Buy to let is one of the biggest mortgage markets in the UK; it is also one of the fastest growing areas of investment. This has resulted in buy to let gaining considerable attention from both novice and experienced investors alike.

The theory of buy to let is very simple: individuals purchase property that they then let out to tenants, either on a long-term or a short-term basis that will, at the very least, cover the mortgage repayments and hopefully generate a regular income.

Driven by the rising concern over the state of pensions and low interest rates on savings, the buy to let market has become one of the fundamental driving forces in Britain’s economy.

As a result of such factors, more and more lenders are now prepared to offer mortgages to people over the age of 60. Currently, there are around twenty-five lenders that will consider borrowers over the age of 60, approximately twelve that are prepared to lend to people over the age of 70 and there are even a few (albeit a small number) that are prepared to consider borrowers over the age of 80.

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Buy to Let Mortgage Opportunities

Buy to let covers a huge range of different opportunities. Whilst it is true that the vast majority of buy to let landlords consider the standard residential market as their bread and butter, there are many other opportunities available that should not be overlooked. By spreading your portfolio throughout the various markets, you will be much better placed to deal with any dips on one or more of the markets, as not all of your investments will dip at the same time, allowing you greater control and predictability in your investments.

Residential Lettings

A standard assured short-hold tenancy is the basic simple residential tenancy. Since 28 February 1997, all tenancies are considered to be an assured short-hold tenancy, unless it is stated in writing to the contrary. As a standard, an assured short-hold tenancy will normally be either six months or twelve months, although it is possible to have any other duration with the agreement of both landlord and tenant.

Once the tenancy term comes to an end, the tenancy can continue but it will be on a periodic basis, the length of the period being determined by how often the rent is paid. For example, if the rent is paid weekly, the period is one week and either tenant or landlord can end the tenancy with one week's notice. During the original short-hold tenancy period, neither tenant nor landlord can end the tenancy, under normal circumstances.

Student Lettings

Student lettings are slightly different from standard assured short-hold tenancies, as the length of the tenancy is almost always for the duration of the academic year, which is ten months. It is common practice for landlords of student houses to let each room out individually. This has the advantage of producing higher returns but does not allow a landlord to claim any unpaid rent by one individual tenant from any of the other tenants. In addition, all rooms will have to be let individually, which can lead to partial voids and a degree of unpredictability.

Any property with more than four individual rooms being let independently will be classified as a house of multiple occupation, which requires certain criteria to be met and licenses to be obtained.

Holiday Lettings

Holiday lettings are by far the most labour-intensive of lettings, with a different set of tenants moving in on a regular basis. The changeover and paperwork is far more time consuming than a standard assured short-hold tenancy. There are advantages to holiday letting such as favourable tax treatment and increased returns if the property is let for a substantial part of the year.

Commercial Lettings

A relatively new concept for the buy to let landlord, commercial lettings offer solid returns on a long-term basis. Commercial lettings can last for decades, providing a guaranteed, stable rental. Despite these advantages, commercial lettings are still not massively popular, usually because they are much more dependent on the economic state of the country and often require specialist commercial knowledge which many buy to let landlords do not possess.

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Financing a Buy to Let Mortgage

Having decided to get involved in the buy to let market, the first thing that needs to be considered is how this project is likely to be financed. Fortunately, there are a wide number of options available which allow potential investors a wealth of opportunities when it comes to financing the project.

Beyond a shadow of a doubt, the vast majority of buy to let investors will use a specialist form of buy to let mortgage in order to purchase their property. A buy to let mortgage has different requirements and restrictions compared with a standard residential mortgage.

In addition, the rates offered are sometimes not as competitive as those mortgages that are used specifically for residential mortgages. Do not be tempted to use a residential mortgage, as if you then let the property you are, in effect, breaking the terms of the mortgage and the lender may withdraw their financing.

Restrictions

A larger deposit is usually required, especially if it is your first buy to let property, as you are a "first time landlord." A deposit of around 15 to 25 percent is usually required and it will be necessary to prove to the mortgage lender that the rent will cover in the region of 125 percent of the mortgage repayments. Some companies will offer mortgages with a lesser deposit or with lesser coverage but in order to give yourself the widest range of choices when it comes to mortgage providers, it pays to be able to meet the basic criteria.

Some mortgage providers will offer services especially tailored for investors who have growing portfolios. Some providers will only finance lending for up to 5 properties, whereas others will allow any number of properties but may place a maximum total value on the portfolio. When you are starting out as a property investor, it can be difficult to consider your future needs. Nevertheless, paying attention to your requirements at this early stage can mean that you have a flexible financing structure in place from the very start.

