What Does it Mean to be a Landlord?
Investing in property can be an overwhelming – but equally as exciting – process, offering landlords the opportunity to yield a consistent passive income to help them reach their financial goals.
Nonetheless, the process of becoming a Buy-to-Let landlord requires a lot of consideration and planning. From establishing your budget and mortgage options, to preparing for solicitors and tax, the responsibilities of being a Buy-to-Let landlord spans the entire process.
With so much to consider, what does it actually mean to be a landlord? It’s no secret that there are many factors that come with owning a Buy-to-Let property, but these can be much more manageable when broken down into distinct steps:
Establish Your Financial Position
Naturally, establishing your financial position is the first step of becoming a Buy-to-Let landlord. This initial step goes hand-in-hand with determining your long-term goals: what are you investing for? Do you have a specific figure to work towards? By knowing your budget and your long-term goals, this will make the decisions that are yet to come much simpler.
Once you know your budget and your financial plan, you’ll be able to gauge an idea of the deposit you can afford to put down on a property, as well as the type of mortgage that would work best for you. You may be in the position to make a cash investment, which would mean no mortgage at all, but if you’re not, there are two mortgage types that the majority of investors tend to go for.
A capital repayment mortgage is the least common of the two, and involves paying back both the mortgage and the interest at the same time. This will inevitably mean bigger monthly payments when compared to interest-only mortgages, but at the end of the mortgage term, you will own the property outright. While you’ll still be yielding a monthly rental income, the chances are that this won’t cover the entire mortgage, so it’s often best to have another source of consistent income to supplement this.
With these bigger monthly payments, interest-only mortgages are often more attractive to prospective landlords. Interest-only mortgages are pretty self-explanatory, but essentially, you’ll only pay back the interest on your mortgage each month. This means that while your monthly payments will be more affordable (and most likely covered by your rental income), you won’t own the property at the end of the mortgage term.
Although you won’t own the property outright, this option allows you to build a healthy pot of savings over the years with the rental income you receive and is often the most common route for those looking to build a property portfolio. So, you have your finances in order, then what?
If you’ve decided you want to become a Buy-to-Let landlord, the chances are that you will have already done some sort of research into property. By this point, you will know how much deposit you can spare and the mortgage you’re going for, meaning your research can now become much more specific.
Both property types and locations will occupy the majority of your research, with these decisions often defining your overall investment strategy. These two variables are often linked , for example, if you know you want to invest in a city centre location, the chances are that an apartment would probably be the property type you go for. Whereas if you’re set on a house, more rural areas might fill your location research.
If you have no preference on either location or property type going into your research, your financial goals can guide you with this decision. Specifically, if your goals are more long-term , then you’ll ideally want to look for a mix of high yielding property types and locations, such as apartments in city centres.
Rental yields will be a key consideration throughout these stages, with apartments averaging a rental yield of 4.75% in the UK, as opposed to the 3.15% of houses. When combined with the disparities between regions across the UK, these rental yields can heavily influence the returns on investment you can expect to see.
Who you invest with is just as, if not more, important than locations and property types. Researching property developers should be a priority at this stage, with this often determining the quality of the property you’ll receive and whether or not you’ll actually receive it in some cases. When researching companies, you should always look for testimonials, their track record and completion times, so you can get an accurate idea of what to expect, and essentially, whether to invest in their property.
Make Your Offer & Invest
You’re nearly at the finish line, you’ve got a property in your sights and your mortgage at the ready, meaning there’s only one thing to do – invest. Once you’ve agreed on a price, a solicitor or conveyancer will begin property checks, which are all pretty similar regardless of the property type. However, for those investing in an apartment with a leasehold, these checks will involve checking lease grants to ensure the property can be rented out.
Providing everything goes to plan with these checks, you can then exchange contracts, making you one step closer to being a landlord. At this point you can begin thinking about the next steps, but bear in mind that the completion process can take anywhere between six weeks and three months, although this can often be shorter if the property doesn’t have a chain.
This time between exchanging contracts and completion is a prime time to consider both tax and insurance. Although the UK is currently on a Stamp Duty holiday, from 1st October, normal rates will return and property investors should be prepared to pay tax on properties over £125,000. In addition to Stamp Duty Land Tax, property investors should also prepare for Income Tax. Any rental income that surpasses the £12,500 personal allowance threshold will be subject to Income Tax, which could impact your returns on both a long- and short-term basis.
In addition to tax, landlords also need to consider several different types of insurance. Landlord insurance is arguably one of the most important, and will cover your monthly rental income if your tenant defaults on payments. With void periods often being critical for a property portfolio, this insurance is essential for landlords. In addition to this, you’ll also need to look for building insurance, to ensure the longevity of your property and to cover it against structural damage.
The process to becoming a landlord is just one piece of the puzzle. The second piece? Understanding your responsibilities. Once you’ve got your Buy-to-Let property, you need to decide what type of investor you want to be – do you want to be hands-on or hands-off?
If you choose to be a hands-on landlord, your responsibilities will be much greater, but you won’t have to consider any property management fees. While both hands-on and hands-off landlords often go to estate agents to source tenants, hands-on landlords will then be responsible for everything going forward, including the maintenance of the property, any emergency calls and conducting regular visits.
Hands-off landlords on the other hand will typically use a property management service to see to any problems the tenants may have while renting the property. From emergency calls to regular maintenance checks, this option is often a popular choice amongst landlords but the additional cost for this service is one to consider.
Investing in property is often a goal for a lot of people, with the prospect of a monthly passive income often overshadowing the responsibilities that come with being a landlord. However, being a landlord can be made much more manageable with thorough research and preparation, making each step clear and achievable.