Buy-to-let landlords have come under the cosh recently from the 3% surcharges on SDLT (stamp duty) to the upcoming tax reforms under Section 24. Having said this, a great many landlords and investors in Harrogate still see property as a very attractive investment at a time of low interest rates and volatile stock markets…. but always remember , like any investment, buy-to-let comes with no guarantees.
Tax changes mean that 3% extra stamp duty is now paid when purchasing buy-to-let property and the tax reforms scheduled for this April mean the end of the ability of a Landlord to offset buy-to-let mortgage interest payments against Income tax.
These are our top 10 buy-to-let tips…
As an income investment for those with enough money to raise a sizeable deposit, buy-to-let still looks attractive, especially compared to low savings rates and unpredictable stock market swings. Meanwhile the strong property market and good rents locally have encouraged more investors to purchase property in the expectation of its value rising. Mortgage rates remain at record low levels and are helping buy-to-let landlords make their investments and yields inviting.
However, be aware that these low rates will not last forever. One day they must rise and you need to know if your investment can stand the financial stress test. Recent history provides important lessons on how returns can be hit by changing circumstances and could impact even in a property ‘Teflon Town’ like Harrogate. Nationally some buy-to-let investors who bought in the boom years before 2007 struggled as mortgage rates rose but good numbers were then thrown a lifeline when the base rate was slashed to 0.5 %. Rates have stuck that low until last summer when they were cut again after Brexit, but remember, they will rise again.
Despite the tax changes and potential for buy-to-let mortgage costs to rise, there are many positives. Strong demand from tenants, rents that have risen with inflation and a far horizon for interest rate rises, means that many investors are still tempted by buy-to-let. It’s also fair to say that lenders nationally have slashed rates on buy-to-let mortgages to low levels to keep the market alive as the Chancellor cracks down.
Estate agents and banks reported a last minute rush to buy second properties before the 3% stamp duty surcharge on second homes arrived on April 1 last year and lenders then slashed rates to keep landlord business coming in.The buy-to-let mortgage you will be offered depends on your circumstances and the lender’s criteria. Ideally they prefer bigger deposits, strong rent to mortgage payments cover and healthy earnings elsewhere.
1. Research the Harrogate buy-to-let market
Remember that the return from an investment in funds, shares or an investment trust through an Isa will see you escape tax on income and get capital growth tax free. You will also have the ability to sell up quickly if you want to. The flip-side is that you cannot buy an unloved investment fund and set about renovating it and adding value yourself.
Investing in buy-to-let involves committing thousands of pounds to a property and typically taking out a mortgage. When house prices rise, this means it is possible to make big leveraged gains above your mortgage debt, but if they fall your deposit gets hit and the mortgage stays the same.
2. Choose the right area
The iron rule of investing always applies .The most value/return on a buy-to-let investment is secured at the purchasing stage. Make sure you know and really understand the Harrogate geography / marketplace, what rents well where ( Hospital Hotspots/School Catchments/Rail Commuters ), what rents can be achieved and which tradesman you can trust to carry out works.
3. Cost of buy-to-let
Sit down with a pen and paper and write down the cost of the houses you are looking at and the rent you are likely to achieve. Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many demand 25% deposits, or even larger, for rates which are already above residential mortgage deals.
4. Shop around and get the best buy-to-let mortgage
Don’t just walk into your bank and building society and ask for a mortgage. It pays to speak to a good independent broker when looking for a very competitive Buy-to-let mortgage and we work with some terrific companies, one of which is stationed in our own offices to provide instant advice.
5. Think about your target tenant
Put yourself in the shoes of your target tenant. Our view is that you should always take out a low cost insurance policy to guard against the consequences of your tenant failing to pay the rent (Rent Guarantee iInsurance). We offer a high quality Rent Recovery Plus Policy to all of our fully managed landlords.
6. Don’t be over ambitious – go for rental yield and remember costs
In very simple terms, a property delivering £10,000 worth of rent that costs £200,000 has a 5% yield but don’t forget in any calculations that Income tax, maintenance costs and other Landlord expenses will eat into the yield . You should also be aware that most buy-to-let mortgages are done on an interest only basis, so that the amount borrowed will not be paid off over time. This is tax efficient if you have incorporated the property into a Limited Company as you can offset mortgage payments against your tax bill.
7. Consider looking further afield or doing a property up
It is always worth looking at properties over a bigger area than just central Harrogate – also those that need improvement as a way of boosting the value of your investment. Tired properties or those in need of some serious renovation can be forcefully negotiated to get a keen price and then refurbished to add value.
The golden rule – you want the final value of a refurbished property to be at least the purchase price, plus cost of all works, plus 20%.
8. Haggle over price when investing in a property
As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount .If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through. Existing Landlords who have owned property for a long time and are cashing in their capital gains, may be more willing to accept a lower offer for a secure sale over a family that needs the best possible price in order to buy their new home.
9. Know the pitfalls of buy-to-let
Financial stress – consider the yield and implications if you plan to move from a standard variable rate mortgage after a fixed rate period. Even in popular areas properties can sometimes sit empty. Some buy-to-let investors factor in the cushion of a property sitting empty for one month of the year. You also need to have set aside some cash reserves as homes can need unforeseen repairs and redecorating.
10. Consider how hands on you want to be
You need to decide if you want rent it out yourself or get an Agent to do so. Agents charge a management fee, but will collect the rent , deal with problems and have a good network of plumbers, electricians and other workers if things go wrong.
They will generally inspect the property several times a year and also keep on top of contract and certificate extensions and renewals for you.Naturally we believe our own Fully Managed Letting service is the best in town.
If you wish to discuss the above or are interested in the Property market in Harrogate then please come along and see us and enjoy a free no obligation chat about the services we provide.