How working with a solicitor can give you the key to unlocking success when operating in the buy-to-let sector.
For many years, property lagged behind more traditional asset classes when it came to investment in the UK. However, in recent years, particularly post-recession the increase in demand for rental homes and the drop in home ownership nationwide, has meant buy-to-let becoming one of the most lucrative and popular investment assets.
As home ownership levels, according to Eurostat data, have fallen to an all-time low of 65 per cent and the number of tenants has continued to rise, more money has been spent in this increasingly popular investment sector year after year since 2007, with the end result that there are now more than 4.5 million tenants living in privately rented accommodation across the country.
Throughout the second half of this decade, the appetite for rental homes is likely to continue from investors, with a more diverse spread across assets such as HMOs, student properties and purpose-built rental blocks likely to increase the available stock and make rental investment a more accessible prospect than ever before.
For those looking to take advantage of the strength in the market, and the potential for both strong returns and impressive long-term capital gains, however, it’s vital to ensure that you build up a bank of knowledge and work with someone who has the expertise to advise you on the ins and outs of what is, on the face of it, a simple market to operate in, but in reality can be a little more complex than it first appears. Terms and conditions and hidden costs can be confusing to understand, but a little help and expertise can allow investors to unlock one of the most lucrative asset classes around.
Although it’s arguably easier than it’s ever been to invest in the rental market – as many as nine in ten landlords are believed to be those who have just one buy-to-let asset to their name – it’s important to remember that it’s not necessarily a straightforward process of obtaining a mortgage and purchasing relevant housing stock. There are a number of costs that your solicitor can advise you about that you must take into account and budget for before you invest.
The Telegraph reports that the average investor will miscalculate investment costs to the tune of some £8,359. Most will forget to budget for simple things such as repair costs, the price of advertising properties to prospective tenants and letting agent fees, all of which a solicitor can help investors budget for before they decide to purchase buy-to-let stock.
Many of these costs can be somewhat fluid, however, and first and foremost it’s important to consider the more rigid costs associated with buy-to-let. Mortgage interest, the three per cent Stamp Duty Land Tax levy that came into effect in Quarter two of 2016 and a property service and management charge when investing in units within blocks of flats, which does vary from property to property and can be in the region of £100.00s a month , are all important costs that need to be considered and budgeted for when it comes to making the decision to invest in buy-to-let properties.
The general consensus is that there has been a slow down in the buy to let market since the introduction of the 3% stamp duty levy on the 1st April.
Mortgages and insurance
When considering mortgages, the most common aspects people will look into will be things like deposit percentages and the interest type and rate that they will face. However, it’s important to know that when it comes to buy-to-let mortgages, there are differences compared to a normal mortgage.
For example, many buy-to-let mortgages come with clauses and restrictions that investors will have to pay close attention to in order to ensure they don’t breach mortgage conditions.
Clauses that are often included in these types of mortgage include limits on how long a tenancy can be. In recent years, there has been a trend to move away from shorter-term tenancy agreements, with more tenants living in one place for longer than they have in the past. It’s meant a fall in the volume of six-month agreements, and a rise in those that last over a year. However, some landlords who have tried offering longer term contracts of up to 36 months in recent years have later discovered that their mortgage policy forbid this sort of contract.
Other clauses can discuss things such as sub-letting. For many years, a common practice in larger rental homes was for one tenant to take on the whole cost of rent and sub-let rooms to others in order to recover the cost. However, many mortgage products available in this day and age restrict this, and there can be strict penalties for landlords who break the conditions of their mortgage.
With this in mind, it’s absolutely vital that anyone investing in rental property speaks with a solicitor before they buy, and has them delve into the terms and conditions of their borrowing to ensure they do not breach their agreement and terms.
Insurance is another area that will require attention when you make the move to buy rental stock. It’s important to understand that the vast majority of standard domestic home insurance policies will not cover properties that are let to tenants, so purchasing one of these could leave you at risk of having to face the costs yourself if you ever have to make a claim.
Dedicated landlord insurance policies are more comprehensive and will lay out exactly what is covered. In these policies, you will have building and contents insured (although not the tenant’s own belongings), as well as important factors such as cover against the loss of rent and damage to the property.
It’s also a good idea to choose a policy that has landlord’s liability insurance packaged with it. This means you will be covered in the unlikely event that a tenant or a visitor to the property is injured or suffers damage to their own belongings when they are in your property. This is often part of a landlord insurance policy, but it’s always a good idea to have your solicitor check to make sure you are fully covered against any issues that can arise.