Your first buy-to-let property: All you need to know

Thinking about buying a property to rent out as an investment? Becoming a landlord is a very exciting and rewarding business endeavour, allowing you to boost your monthly income while investing for the long term. However, like with the start of any other type of investment, your first buy-to-let property will not be a risk-free enterprise.

As a property owner, you understand the importance of having proper property owners insurance. We know that the process of buying a property and renting it out is not always easy. It requires careful consideration of legal requirements and ensuring that the property is safe for tenants to live in. You cannot simply purchase a property and immediately rent it out without taking into account all the necessary legalities. It’s crucial to do everything by the book to protect yourself and your tenants, and having the right insurance coverage can provide you with peace of mind.

What’s more, the work doesn’t stop there. As long as you have people living in your property, you have a responsibility to maintain it and keep your tenants happy. Getting started therefore might seem a bit daunting, which is why we’ve created this helpful all-you-need-to-know guide for your first buy-to-let property.

1. UNDERSTAND WHAT IT INVOLVES
2. CALCULATE YOUR COST AND INVESTMENT YIELD
3. RESEARCH YOUR IDEAL TENANT
4. SEARCH FOR THE PERFECT PROPERTY
5. GET THE RIGHT INSURANCE

1. Understand what it involves

Acquiring a buy-to-let property is not as easy as simply purchasing a house or apartment — there’s a lot to consider, including rules, taxes, and mortgages. Landlords need a buy-to-let mortgage, as they cannot rent out a property with a standard residential mortgage, which is only intended for buyers who intend to live there. To be eligible for a buy-to-let mortgage, you’ll likely need a deposit of at least 20-25% (or around 40% to receive better interest rates), pass the lender’s affordability rules and have a sufficient interest cover ratio (typically between 125% to 140%).

When it comes to taxes on a buy-to-let property, if you earn more than £6,725 a year or more as a landlord, Class 2 National Insurance (NI) is a requirement — voluntary NI payments can be made if you’re below the profit threshold. Rental income is to be taxed in the same way as business income, with deductibles on residential lets including things like letting agents’ fees, accountants’ fees, building and contents insurance, utility bills, and council tax. Stamp duty is another component to factor in if you already own a home you live in yourself. A 3% minimum extra charge (also known as Additional Stamp Duty Rate) is added onto to your standard bill if your buy-to-let property is worth more than £40,000.

Know your responsibilities

Being a landlord comes with a handful of responsibilities, including:

• Regularly checking and maintaining the property to make sure it’s fit for purpose
• Ensuring gas and electrical installations are safe
• Providing an Energy Performance Certificate for the property
• Protecting your tenant’s deposit in a legitimate scheme
• Conducting right to rent checks
• Giving your tenant a copy of the How To Rent checklist
• Carrying out repairs
• Implementing fire safety measures

There are also various other rules and regulations that have been implemented or adjusted in recent years as the buy-to-let market undergoes innovation to become more professionalised. For example, you need to comply with new electrical safety regulations — these ensure all installations are checked and tested by qualified electricians — as well as complete the right to rent checks, and adhere to the caps now placed on deposit and holding deposit fees.

2. Calculate your cost and investment yield

We’ve addressed some of the costs associated with owning a buy-to-let property, but it’s time to look at this from a more comprehensive financial point of view.

In order to secure a mortgage, you will first need to calculate your rental yields to prove that your investment is profitable. To do this, take the yearly rental income of the property, divide by the amount you paid for it, and multiply by 100 to find the percentage. This will help you assess whether you’ve made a good decision on the building. For example, if your rental income is £15,000 per year and you paid £250,000 for the property, your rental (gross) yield is 6%. You can also work out the net field by factoring in things like insurance and maintenance costs.

It’s also worth looking at capital appreciation — the potential increase in value of the property over time. However, uncertainty over future prices suggests that rental yield will probably be a more important factor to you.

3. Research your ideal tenant

Now, you need to find the right tenant for your property. Is it undergraduate or postgraduate students, a professional living alone, or a family?

Depending on which one you decide upon, you need to make sure your property matches your tenant’s needs. For example, a family might be less likely to rent somewhere if there isn’t a garden or enough space. If you have purchased a small one bedroom flat in a busy city centre, your ideal tenant may be a working professional aged between 25 and 40, for example. Match the tenant to the property, and you’ll be in luck.

Students

If you have bought a large property in a town or city that has a popular university, you’re likely to attract students. Most landlords decide on a HMO (Houses in Multiple Occupation) model in which they rent out individual rooms to students, rather than the whole property to one tenant. This enables you to maximise your yearly rental income. This type of renting might not be a viable option for you if your goal is short-term investment though, as those in education will need a tenancy for their entire academic year. Be prepared for potentially higher maintenance costs — students can be messy.

