Recently, owing to various political factors, the confidence in the UK stock market and pension funds has been inconsistent.
The UK property market, whilst cyclical, has proved over the long-term to be a safe and sometimes very lucrative investment, resulting in an increased interest in the Buy-To-Let aspect of the rental sector.
Buy-to-let involves investing in housing anticipating house-price increase whilst the rental income covers the overheads.
However, the gross return from buy-to-let properties – ie the rent received less costs such as mortgage, property upkeep, insurance, service charges is not the attraction it once was.
Investors therefore need to ascertain whether the capital growth of the property will outpace the cost of living.
Is Derby a good place to invest?
Derby is proving to be a good place to invest, with growing interest in house purchase for buy-to-let purposes coming from outside the local area, and can still allow for as high as 9% yield on investment, although 4 – 5% is more common.
Investors are attracted by the relatively low house price, the fact that Derby is a University City, has a central location, good transport facilities, increasing and residual industry/large employers in the area (Rolls Royce, Bombardier, Toyota, East Midlands Transport / Logistics Hub near Castle Donington airport).
The Student Market
The average Terraced House Price in Derby for the last year (2019) is £146K, a £5K increase on the year (source: Zoopla), and the average rent for the same kind of property is £6.3K per annum
Some terraced properties in the main Student Catchment areas can be purchased for less than £100K, however such houses may require an amount of remedial work.
Certain areas buck the trend and off-the-shelf rentable properties in the Slack Lane area of Derby can be bought for £100 – £110K (source: OurProperty.co.uk). The main Student buy-to-let areas are unsurprisingly within a mile or so of the University and comprise mainly of Victorian red brick terraced houses in the western sector of Derby.
The Main Differences With Buy-To-Let mortgages:
Rent Potential – the result of this determines the amount lenders will be willing to loan. Often your main income will not affect this amount.
Larger Deposit – normally a deposit consists of 20%-25% of the property’s value.
Interest Rate – buy-to-let mortgages traditionally incur higher rates of interest.
Interest-Only – monthly payments cover the interest on the loan, at the end of the mortgage term the original sum is repaid in full.
Outgoings Not Solely The Mortgage
A major investment should never be taken lightly and there are a number of factors to consider apart from the anticipated cost / benefit.
To cover most eventualities the letter should be looking to recoup 125-140% of the mortgage repayment.
Do Your Research, check the local market:
- What property will attract (or deter) your target tenant-type?
- If you are targetting the student market would squeezing that 3rd person in the 2 bed terrace be worth it?
- What rent is competitive for that area?
- What Unique Selling Points are other letters offering?
Your buy-to-let purchase should be thought of as a 5+ year investment.
- Anticipate significant upfront expenditure.
- Decorating to a very good standard greatly increases your chances of a rapid let.
- Check and double check your sums, factor in increased mortgage repayments if you are on a short-term fixed or variable mortgage.
- Anticipate a Rental increase every two years.
- Very few lets have 100% occupancy.
- Self-let or use an Agency? Personally organising the letting can get quite painful, and if you are away from Derby then it would become nigh on impossible to let professionally without using some kind of agent.
If you decide to use a letting agent then their fees will be approximately 10 -17% of the monthly rental income, or if using them to let the property only then the fee will be about one month’s rent. Their services normally include carrying out credit checks on prospective tenants, writing contracts and chasing unpaid rent.
They can also arrange the health and safety checks on your property, which you must do to ensure the property is within renting standards.
Loan Interest Relief for ‘buy to let’ landlords in 2020
Rules have been gradually introduced restricting landlords’ income tax relief on residential property finance costs.
These costs incorporate mortgage/loan interest, interest on loans to buy furnishings and fees incurred when taking out or repaying credit.
There is NO tax relief available for capital repayments of a mortgage or loan.
Landlords cannot now deduct their cost of finance from their property income, instead they will receive a basic rate reduction from their income tax liability for such costs.
Replacement of Furnishings Allowance 2020
Under the Replacement of Domestic Items Relief, landlords can only claim for the actual cost of replacing furnishings.
This covers items of furniture such as televisions, carpets, curtains, white goods and crockery.
This relief replaces the previous allowance of 10% of the rental income.
Ascentant can advise on claimable allowances for buy-to-let investors.
The type of landlord insurance you need depends on the specific risks you want to cover against.
- Landlord Liability – protects you against compensation claims arising from injury or damage to a tenant because the property is faulty.
- Landlord Buildings – covers you against damage to the property itself.
- Landlord Contents – protects items like white goods and furniture against theft or damage.
- Loss Of Rent – covers the rent if the property becomes uninhabitable as a result of an insured event such as fire or flood.
- Tenant Default – if tenants fail to pay the rent for two consecutive months, tenant default insurance may cover you.
- Accidental Damage – covers against problems such as a wine spill on a sofa or the impacts of a botched DIY job.
- Unoccupied Property – provides cover during times in which the property is unoccupied (with certain caveats).
- Landlord Home Emergency – provides 24/7 access to help with plumbing, drainage, heating, or power.
- Landlord Legal Expenses – gives cover for up to £50,000 of legal expenses associated with the property.
Buy-to-let has become increasingly regulated and the investor has suffered quite sharply through punitive tax measures in recent years,
ensure that you claim any relief you are due on your buy-to-let investment by contacting Ascentant Accountants in Derby.