FOOL SCHOOL
Homeowning: Buy-To-Let

May 17, 2002

Buying a property to rent it out seems to be all the rage these days. 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.

But the UK has an unusually large 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 small deposit 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 and other outgoings, and you enjoy the capital gain as the house price increases.

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 than one property, 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 several years, to find and buy a small portfolio of properties.

Letting Agents

One way you can ease the pain is by employing letting agents who will deal with the tenants for you, in return for a small fee of course. 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. 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. This article has more details. 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, less deductions 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. One angle that is worth investigating is to invest in property using a self-invested personal pension (SIPP).

Useful links: ARLA | RICS | NAEA

More: Homeowning Centre