Alternative Financing

As well as a buy to let mortgage, many investors will consider joining a property syndicate, whereby they are only required to invest a small amount of cash. By joining forces with other investors it may not be necessary to borrow any cash at all. Other alternatives include re-mortgaging the family home, which is a popular choice for investors who do not have a mortgage on their home. For those who do have a mortgage on their home, they may wish to remortgage a small amount to raise deposit funds. Short-term financing with loans and credit cards is also an option but can be costly, although it does allow for a quick release of cash.

Ongoing Costs

Anyone who has purchased a property to live in is more than aware of the costs such as heating and electricity. However, there are so many additional costs involved in buy to let which absolutely must be budgeted for, as part of the project planning.

Modern tenants do, generally, require white goods to be part of the property. Therefore, an additional £1,500 should be budgeted as part of the initial setting up costs, if you are to appeal to the largest possible number of tenants.

Although your tenants will usually be responsible for costs such as council tax, water rates and utility bills including electricity and gas, it is not uncommon for landlords to include regular costs such as council tax as part of the rent. This has several advantages; tenants like the predictability of having some bills included as it allows them to budget accurately; as a landlord you are then certain that a council tax bill will have been paid. Although it is the resident tenant who is responsible for the council tax bill (unless the landlord is also resident), it may be difficult to retrieve the cash from a tenant who has moved on, leaving the landlord with a potential liability to prevent fines. A similar principle applies with water and sewerage charges and this is another bill that is often included as part of the rent.

Insurance is another ongoing cost that should be viewed as truly essential. The two main insurances that you should be maintaining are buildings’ insurance and public liability insurance. This will cover you if the property has a structural problem such as fire or flooding and will also cover you if your tenants are injured in your property and try to claim compensation from you, as the landlord.

Buy to let investors should budget for the following expenses:

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Tax Implications

Nobody really likes to think about taxes but unfortunately, where buy to let is concerned, there are a range of taxes that need to be considered when budgeting for your growing portfolio. Generally, the following taxes will have to be dealt with and planned for as part of a buy to let investment:

Income Tax

In its simplest form, income tax is payable on rental income in the same way as any other type of income that you receive. Bear in mind that if you are receiving an alternative income which is anywhere near the 40 percent tax rate point, then the rental income may push you into the higher income tax band and result in you paying 40 percent tax on your rental income.

Not all of your rental income will be taxable, as certain expenses can be deducted from the income before it is used to complete the tax calculation - it is worth speaking to a specialist tax advisor in this respect.

Capital Gains Tax

Perhaps the most dreaded of all taxes! Every individual will have a personal allowance for any gain made in the tax year. The allowance amount will be deducted from the gain, with the remainder amount being the taxable gain amount. This amount is then added to the income received that year and taxed at the appropriate rate.

Capital gain is defined as the selling price minus the purchase price, purchase expenses, sale expenses and any taper relief and indexation allowances available. Again, a specialist tax advisor should be consulted.

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Buy to Let Landlord Restrictions

As a landlord, you have numerous ongoing considerations and obligations, many of which are required by law. The Landlord and Tenant Act 1985 is the primary legislation in this area and any landlord, particularly one who is managing their own property, should be at least familiar with the contents of this Act.

What Repairs are the Landlord's Responsibility

Unless the tenancy has a length of more than 7 years, the landlord is responsible for the repairs and maintenance of the property. This includes:

Other repairs may be negotiated between landlord and tenant and a landlord can legitimately ask for a contribution towards other repairs, if the tenant is responsible for the damage incurred.

Gas and Electrical Appliances

As a landlord, you have considerable obligations to maintain the safety of the gas and electrical appliances in the property. This is often overlooked, as the amount of servicing required by a landlord is considerably higher than the requirements in a standard owner occupied residential property.

Under the Gas Safety (Installation and Use) Regulations 1998 , the landlord must ensure that all gas appliances are in good working order and that the appliances are serviced by a registered CORGI specialist, on an annual basis. Evidence of this servicing must be given to the tenant, within 28 days of the check being completed.

Fire Regulations

All furniture and furnishings supplied must comply with the Furniture and Furnishings (Fire) (Safety) Regulations 1988. Most furniture will be labelled in a way that makes it clear whether it meets with these requirements. If in doubt - chuck it out!

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