you may use both of your CGT allowances when selling. You can costs incurred in buying and selling from your overall profit.

As the owner of a buy to let property, you may also be eligible for something called CGT taper relief. If you sell the property within three years, you will incur CGT on 100 per cent of all profits (less buying and selling costs.) However, should you keep the property for over three years, the amount that you pay begins to be reduced by 5 per cent per annum. This comes down to 60 per cent after ten years or more.

Could I still buy to let without a letting agent?

In theory, it is possible to buy a property to let without a letting agent; you are not legally obligated to have an agent. However, agents will deal with the tenancy agreement, the tenants’ references and any day-to-day administrative problems that might occur. Unless you are experienced, it is highly likely that you will benefit from the expertise of a letting agent.

If you do decide to take on a letting agent, it is almost certainly advisable to choose one who is a member of ARLA (the Association of Residential Letting Agents.)

Once I have purchased a buy to let property, what will the letting agent do?

Following your acquisition, your letting agent will find and introduce tenants, as well as screening their references to make sure they are suitable. The letting agent will also provide the necessary tenancy agreements and advise you on an inventory of what to provide with the house. They should arrange condition reports and make sure that the tenants have made changes to the utility bill accounts and the Council Tax. The letting agent will also collect the rent and pay the balance into the landlord’s account.

A letting agent should also regularly inspect the property and recommend and oversee any necessary re-decoration or repair.

Is there any way in which I can protect my buy to let investment?

It is possible to get insurance cover that protects landlords in the event of a tenant defaulting on their rent. This insurance should also cover any additional legal costs beyond the normal buildings and contents insurance.

Are there lots of hidden costs with buy to let investment property?

Although the tenant is responsible for the interior costs of the house such as the utility accounts, the Council Tax and the TV licence, if you have a vacant period you will incur those costs. Furthermore, you should bear in mind the costs of keeping a property at a marketable level.

General expenses include the Letting Agent’s commission and management fees. Before signing with an agent make sure that you know exactly how much you will be paying them, and whether you will incur fees in the event of defaulting tenants etc.

Managing a buy to let property always ends up costing more than just the mortgage repayments. It is generally advised that you should be achieving a gross rent of between 125 and 150 per cent of interest-only mortgage repayments. This will cover your costs of buying to let.

The Dos and Don’ts of Buying an investment property to let

DO Seek the advice of a letting agent who understands the local market.

DO Budget for every eventuality. Make sure that the gross rent will cover all your costs and borrowings. Also, be aware that void periods when the dwelling is empty are a possibility and factor them in.

DO Make sure that your buy to let property is furnished to a high enough standard to attract the best tenants. This includes kitchens and bathrooms, both of which are essential to letting out a house.

DO Maintain the high standard of repair by managing your property well. Be aware of when tenants are looking to move out, and make sure you repair any problems quickly in order to avoid empty periods.

DO Make sure that your letting agent is registered with ARLA.

DON’T Let your personal tastes affect your choice of property. I is essential that your property meets all market requirements and is attractive to a wide range of people who live in the surrounding area.

DON’T Purchase a property that has large maintenance requirements, particularly if it does not add to the property’s rental attraction. Anything that constantly costs money to maintain must be considered carefully.

DON’T Be fooled into thinking that running a buy to let property will be east. Being a private landlord is a time-consuming task, and tenants need a management service on call constantly.

DON’T Try to write a tenancy agreement yourself, unless you are very experienced. It is necessary to provide an inventory and condition report before a tenant moves in.

DON’T Furnish your buy to let property with cheap second hand furniture. As well as being unattractive to many tenants, it is possible that this type of furnishing will contravene some legislation.