Retirees

Perhaps you’ve found a quaint, little bungalow in a quiet seaside town. While this kind of property will not appeal to students, it could be perfect for someone wanting to move away and retire. As such, you’re looking at a completely different demographic. The benefits can be plentiful, as older renters typically intend to stay for long periods of time and are less likely to cause any damage.

If they pay rent with their pension, this will also provide you with a guarantee of a more secure rental income. However, if your ideal tenant is above 65, you need to evaluate if the property is suitable. Consider a wet room or shower, step-free access and close proximity to local shops and transport links.

Working professionals

If you’d rather rent to a working professional, this offers a lot of wiggle room when it comes to choosing a buy-to-let property. Depending on the location, this type of tenant is more likely to enter into a long-term tenancy agreement, meaning you can ensure you receive income for at least six months. They are also a low-risk option as their full-time employment is proof of ability to pay rent monthly.

What’s more, your property could be anywhere. It might be in the middle of nowhere, or somewhere out of the main hub of a city that is perfect for a tenant working from home. Or it may be located on a busy high street close to office buildings and shops — there’s plenty of lucrative opportunities!

4. Search for the perfect property

There are a number of properties a landlord can invest in, including commercial, residential and mixed use buildings. Commercial is split into different categories: retail such as supermarkets, leisure and restaurants, office and industrial-type locations. Residential covers flats, bungalows, terraced houses, semi-detached, and detached homes. While mixed use properties refer to buildings that have been split into domestic and commercial units, such as a couple of flats above a high street shop.

Location

When it comes to finding the perfect property to rent out, a few things need to be considered. The location is key, as your property will be much more profitable if it’s in the right neighbourhood. It’s possible to buy property in a bad area, so it’s essential you conduct research into different places to see where the demand is.

The best buy-to-let areas tend to be those with nearby transport links, shops and eateries, schools and a community. You should evaluate how central a property is, the local neighbourhood and future development of the area, among other factors.

Price

The price is also important, with lots of different costs to take into account bar the initial outlay, including maintenance, mortgage fees, legal costs, renovations and landlord insurance. When browsing for properties, don’t be afraid to haggle with the sellers. The market is always fluctuating, and you might be able to get a lower price.

Look at properties that will offer you the best potential rental yields to ensure you profit from your investment. For example, if a building is in disrepair it’s likely there will be additional costs for renovating it, which could impact your overall income. Research is essential here, especially as a first-time buyer. Don’t forget your budget either — consider what you can realistically afford, including the extra costs associated with buying a property and carrying out landlord duties.

5. Get the right insurance

Since you’ve invested a significant sum into your first buy-to-let property, you’ll certainly want insurance to protect you and your finances. There are a variety of specific covers that are important for landlords. First of all, public liability insurance is essential. This protects your livelihood should a tenant make a claim against you for accidental injury, for example, if they trip over a loose floorboard and hurt themselves. Accidents do happen, even if you’ve taken care and precaution to reduce any risks.

You’ll also need legal expenses protection to cover the legal costs in a situation like this, while another vital cover is buildings insurance which safeguards your business in the event that something happens to the structure of the property. Whether it’s caused by extreme weather, a fire or flood, you’ll be covered.

Those are the foundations of your insurance policy, but you can add more specific covers to make sure your property business is safe. Landlord insurance (also known as buy-to-let insurance) offers specialist protection to those renting a building to tenants, covering things like loss of rent, injury claims, and damage or theft. It’s not legally required by law, however, this type of policy can be a lifesaver should anything go wrong. Contents insurance will cover the costs of if any of your building’s contents are lost, damaged or stolen. For example, if the property is furnished, your finances will be secure should a fire destroy any of the items you provided for the tenant.

You may also want to consider glass insurance in case any windows are damaged, accidental damage cover should you or a tenant cause damage by mistake, and alternative accommodation which pays out if your property becomes inhabitable for whatever reason.

So that’s that: everything you need to know about buying your first buy-to-let property! To create the best insurance package for your needs, don’t hesitate to get a quote from us at your nearest convenience. Looking for affordable business insurance options? Look no further than Brisco Business.

Darragh Timlin

With over 25 years’ experience, Darragh is an expert in all things insurance. Starting his career in commercial property underwriting, Darragh has worked for a number of global insurers and is now Managing Director of Brisco Business, part of the wider Henry Seymour Group.

All articles by Darragh Timlin