First Time Landlords – The Genius Guide

Whether you’re looking to support your retirement or perhaps interested in creating a passive income, buy to let investments can be great vehicles to achieve your life aspirations.

The biggest piece of advice we’ll give you is to understand why you want to purchase an investment property and what your opportunities and limitations are.

I don’t own any properties; can I buy a BTL property?

Most BTL lenders will only lend to either existing homeowners or landlords, meaning if you’re a first-time buyer & first-time landlord, your options will be limited. There are very few lenders who will lend to you in this scenario but it is possible.

One potential solution to this problem is having an existing homeowner or landlord to go on the mortgage with you but this presents its own drawbacks, let’s look at an example:

Damian is looking to purchase a BTL property as homes where he lives are too expensive to buy and wants to make his money work for him. He cannot get a BTL mortgage as he does not own any property at all, so his mother (Jill who is a homeowner) is happy to go on the mortgage with him.

• They purchase the BTL property via a “Tenancy in Common” basis where Damian owns 99% of the property and Jill owns 1%. Even with this ownership structure; both Jill & Damian are jointly liable for the entire mortgage. There’s no necessity to purchase via “Tenancy in Common” basis as “Joint Tenancy” ownership is also possible. We recommend taking the advice of your solicitor regarding this matter.

• As Jill is an existing homeowner, Damian would not benefit from any forms of first-time buyer relief when it comes to stamp duty and government assistance programs.

• As mentioned before, as Jill is an existing homeowner, standard Stamp Duty Land Tax will be payable along with the additional 3% surcharge as this would be Jill’s second property. We recommend speaking to a tax adviser or conveyancer regarding any queries on stamp duty.

So, it is indeed possible for Damian to purchase a BTL as his first property but it comes with the drawbacks as mentioned above.

Alternatively, the very few lenders potentially available to Damian may lend to him being a first-time buyer & first-time landlord however they would work off Damian’s income/outgoings (affordability) so this may not solve his initial problem.

Some buy to let mortgages are not regulated by the Financial Conduct Authority

How is my mortgage affordability calculated?

Unlike your residential mortgage affordability which is based on your income and outgoings, BTL mortgage affordability is based on the rental income of the property. Lenders will apply a stress test on the amount which you wish to borrow, for example a stress test of 125% @ 5% , this means the rental income needs to be higher than the 125% of the mortgage amount. Many lenders have a variety of different stress tests depending on their risk appetite and your broker will discuss the minimum rental needed to get the mortgage you need. From 2017 Regulation requires lenders to often assume a rate of 5.5% – so even though the rate could be as low as 1.28%. This is due to the fact that in the main stress tests have increased to 145% of an assumed 5.5% rate. Regulation, however, is different for 5-year Fixed rate products and also for Limited companies, always discuss your BTL mortgage affordability with a suitably qualified mortgage adviser.

What other restrictions do First-Time landlords have when it comes to getting a mortgage?

Complex investment properties such as HMOs, multi-unit blocks, commercial properties aren’t easily available for first-time landlords due to experience. If you’re looking to buy a complex investment property, most lenders would require you to be an existing landlord for at least 6 months.

What responsibilities should I be aware of?

There are both local and national regulations you need to be aware of.

As per government legislation assuming it’s a standard property and not a “complex investment property”, you need to be aware of the following:

• The property needs to be safe and free from any health hazards

• All gas and electrical equipment needs to be safely and maintained.

• A valid EPC certificate

• Your tenant’s deposit needs to put into a government approved tenancy deposit protection scheme.

• Give your tenant a copy of the “How to Rent” checklist, alternatively email it to them.
  

What should I do prior to a tenant moving in?

Ensure you have a valid AST in place, make sure your tenant is aware what their responsibilities are such as when the rent is paid and how they maintain the property.

Be sure to also to do an ‘Inventory’, this doesn’t have to be incredibly complex. It’s details of the condition of the property and items inside it such as white goods. You can mind many templates online or even create one for yourself. In the event of potential damages, you’d want proof of the condition before the tenants moved in allowing for disputes to be handled with ease.

How do I know if I’m making a good investment?

Always ensure you're researching into costs as some time's it's not the the case of "spending more money to make more". It’s important to understand the difference between your gross and your net. For example new Build flats, you might see an advertised 10% yield but this becomes a very different picture if there's an high cost when it comes to ground rent and service charge which is still payable by the landlord. HMO's can often carry high yields but require more time and costs due to higher mortgage rates, local authority costs and potentially increased management costs. We have a great portfolio assessment tool to help you calculate your yields!

Any additional tax concerns I should be aware of?

If you’re an existing homeowner you will have to pay an additional 3% SDLT on the purchase price on your BTL investment, however if you’re first-time buyer & first-time landlord, you will not qualify for residential SDLT relief as this is for the purpose of buying a home to live in. On the bright side, the 3% surcharge will still not be applicable as this is the first property. This information can be confirmed on the UK Gov website however we still recommend speaking to a qualified solicitor/tax adviser regarding the correct stamp duty applicable.