15 things to know before investing in buy-to-let

The buy-to-let world is something many of us have considered, and with good reason. What’s not to love about purchasing a property, renovating it, renting it out and enjoying a reasonable return on investment? From here, many first-time buy-to-let owners go on to develop large property portfolios and ultimately become the masters of their very own property empire. In this article, we’re going to explain the things you need to know about buy to let in 2021.

Is property a good investment UK 2021?

To kickstart the economy at the beginning of the coronavirus pandemic, chancellor Rishi Sunak introduced a Stamp Duty holiday on all property purchases. While this has come to an end, there are still plenty of great property investment opportunities in the United Kingdom. House prices are predicted to fall now that the Stamp Duty holiday has expired, which means an investor with a keen eye should be able to improve their portfolio.

Is buy to let profitable 2021?

Uncertainty surrounding Covid-19 and Brexit is affecting investors this year, with many left wondering “is buy-to-let worth it in 2021?”

To be successful, investors in 2021/2022 need to keep up to date with all the happenings in the market and adjust their strategy accordingly. It’s worth remembering that almost anybody can make money in a rising market, but in times of recession, things can get a little trickier.

Despite this, the rental market remains resilient. To maximise profits, you may need to put a little more time and effort in than before and be hands-on instead of using the services of a letting agency. You may also want to consider things like making properties available as HMOs (houses of multiple occupation). These sorts of lets generally require more paperwork but can be particularly lucrative in areas with a large student population or young professional demographic.

Buy-to-let guide 2021: should I set up a limited company to cut costs?

Since April 2020, buy-to-let landlords have had to pay income tax on all rental income, regardless of how much of that income is swept up by mortgage interest. Those who don’t want to pay quite so much tax on rental income could save money by setting up a limited company.

When a property is owned by a company, all costs (such as mortgage interest) can be deducted as a business expense. Instead, the company pays corporation tax on its profits. While setting up a limited company won’t be beneficial for everybody, it’s worth consulting with a financial advisor to see if this method could save you money.

How big a deposit will I need?

Standard mortgages can be secured with small deposits. In some cases, it’s possible to get a mortgage with just 5% of the overall property price as a deposit. However, for buy-to-let mortgages, you can expect to have to place down 25% at the very least. If you can manage to stump up 40%, you will almost certainly enjoy a lower interest rate. In addition to this, you’ll also need to earn at least £25,000 per annum to qualify for a buy-to-let mortgage.

Can I cash my pension in to fund my buy-to-let mortgage?

Yes, you can - but think twice. Only the first 25% of your pension is classed as tax-free when withdrawn. The rest will be subject to income tax. In addition to this, you’ll have stamp duty and tax on rental income. If you leave the property to a loved one when you pass away, it will be subject to inheritance tax, whereas your pension will not be liable for inheritance tax. It may be helpful to seek the assistance of a financial adviser prior to cashing in your pension to fund a buy-to-let mortgage.

I’m a first-time buyer: will I qualify for a buy-to-let mortgage?

It can be extremely difficult (though not impossible) for first-time buyers to qualify for a buy-to-let mortgage. This is because most financiers consider first-time buyers as too risky. However, there are several building societies and mortgage lenders that will look carefully at the circumstances of the first-time buyer, and scrutinise their reasons for wanting a buy-to-let mortgage without currently owning a property.

Do buy-to-let properties always make a profit?

No. You’ll need to purchase a property with a reasonable rental yield in order for it to function as a good investment. To secure a buy-to-let mortgage, in many instances you’ll be required to demonstrate that renting out will actually turn a profit. To calculate potential rental yields, take the projected yearly rental income of the property, divide it by the amount you paid and then multiply this figure by 100. Alternatively, use our rental yield calculator.

I don’t know the area - am I taking a risk?

It can be tempting to jump in head-first and make an offer on a property in an area with low property prices - but it’s important to do a little research first. If the area has a low demand for rental properties, you could find yourself with a property that is difficult to let. Don’t just parachute into an area you’re unfamiliar with. Use PropertyData's Local Data tool to understand prices, rents, demand and much more in any local area before investing.

Are buy to let still good investments?

While it’s true that buy-to-let investors have been stung with a series of new taxes in recent years, property investment is still incredibly popular - mainly because it’s a reliable way to make money. If you’re willing to be hands-on and comfortable with putting in the work to develop a business plan/risk assessment, there’s no reason why buy-to-let can’t be lucrative in 2021.

What is “Right to Rent”?

At present, landlords are required to check that their tenants have the right to live in the United Kingdom before they are allowed to move in. If you’d prefer to be less hands-on, you could use the services of a letting agency to take care of the administrative side of things - although this could potentially eat into your profits.

Is age a barrier to qualifying for a buy-to-let mortgage?

Until recently, it used to be difficult for those of pensionable age (or approaching pensionable age) to obtain a mortgage. However, increased demand for buy-to-let mortgages from those in their fifties, sixties and above has meant that lenders have been happy to raise the age limit. Some lenders will stipulate an “age at end of mortgage” limit, which means that the loan must be repaid by the time you reach a certain age (usually between 75 and 90).

In many ways, it can be lucrative to purchase a buy-to-let property in your fifties or sixties. According to the Financial Times, profits can “count as earnings” for pension purposes, allowing you to gain tax relief via a pension contribution.

How does buy-to-let tax work?

Income from a buy-to-let investment must be declared on a tax return. The amount of tax you pay will depend on whether you’re a basic rate or a higher rate taxpayer. As a basic rate taxpayer, you can expect to pay 20% on rental income. Higher rate taxpayers can expect to pay 40%. For example, if you earned £12,000 in rental income over a year, you’d be expected to pay £2,400 as a lower rate taxpayer, and £4,800 as a higher rate taxpayer, ignoring any expenses that can be offset against tax (such as maintenance costs).

When should I submit my buy-to-let tax return?

January 31st is the deadline for self-assessment tax returns. If you fail to meet this deadline, you may be required to pay a penalty. Self-employed workers who owe less than £30,000 are eligible to spread the costs over the course of a year using the Time to Pay scheme.

What if I need to evict a tenant?

During the Covid-19 pandemic, the government introduced temporary rules which mean landlords must provide longer notice periods when beginning eviction proceedings against a tenant.

In England and Wales, landlords must give at least six months’ notice, unless extreme circumstances apply, such as fraud, rent arrears of six months or more, or persistent anti-social behaviour.

Similar rules apply in Scotland, although the notice period is reduced from six months to 28 days if anti-social behaviour has been an issue. In Northern Ireland, landlords are required to provide 12 weeks’ notice, and should refrain from issuing eviction notices unless it is “completely unavoidable”.

How do I get started in buy to let?

Market research should be your first step. Think about areas you’d like to invest in, whether you can afford the investment, who your target tenants are, and the costs you’re likely to incur.

A great way to start your buy-to-let journey is to have a look at our tutorials to see how you can make use of PropertyData. With extensive up-to-date market data, sourcing strategies, valuation tools and much more, it’s your first step towards building your property portfolio.

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