5 Things To Know Before Purchasing a Buy-To-Let Property

The past decade has been rough for most sectors. But despite an EU exit, soaring inflation, and a pandemic, the UK’s Buy-To-Let market continues to endure. The sector has grown by £215 billion over the past five years. Its total value now stands at £1.7 trillion.

Even with new Stamp Duty surcharges and decreased tax relief increasing the barrier to entry, a third of landlords are looking to acquire new assets within the next 12 months. The public sector has been pouring money into the space, investing £4.1bn in Build-To-Rent (BTR) ventures.

Those eager to get into the sector will find it lucrative. Yet many pitfalls still await first-time investors. To maximise long and short term returns, prospective landlords need an extensive knowledge of location, renting trends, and the legal responsibilities of owning a buy-to-let property.

Rental Preferences Are Shifting

One bedroom properties used to see the highest demand. However, rising property costs and soaring inflation are forcing prospective renters to adapt to save more. People are looking to split the bill, driving demand for properties with multiple bedrooms and Houses of Multiple Occupancy (HMOs).

Co-living is on the rise, especially amongst young professionals in dense and high-cost locations like London. “Compared to what else is on the market, it is affordable”, says one 25-year-old man who moved to London for work

Families are also struggling to get onto the property ladder, choosing to rent while waiting for more favourable housing conditions. These people want to raise families in larger spaces with a garden, a stand-in for their own dream home. Single-family houses rented 30 percent faster in 2020 than the previous year. In comparison, flats only leased 2 percent faster within the same period. “Houses in major cities are now being rented out more quickly than a year ago. In more cases flats are now taking longer to rent out,” says Gráinne Gilmore, head of research at listing platform Zoopla.

When looking for a property, consider these emerging preferences. Analysts predict that the majority of individuals will continue to face difficulties in purchasing property, their spending power capped by record-breaking petrol prices and high inflation.

Research Your Location

In the buy-to-let market, some areas are more lucrative than others. Ideally, prospective investors will want to buy in a region that shows strong long term growth in house pricing and short term profitability through rent rates.

It’s a balance that you’ll need to look into carefully. Liverpool has areas where rental yield can go as high as 8 percent, while some districts rate at lower than 3 percent. According to data from Aldmore Bank, Bristol is currently the most stable buy-to-let market, with less than 0.6 percent long-term property vacancies and over a quarter of its residents renting privately.

Bustling locales like London and Manchester are no longer the most viable locations at the top. Renters have set their sights further out into the suburbs and towns, the result of permanent changes to your average work week. Prospective landlords who follow price hikes will find places like Bolton, whose rising property costs, growing population, and relative distance to a major city is making an appealing investment alternative.

Beyond the growth statistics, prospective landlords should also take note of developments within an area. Are there any major businesses planning to open offices? Does the demographic consist mostly of young, single professionals who tend to move around, or families looking to settle down in the long-term? These factors will affect tenancy rates and let you anticipate and plan around potential void periods.

Corporate vs Personal Ownership

In recent years, the government has slowly been scaling back tax relief for landlords. Previously, landlords were able to expense mortgage interest. Now that that’s no longer the case, they can see their payables rise as relief is cut. Some are also looking at a higher tax bracket status, as they’ll need to declare income before mortgage payments.

Prospective landlords can circumvent these changes by registering as a limited company, as they only apply to privately owned properties. Landlords can still deduct mortgage interest from rental income as a business expense.

However, which setup will be more advantageous still depends on your overall rental yield. Mortgage interest is typically higher for buy-to-let properties registered under companies. Corporation tax is set at 19 percent, which can end up costing you more if you’re in a lower tax band. Running the business will also be more complex, as you’ll have to keep Company Accounts and deal with extra legal and accounting fees.

Climate Goals Push Stricter Energy Efficiency

Energy Performance Certificates (EPCs) assess a property’s energy efficiency. Properties are rated on a scale of A to G, with A being Very Energy Efficient and G being Not Energy Efficient.

In 2018, the introduction of the Minimum Energy Efficiency Requirements forced landlords of privately rented domestic properties to maintain a rating of E. Those who fail to meet the standard are restricted from letting.

In the beginning, the requirement only applied to new and renewal tenancies. Now the law applies to all existing tenancies. More importantly, the bar is set to be raised on acceptable efficiency levels. Starting 2025, new properties need to score a C, with all properties required to be a C or higher from 2028.

Most properties on the market come with an EPC. Prospective buyers will also be happy to find that a majority of modern homes are already compliant. Around 84 percent of all EPC ratings for new builds are A and B. As certifications are valid for ten years, landlords of newly built properties will have little to fret over beyond yearly maintenance to ensure the property stays efficient.

Older properties will require more due diligence. Before signing that deed, inspect the condition of electrical and heating systems. Costs can add up quickly between upgrading or adding insulation and replacing old boilers. Bringing a property up to spec may end up costing more than your budget allows.

Your Safety Responsibilities As A Landlord

As a landlord, it is your obligation to provide a safe home for tenants. And it’s not one to be taken lightly. Failure to comply can result in hefty fines, imprisonment, and loss of human life. 

Compliance means ensuring systems like fire alarms and gas appliances are regularly maintained. Gas Safety Certifications need to be renewed every 12 months. Fire alarm inspections need to be conducted every time a new tenancy begins. Landlords are also required to provide the alarms as well as fixtures such as fire extinguishers.

These measures aren’t free. Gas Safety Certifications can cost up to £150, depending on the number of gas appliances in a home. The law also mandates that electrical appliances can be used safely. Regulations don’t explicitly state how landlords should carry out these checks, so it will fall onto property owners to arrange checks by electricians. Prospecting buyers should factor in these costs and responsibilities when considering purchasing buy-to-let property.

Looking to expand your portfolio or purchase a property for the first time? At Hopewell, our expert letting agents can help you find properties that meet your requirements. Get in touch with us today to get started.