TO LET Your guide to Buy to Let Protection made easier by Legal & General
2 Welcome to Legal & General s Buy to Let guide. We hope you find this useful when considering whether to purchase a Buy to Let property.
What is a Buy to Let? A Buy to Let is a property bought for the sole purpose of renting, and the owner is therefore classed as a landlord. Usually a buy to let mortgage is used to purchase the property and the rental income is used to repay the mortgage. A Buy to Let property can benefit landlords in two ways: 1It could provide a regular income. 2 It has the potential for long term capital growth, should house prices increase in value. What you need to know Buying a Buy to Let property has become popular in recent years. In 2008, 223,200 buy to let mortgages worth 27.3 billion were taken out. This represents 10.6% of all new lending. (Council of Mortgage Lenders 01/02/2009) As with any long term investment, however, you cannot rely on a constantly rising market and as we know in the past year house prices have been falling. Also, there is no guarantee that it s possible to arrange continuous letting of the property or that the rental income will be sufficient to cover the cost of the mortgage. Whilst this may not necessarily dissuade you from investing in Buy to Let, you should consider how you can protect yourself from the unexpected. This guide covers the following steps: 1 Finding the right property Page 4 2 Buying your property Page 6 3 Helping protect your Buy to Let mortgage Page 8 4 Renting out and managing the property Page 10 5 Points to consider when selling in future Page 12 6 Tax implications Page 13 Whilst we have tried to ensure that all relevant areas are covered, please ensure you seek professional advice on legal, tax and mortgage related areas. Your adviser can help put you in touch with the experts in these areas. Why not talk to them to find out more. 3
Step 1 Finding the right property Research the market As with any property purchase it is important to research the market well. It is a good idea to look in local property papers or online, to see what type of properties are on offer and the current rental being achieved. You could also talk to your estate agent to get their view, or instruct a specialist letting agent to help you understand the market. Tenants You then need to decide what type of tenant you are hoping to get to rent your property. For example, are you hoping to appeal to a family or a young professional couple? Whilst both are desirable, it is unlikely they would want the same property, as their needs are very different. A family may want a location close to good schools and local parks, whereas a young professional couple may be more interested in being close to good transport links, plenty of bars and the cinema. Property location, size and condition Having considered both the market and the type of tenants that you are hoping to attract, you can now look for properties that meet their needs. As well as where and how big the property is you also need to consider the level of decoration, furnishing and maintenance that may be required. 4
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Step 2 Buying your property The mortgage and deposit Most lenders require a substantial deposit of around 25% Budget Once you have decided on the property and your offer has been accepted, the next step is to choose how you are going to pay for it. Although the amount of Buy to Let mortgage products has fallen in recent times, there are still a range of mortgages available from a variety of lenders. Most lenders require a substantial deposit, of around 25%, but your mortgage adviser will be able to find the lender that best meets your needs. A Buy to Let mortgage can be used to buy more than one property. There is also the option of either interest only or repayment mortgages, plus you also have the choice of fixed rate repayments or variable rate, depending on whether you like to fix your outgoings or want to benefit from lower payments if interest rates fall, though they may also go up if rates rise. Your property may be repossessed if you do not keep up repayments on your mortgage. Buying or selling a property can be one of the most stressful and expensive purchases you ever make. When buying a Buy to Let property, you also need to budget for the following expenses: Deposit Mortgage arrangement fees Property survey and valuation Energy Performance Certificate (EPC) Solicitors fees Stamp duty * 0% for purchase price up to 175,000 1% if between 175,000-250,000 3% if between 250,001-500,000 4% if 500,001 or more Buildings and/or contents insurance 6 * Please note this stamp duty information is correct at time of printing. The nil rate band of up to 175,000, is currently expected to apply until 31 December 2009 although this could be subject to change. Your adviser can help you with working out your budget if you wish and will also confirm any broker fees that may be charged for their service.
Valuation and survey Energy Performance Certificates (EPCs) Legal advice Buildings insurance Home Information Packs Before approving a mortgage, lenders will require a valuation to check the property s value and also to confirm the rental income you are hoping to repay the mortgage with. The valuation is not a survey. Therefore to ensure you are fully aware of any issue or repairs/maintenance required, you should consider having a complete building survey or mid range home buyers report, which can be done at the same time as the valuation. Your adviser should be able to help you do this. When you let a property you re now required to obtain an EPC. Private rental and social housing must have an EPC whenever a building in the social or private rented sectors is let to a new tenant. The EPC must be provided when (or before) any written information about the property is offered to prospective tenants or when a viewing is conducted. A landlord doesn t need to provide an EPC to the prospective tenant if: They believe the prospective tenant can t afford the rent on the property. The prospective tenant is not genuinely interested in renting the property. The landlord is unlikely to let the property to the prospective tenant. A new certificate is NOT required for every change of tenant. An EPC (on rental property) is valid for 10 years, unlike in residential sales where, as part of Home Information Packs (HIPs) EPCs only have a shelf life of 12 months. Landlords and property managers are responsible for ensuring that an EPC is made available on rental properties. If a rented property is sold by the landlord, then they will become responsible for producing an EPC as part of a HIP. As soon as your offer has been accepted you should appoint a solicitor or licensed conveyancer to provide you with legal advice and to fulfil all the necessary documentation to purchase the property. Don t forget as a landlord, you need to be aware that adequate insurance protection for your investment property is essential and a key requirement of any mortgage agreement. Home Information Packs are now a legal requirement for all properties. The Home Information Pack aims to ensure that important information about a property is available to buyers and sellers early in the home buying and selling process. This can help identify any problems early on so that they do not delay the buying process later on which could cause it to fail. Your estate agent should be able to provide this for you on the property you are looking to buy. 7
