Landlords: How non-traditional lets could earn you your dream lifestyle
For many, the idea of investing in property feels safer than investing in stocks or shares because it allows for a higher level of personal involvement. Much like hiring a financial advisor when investing in financial markets, you can choose to let an experienced professional take care of your property and its tenants through a letting agency, if you’d rather take a less hands-on approach.
A buy-to-let is when a property is bought specifically for the purpose of renting it out.
In order to make a profit, the monthly rent payments should be higher than the cost of maintenance, letting agent fees (if applicable) and your monthly mortgage repayments.
If you plan to rent your property, you must have a buy-to-let mortgage. The rules around buy-to-let mortgages differ from those around regular residential mortgages, so it’s essential that you understand how. To help you in this regard, you can speak to Adam or Matt, our in-house Mortgage & Protection Advisors.
In this 3-minute read, we explore why landlords consider buy-to-let and, more recently, why investing in non-traditional buy-to-lets, such as Airbnb properties or houses in multiple occupation (HMOs) is of particular appeal.
Why a buy-to-let?
One of the biggest advantages of investing in buy-to-let means that you’ll earn rental income as well as generate capital growth. A reassuring factor to landlords considering entering this investment space is that you can take out insurance policies to protect you against loss of rental income, damages, and legal costs.
Some points you need to consider before investing in a buy-to-let include:
- Your tax bill will be higher than before the BTL investment and therefore will impact your profits
- If you don’t have the right insurance in place, you might not be able to generate an income if the property is unoccupied
- If property prices fall, your capital will reduce. If you have an interest-only mortgage, you’ll need to make up for any variances if the property sells for less than your original purchase price
- Factor in the costs of stamp duty, insurance plus wear and tear, as these are higher than most people anticipate
Recent changes to legislation and taxation, such as the 3% Stamp Duty surcharge, have made buy-to-let less appealing for many UK property investors; but with so much more return than a standard bank or building society account, the right buy-to-let’s are well worth it.
What buy-to-let options are there?
In a nutshell: traditional vs non-traditional.
Why look at non-traditional buy-to-lets?
Non-traditional buy-to-lets have significant financial benefits when compared with their counterparts. The answer to this question, however, goes beyond the issue of tax we’ve previously highlighted. To a large extent, it depends on the type of investment you’re looking for, and why you need the extra income.
Oftentimes, buy-to-let properties include flats or house shares that are generally situated close to city centres. This is where property prices are often very high, so renting becomes an affordable living option for those looking to stay within walking distance to work.
A good example of non-traditional buy-to-lets include properties bought with the sole purpose of letting exclusively through sites like Airbnb.
The world’s most successful Airbnb landlord earns £12million a year by letting out properties in London; and many others have materialised their dreams by starting small and growing over time.
Both Airbnb investing and the traditional rental model can be profitable, depending on the property’s location and amenities. In high-demand areas, Airbnb properties can be more profitable in terms of rent, which is a huge attraction to landlords.
Typically offering short-term lets, the main benefit of Airbnb rentals is that it allows you to host multiple guests throughout the year, for a daily rate, that in some cases can be as much as a months rent using the traditional model. In contrast to this, traditional investment properties are usually rented to long-term tenants at a fixed-cost.
Houses in multiple occupation (HMOs) are another form of buy-to-let property and considered non-traditional. With an HMO, some landlords have been known to generate a rental yield up to three times higher than renting a whole property on one agreement. On the flip side, they do have the potential to require additional long-term maintenance costs; so it’s worth weighing up the likelihood of each.
How do I get started with buy-to-let?
Your journey to becoming a landlord will typically involve five steps:
Organise your finances. Speak to a financial adviser to decide how much money you should be investing and what returns you should be striving for. Additionally, speak to a mortgage broker to get the best mortgage in principle so you’re able to move quickly once you find the right property.
Find a property that offers the best yield and have your offer accepted. Allow a number of months for the process, as there’s no guaranteed timeframe to determine how long a sale can take.
Take out insurance to protect you against unexpected costs like injuries to tenants, damages and loss of rent. This is in addition to buildings insurance.
Source specific tenants. You can either use an agency or do this privately, depending on how involved you want to be. Many landlords choose to use an agency due to the additional marketing their property will receive; plus, the agent takes control of the reference checking process and all the administration. Regardless of whether you hand-pick your own tenants and know them well or not, always draw up a legally binding contract.
Buy-to-let is the type of investment that requires continuous analysis. You’ll need to be up to speed to review your mortgage for when your current deal expires, as well as conduct required maintenance on the property. Some landlords also suggest hiring an accountant to ensure that any income generated from the buy-to-let is taken care of in the most tax-efficient way.