There comes a point in most successful people's lives where they consider buying rental property as a way of diversifying their assets and building an additional income stream. Are you a first time buyer who is interested in purchasing a rental property with a buy to let mortgage? If so, you may be wondering what the best way to go about it is. Buy to let properties are not completely passive investments, and you need to be aware of that before making the decision to purchase, or compare buy to let options with other investment opportunities.
There are many different types of buy to let mortgages available, and it can be difficult to decide which one is right for you. Properties can be purchased on an interest only basis, where you use the monthly rental yield to pay off only the interest on the loan, although this means that you will never pay down the loan entirely.
Interest only loans have also become more expensive in recent months given economic conditions, and high rates should be expected to persist for the foreseeable future. Increased stamp duty and higher taxes have also reduced buy to let lending, and there are much fewer easy wins than in previous eras.
In this blog post, we will discuss the best buy to let mortgage for first time buyers and give you some tips on how to get started! This is the first in a series discussing the process of buying rental property end to end.
Finding a Buy to Let Property
The first step in the process is finding a property that you are interested in purchasing. There are many different factors to consider when choosing a property, such as location, size, and type of property.
You will also need to research the local rental market to determine how much rent you can charge and what the demand for rental properties is like in your area. Finding the best buy to let mortgage for first time buyers is often more a case of discovering the right property.
It's a little bit of a balancing act: you will want a property in a strong, well-developed area so that you can be sure of consistent demand.
However, these areas naturally command the highest prices, which means that your initial outlay will be much larger. This often means that even with the higher rents that these properties command, it can often be difficult to make a reasonably good yield.
It also means that there is less scope for capital growth. What does that mean? Well, in the ideal scenario, you are hoping for two types of return. A consistent yield from the rent you receive per month, and an appreciation in the property that will allow you to either refinance and take money out at a higher valuation, or sell down the line for a tidy profit.
Limitations: what is the best buy to let mortgage for first time buyers?
The best buy to let mortgage for first time buyers is one that offers a low interest rate and a reasonable loan-to-value ratio. The loan-to-value ratio (LTV) is the amount of the property's value that you will be borrowing from the bank.
For example, if you are purchasing a property for £100,000 and your LTV is 75%, this means that you will be borrowing £75,000 from the bank. The lower the LTV, the less risk for the lender, and therefore the lower the interest rate will be. A typical buy to let mortgage will require first time buyers to put down a 25% deposit.
There are many different types of mortgage available, so it is important to do your research and compare different offers before deciding which one is right for you.
You should also speak to a mortgage broker who can help you to find the best deal and answer any questions that you may have.
How do you go about getting the best buy to let mortgages for first time buyers?
The process of getting a mortgage for a rental property is similar to the process of getting a mortgage for a residential property. However, there are some additional things that you will need to take into account.
For example, most lenders will require you to have a minimum income of £25,000 per year in order to qualify for a buy to let mortgage. They will also take into account the rental income that you are likely to receive when assessing your application.
It is important to remember that a buy to let mortgage is a commercial loan, and therefore the criteria that lenders use to assess applications are slightly different. In most cases, you will need a larger deposit than you would for a residential mortgage (typically 25% as mentioned above), and the interest rates are usually higher.
However, this is offset by the fact that you can claim certain expenses against your rental income, which reduces the amount of tax that you have to pay.
It's a little bit of a grey area, but anything that constitutes reasonable expense in the upkeep and maintenance of the property can be tax deductible.
What are some of the things you need to consider when buying a rental property?
There are a few things that you need to take into account when buying a rental property: the location of the property is important.
- You will want to choose an area with high demand for rental properties, as this will help to ensure that you are able to charge a competitive rent. The size and type of property is also important.
- You will want to choose a property that is large enough to appeal to a wide range of potential tenants, but not so large that it is difficult to maintain.
- The condition of the property is also something you need to consider. Obviously, you will want to choose a property that is in good condition and does not require any major work. However, one that has recently been fully renovated likely doesn't represent good value.
Personally, we like to go for properties that are structurally sound but in need of touching up. In general by doing light renovations here, you can put up for rent a property that is more than the sum of its parts, and worth more than the combined sum you paid for it plus the renovation.
The money isn't necessarily made in the rate you get, which means that it isn't just about finding the best buy to let mortgage for first time buyers.
Collecting rental income
In looking at the best buy to let mortgage, you should also think about how you will be collecting the income. Aside from how much this covers your monthly repayments, you also will also have to set up a bank account and choose from the huge selection available.
One particularly useful strategy when taking out a buy to let mortgage is to put the property or properties into a limited company, which means that the rent will not be instantly taxed at your marginal income tax rate.
Fortunately, we've compiled a list of the best bank accounts for rental income, so you can choose from a wealth of available information to support your application, credit history and mortgage term dependent .
Setting up a company
This does mean that you won't be able to start off buying a property with a residential buy to let mortgage, and so the mortgage deal you get will have different (and often more onerous) requirements.
An interest only mortgage deal should still be possible (as opposed to repayment mortgages), depending on your circumstances, but you should tread carefully here as you will be at the whim of the interest rate environment
How can you make your rental property stand out from the competition?
In the current rental market, there is very little you need to do to stand out! Properties are being snapped up almost immediately, and there are plenty of anecdotes about people not even being able to get to see the property before it is gone.
That being said, as simple as it sounds it's actually pretty easy to stand out simply by doing your job well. Make sure the property undergoes necessary maintenance, treat your tenants well and keep up with your monthly payments and you're already ahead of a whole load of existing landlords!
This might seem like it cuts into both your time and your margin, but this is a multi-decade long play, and your priority should be to build something sustainable.
In fact, one sensible way of looking at it is hoping to break even on the first property and use it as experience for further expansion: anything beyond that is a bonus!
The rental income will ideally cover your monthly payments and as long as that's the case, you can extend the buy to let mortgage if necessary at the end of the mortgage term, and hold onto the property in perpetuity at a new interest rate.
The difference between the purchase price and the current value will hopefully be sufficient to also represent a strong capital gain, which is also taxed at a much lower rate than the monthly income. Remember, some mortgage debt is no bad thing, as long as it is serviced correctly and if interest only mortgage, there is enough headroom to weather volatility.
So you've put together the details and done a couple of applications for your first buy to let mortgage. What are the next steps?
Well, you'll be assessed on a variety of criteria including the collateral for the loan, your income and how much risk the bank will be taking on. This will obviously be mitigated in their mortgage calculator if you already own buy to let property, and will also depend on how much deposit you put down.
Obviously, the larger the deposit, the less risk they are taking and the less capital debt the bank will have to take on. Almost everyone has to borrow money to make their first buy to let investment investment, so having enough rent to pay interest and have some profit left over is something you will have to get used to.
Of course, the fact that it is hardest at the beginning before you own multiple properties means that if you manage to sort out your first one, the next will only get easier.
Standard residential mortgages will favour this, and by rolling over the proceeds from one to the next, you can avoid some capital gains tax too. Portfolio landlords soon become familiar with the UK tax code! Your monthly mortgage payment will soon be large enough that you have significant outgoings to write off against, and many lenders will be happy to use your existing properties as collateral.