Buy-To-Let Basics

Buying a property to rent it out has become increasingly popular in recent years. In the world of finance, that is often a clear sign that many of the best gains have been made already. As the saying goes, once you've spotted the bandwagon you've already missed it.

The UK has an unusually high proportion of people who own their own homes and many see that as a good reason for the buy-to-let sector to keep on expanding. It is also a lot easier to get a buy-to-let mortgage than it has been in the past, with many mortgage providers now offering these products for the first time.

So how does it all work? Put simply, you buy a house or flat in the normal way, putting down a deposit (usually a minimum of 15% to 20% is required) and getting a mortgage to fund the difference. The idea is that the rent you get should more or less cover the interest payments, letting fees, insurance and other outgoings, and you enjoy the capital gain as the house price (hopefully) increases over the long-term. Most lenders will look for the gross rent to cover at least 130% of your mortgage payments.

What can go wrong?

Sounds easy, doesn't it? Naturally there are a number of pitfalls. First of all, this is a geared investment, courtesy of the mortgage used to buy the property. Should house prices fall or the rent be insufficient to cover the mortgage payments then you could be in trouble. You may have net outflows each month or, in the worst cases, have to sell the property.

There may be times when you won't be able to get a tenant, or when the rent is paid late or not at all. You may also have to repair damage to the property. You also have legal responsibilities in relation to safety of the building, the furniture and the gas and electricity supplies.

You can reduce your risk by having more several properties, allowing you to ride out periods when you don't have tenants in one property, for example. But obviously this means you have to take on more debt and it will take some time, possibly a few years, to find and buy a small portfolio of properties.

Letting Agents

Letting out a property can take up a lot of your free time. One way you can reduce the hassle is by employing letting agents who will deal with the tenants for you. There will be a fee for this of course, typically based on a percentage (usually 10-15%) of the rental income. If you have little experience of the property market this can be a good way to start and give you time to learn the ropes. Make sure any agent you employ is registered with a proper industry association, such as the Association of Residential Letting Agents (ARLA).

What sort of properties?

Flats and small houses seem to be the most popular. As with buying your own home, location is everything. A property close to transport and amenities will be easier to let and is more likely to appreciate in value as well. But of course this means that there can be a lot of competition for the 'best' properties. In some places there could be a glut of properties available for rent which can lead to a fall in rents in that area. To get an idea of what sort of rental you can expect just flick through the local paper or check out the windows of some local estate agents. Of course, you can always cheat and use the Internet as well!

Tax

Broadly speaking, any capital gains you make on a house that you live in are exempt from tax. However, you may have to pay tax on capital gains you make when you sell a rented property. You also have to pay tax on the rent you receive, after deducting for interest payments, letting fees and so on. You may need to employ an accountant to work everything out, especially if you have more than one property.

Discuss Property with other Fools

One of our busiest discussion boards is 'Property Investing - Practical'. It's well worth a visit if you're contemplating becoming a landlord.