A beginner’s guide to buy-to-let financing
Despite rising interest rates and increasing numbers of lenders refining their lending criteria, the property market is currently presenting an array of opportunities for everyone interested in purchasing a buy-to-let property.
Demand for quality rental properties and trustworthy landlords is higher than ever, which is being heightened by reports like this one from the Evening Standard that increasing numbers of first-time buyers are holding back on making that step onto the property ladder.
If you are thinking about becoming a landlord, here are some of the most important things you need to know.
Understanding buy-to-let terminology
Buy-to-let terminology is used by all parties throughout the property purchasing process, so it is important to understand exactly what all these terms mean.
Your yield is calculated with the following formula: rental income divided by the value of the property multiplied by 100.
There are a range of factors that will affect your potential yield, however, the location of your property is arguably the factor that can have the most significant impact. The highest yields can be found in areas with low property prices but comparatively high rental costs.
If maximising your yield is a top priority, it will be worth paying close attention to cities with large student populations. Of course, this isn’t your only option, so make sure that you’re committed to doing your research before signing on the dotted line.
– Interest coverage ratio (ICR)
ICR compares rental income to the level of mortgage interest you are being charged and it is typically set between 125% and 145%. So, if your ICR is 125%, your rental income must cover at least 125% of your mortgage interest payments.
Buy-to-let tax arrangements
There are a variety of tax implications that you may need to consider when purchasing a buy-to-let property. Personal taxation thresholds will determine the precise costs that you will need to account for, which will impact the profits you are able to make from your new venture.
Some landlords choose to register as a limited company and channel all sales through their company. There are certain benefits to choosing this route, however, it is important to remember that you will be liable for corporation tax. It is also worth emphasising that the number of loan opportunities available to you when buying through a limited company will be impacted.
You will typically be required to submit a self-assessment tax form every year, so keeping comprehensive financial records throughout the year will help you with this. If you are unsure of anything relating to taxation, speaking with an accountant who specialises in buy-to-let property tax will be beneficial.
The costs of buy-to-let properties
Taxes aren’t the only costs that you’ll need to cover when purchasing a buy-to-let property. In fact, the conveyancing process can be more involved than expected, even during relatively straightforward purchases, so it is in your favour to work with respected conveyancing solicitors.
Don’t forget, the best conveyancing solicitors Guildford and elsewhere, such as Sam Conveyancing, have team members who specialise in buy-to-let investments, who can prepare you for all stages of the process including other costs.
These other costs can include property survey fees, health, safety and fire measures, energy performance certificates, electrical and gas safety certificates, buildings insurance and utilities, and rental voids.