When starting out in buy to let, it’s very tempting to rush into finding your first investment and start viewing properties. Spending hours on the property portals is fun and exciting, but it’s not the first step that novice landlords should be taking. There are other considerations that need to be taken into account before you even open up your browser to go on a property hunt.
In property, you can have all the dreams and aspirations in the world, but if you don’t have access to cash and/or mortgage finance, then you will not be able to move forward. Finance is the lifeblood of property business.
When approaching an estate agent to put in an offer, they will want to know straight away if you have cash funds or a mortgage in place, also known as being “proceed-able”. If not, they may not even allow you to view a property, and they will not put any of your offers forward to their client (the seller).
If you are a cash buyer, then things are a lot simpler - although you would be well advised to consider leveraging buy to let finance in order to minimise the amount of cash you put into deals, which in turn could mean you could grow a portfolio faster (if that is your intention).
For example with £100K cash, you could buy one property outright for that amount, or you could buy 4 x £100K properties, using a £25K deposit per property. (You will need to take into account stamp study - bearing in mind the 3% surcharge for purchasing a second property)
If you are intending to use a combination of cash for deposits, and mortgage finance, which is what most landlords do, then you will typically need to earn over £25K and have a clean credit rating. It also helps a great deal if you already own your own home and are registered on the electoral roll. Lenders also prefer to lend to people who have lived at the same address for over three years.
You will also require a deposit of typically 25% to 35% of the purchase price of the property you intend to invest in.
With all that in mind, the very first thing you should do is speak to a reputable and specialist BTL mortgage broker.
Understandably, many newbie investors are tempted just to visit their bank, who they hold a current account with.
As a general rule, High Street banks typically only have a small selection of BTL products, so the choice is limited and rates may not be particularly favourable. Loan to values may also be lower, requiring a larger deposit.
However, if you speak to a specialist buy to let mortgage broker, you will have access to the whole of the market, meaning you can access far more competitive and specialised products than your bank can offer you.
These products will almost certainly have a higher loan to values, better rates, and other attractive features such as free valuation or free legal.
On contacting a reputable BTL broker, you will need to spend 20 - 30 minutes going through what is known as a “fact find”, so that the broker can ascertain your personal circumstances and get to understand your financial position.
They will then be in a position to help you access the best products, not only for your personal circumstances but also for the type of property you intend to buy.
A good broker can also assist you in assessing deals by “stacking” them based on the achievable rent, so, if you are intending to grow a portfolio, a broker is worth their weight in gold and can play a significant and long-term role in your property business.
Their input can stop you wasting time on deals that don’t work or properties that you won’t be able to access funding for.
Again, this is imperative to get right from the start, otherwise, it could be very costly to change tax structure later down the line.
In very broad terms, landlords have two options when investing in BTL property:
As in any scenario, there are pros and cons for both and it will largely depend on whether you are a higher rate taxpayer or not and also what your aspirations are in using your property portfolio to extract income.
Recent tax legislation known as Section 24 introduced by George Osborne in 2015, and being introduced in increments over 4 years, has made the relationship between finance and tax far stronger and all landlords now need to consider finance and tax together, as they are inextricably linked.
Section 24 is the incremental removal of off-setting mortgage interest relief against the tax, meaning that buying in a sole trader name is may no longer be as attractive or tax efficient - depending on your personal circumstances.
This relates back to your finances, as there is now an increasing number of mortgage products for limited company landlords, many with rates comparable to sole trader landlords.
This area of the mortgage market is becoming more competitive as more and more lenders enter the space to meet the demand.
Once again professional tax advice is worth its weight in gold and will likely end up saving you money through tax efficiencies.
Likewise, as the case with mortgages, you need to access specialist tax advice - a firm that deals with landlord and property tax, not a “Jack of all trades” firm.
Remember - all landlords in receipt of rental income are required to complete a SATR (Self-assessment tax return) every year and it is advisable to work with a specialist accountant to ensure that you not only structure your property holdings in the most efficient manner but also that you claim for all allowable expenses to offset against your tax liability.
Landlord and property tax is an increasingly complex area of taxation, so it makes sense to pay for independent tax advice that is going to ensure your properties are as tax efficient as possible.
Once you understand your access to finance, and also whether you will be buying as a sole trader or limited company, then your way forwards will be a lot clearer. Taking time to build solid foundations and relationships from the start will pay dividends down the line later on.
Speaking to mortgage brokers and tax advisors may not be as exciting as going out and viewing potential investments, but its a highly necessary step in the current tax, finance, and market conditions and those who do not go through this process will find it a lot harder to make BTL a profitable and efficient business.