Step 3 Helping protect your Buy to Let mortgage Having made the effort to consider your future and invest a substantial amount of time and money into a Buy to Let, it makes sense to help protect the mortgage. After all, if it s worth investing in, it s worth protecting for the long term. If it s worth investing in, it s worth protecting for the long term. People often say that if the worst were to happen they would just sell the property, but wouldn t you rather that your spouse, registered civil partner or family could be helped financially if you died? This could also allow them to use the rent as an income rather than paying the mortgage. Or if you became critically ill wouldn t you rather pay off the mortgage and have the majority of the rental income from the property for yourself? 8
Legal & General offer a range of solutions to help you protect you and your families future. You can choose from: Life Assurance Our life assurance plans give you the option to receive a lump sum or monthly benefit, depending on the type of cover chosen. These plans could pay out in the event of your death or diagnosis of a terminal illness, during the term of the plan. This will help ensure that your dependents could benefit from the full sale value of the property or all the rental income, as this lump sum or monthly benefit can be used to help repay the mortgage. Critical Illness Cover Our Critical Illness Cover* gives you the option to receive a lump sum or monthly benefit, depending on the type of cover chosen. Upon death or diagnosis of one of 35 critical illnesses (including Cancer, Heart Attack, Stroke and Multiple Sclerosis) you could use this lump sum or monthly benefit towards the mortgage enabling you to benefit from more of the rental income or just help towards costs at this time. For example, a monthly benefit could help with the cost of maintaining the Buy to Let and could give the option to pay a letting agent to manage and maintain the property. So you or your family can concentrate on more important things, until you or they are able to manage the property or sell it. * As defined in the plan during the period of cover and are eligible to claim. As with all Critical Illness Cover products, our policies do not cover all forms of cancer, particularly those that are non-invasive and those diagnosed early for example, skin cancer. The full list of critical illnesses covered and their definitions are given in Legal & General s Guide to critical illness cover. Buildings and contents insurance Depending on whether you re letting the property furnished, part furnished or unfurnished, it makes sense to insure your property and any contents of yours. Legal expenses and rent guarantee Cover is also available for irrecoverable costs and fees to pursue or defend civil claims involving breach of tenancy agreement. Our rent guarantee will cover rent arrears for up to 12 months or until vacant possession is gained, whichever happens soonest. Legal expenses and rent guarantee cover is available as an additional option with buy to let property insurance. 9
Step 4 Renting out and managing the property Once you have found the right property you need to decide whether to manage it yourself or to instruct a letting agent to do it for you. Either way the following areas need to be addressed: Finding the 1 right tenants and obtaining references This is where a letting agent can add real value, as they can help you find the right tenant easily and quickly, thereby saving you time and effort. Plus they can undertake credit reference checks and personal references helping to minimise your risk and draw up the tenancy agreement; thereby ensuring you have a legally binding agreement. 2Deciding how you are going to collect the rent Depending on whether you instruct a letting agent to do this, you may want to agree with your tenants that they pay your rent into a designated account on a monthly basis. If you use a letting agent to collect the rent for you, this will make life easier but they will usually charge a management fee of between 10-20% of the monthly rent, which will be automatically deducted from the rent received. Maintaining the 3 property and the ongoing budget As a landlord you are legally required to keep the property safe. Therefore, annual safety checks and certificates are required for gas and electricity in the property. In addition every ten years you are required to obtain an up to date energy performance certificate (see page 7 for more information) Ongoing budget considerations It would also be a good idea to consider the following costs: Electrical and gas appliance checks Emergency fund (to cover repairs and void periods where the property may be empty) Letting agent management fees Redecoration/updating in between tenants 10
Legal rights for landlords and tenants It s always a good idea to keep up to date on the latest legislation affecting both you and your tenants. Your letting agent will usually be able to provide advice on this. Why not look online at the Association of Residential Lettings Agents (ARLA) or National Association of Estate Agents (NAEA). 8Visit their websites www.naea.co.uk or www.arla.co.uk for more details. 11
Step 5 Points to consider when selling in future Whilst your Buy to Let investment is probably for the long term, you need to consider the following points should you wish to sell: 1 How much notice would you need to give to your tenants to have an empty property to sell? Or could you sell the property with your tenants in residence? 2 If 3 It you needed to sell the property quickly, would you have to pay the tenants compensation? can take a number of months to buy or sell a property. How would you cover the mortgage payments and expenses if the property was vacant for any period? 4 Selling costs such as estate agent fees and solicitors costs. 12
Step 6 Tax implications Finally, any property which is not your main residence and is bought for the purposes of renting out is classed as a business asset. As such you should obtain professional advice on the full tax implications but below are some useful points to note: 1 You 2 You 3 You are required to complete a self assessment tax form and pay income tax on any income. may be able to offset mortgage interest against any tax liability. may be able to claim tax relief on your costs such as buildings insurance, cleaning, gardening and commission for letting agents. 4 You can usually claim a wear and tear allowance of 10% of the rent if the property is furnished. You should obtain professional advice on the full tax implications of buy to let. 5 You may be liable to capital gains tax on the disposal of the property. Accurate records and receipts where applicable should be held. This buy to let guide is accurate as at May 2009. Please ensure you seek professional advice on legal, financial and tax issues. 13
Further information Why not visit the Association of Residential Letting Agents or the National Association of Estate Agents for more details. 8 www.arla.co.uk or www.naea.co.uk for more details. 14
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