A total novice? Don’t worry — here’s how to get started

THE first thing you need to know is that there i s no easy route to success. You’ll need to put in long hours of r esearch and keep the property you buy in good condition.

Start by considering who you would want as tenants and why they would rent from you. The answer depends on whom you want to target: families, young professionals or students.

Each has particular needs for which you will need to cater.

Families are likely to need a home with a garden, at l east three bedrooms, decent parking and good schools nearby. Many will prefer an unfurnished property.

For young professionals, it’s all about being a stone’s throw from restaurants, shops and the gym, and efficient transport links.

Students need to be reasonably close to campus and other student homes where their friends live, favourite bars and college haunts. You won’t need to provide highspec amenities: think clean and comfortable instead.

You’ll need to know a lot about an area to choose the best spot. That’s why investors — and particularly novices — tend to buy a property close to where they live.

You’re likely to know this market better than anywhere else (more than estate agents who might try to pull the wool over your eyes) and can pick out the kind of property and location that you want.

It also makes it easy to keep an eye on the property and react swiftly to problems.

To save money, you might consider buying a rundown property that you can do up. But this is a risk. As well as eating up your spare cash, the property will remain empty while you carry out repairs.

Common mistakes that novice landlords make are buying a home at a reduced price because they think it will save them money (it rarely does) and snapping up a property they would like to call home themselves (you won’t live in it).

It’s all about unearthing a good location for the market that you have chosen. Put yourself in a tenant’s shoes.

FIND OUT WHAT YOU CAN BORROW

THErE are two ways of getting the money you need for a buy-to-let deposit. You may have enough in savings or have taken a tax-free lump sum from your pension and plan to use this cash to buy a house outright or at least put down a hefty deposit.

Or you may have a small deposit and intend to use some of the equity built up in your own home.

This is not unusual, particularly for those who have been in the same house for a while and seen the value of their pr o per t y increase significantly. It involves going to your mortgage company and asking to take out a bigger loan on your current home.

You may have £75,000 left to pay off, but your property has increased in value from £200,000 to £350,000. You could extend your borrowing to £150,000 and take the extra £75,000 to use as a deposit for your buy-tolet mortgage.

remember, though, that this will increase your monthly mortgage payments — for someone with ten years left to pay off their existing deal, it would double from £724 to £1,448 on a typical mortgage rate of 3 per cent. The advantage is that nowadays there are some of the cheapest mortgage rates around.

YOU’LL NEED A 25 PC DEPOSIT

AFTEr you have worked out the best way to fund your investment property, it’s time to find a buy-tolet mortgage.

These are different from normal residential mortgages and the banks make borrowers pass different (though still stringent) tests.

First, they will want the potential rental income to more than cover the mortgage. As a yardstick, nearly every l ender will i nsist on the monthly rent being at least 125 pc of the monthly interest payment on your loan. This means that a £500 interest payment needs a monthly rental income of at least £625.

Second, be prepared to put down a deposit of at least 25 pc. For the most competitive rates, you’ll need 40 pc or more.

As a rule, buy-to-let mortgage rates tend to be more expensive than residential loans. This is to reflect the greater borrowing risk to lenders of a default, whether from bad tenants, indebted owners overstretching themselves or a shock interest rate rise.

Buy-to-let interest rates have fallen along with other mortgages in recent years. As a guide, you can get a competitive five-year fix at 3.19 pc if you have a 40 pc deposit. The cheapest equivalent f or ordinary residential borrowers would be 2.24 pc — nearly a third less.

A 30 pc deposit could mean you pay slightly more for your buy-to-let loan— 3.89 pc. And if you have the usual minimum of 25 pc, then you can expect to pay 4.14 pc.

Try an i ndependent f ee- f ree broker, such as London & Country. They can analyse your personal finances and give you a guide to what you will be able to borrow. Like ordinary residential loans, this will depend on how much you earn and any other income from investments or savings.

If you’re already a homeowner, the broker will assess your existing mortgage and how much equity you have in your home.

Though a mortgage means that you already have a lot of debt, being an existing homeowner is no barrier to buy-to-let. In fact, it shows that you can manage borrowing large sums of money.

IS INTEREST-ONLY THE BEST OPTION?

WITH buy-to-let, you will almost certainly end up taking out an interest-only mortgage.

These days, when you borrow to buy a house to live in yourself, you take out what i s called a repayment mortgage.

This means that each month you pay back a chunk of the original capital sum you borrowed and some interest on top. Over a typical 25-year term, you repay all the debt and end up owning the house.

But buy-to-let borrowers take out an interest- only loan instead. It is much cheaper, as there is no capital to repay (and there are tax benefits, too).

For example, on a £ 150,000 mortgage at 4 pc you would pay £792 a month as a normal borrower on a typical 25-year term loan, but £500 a month as a landlord with an interest-only mortgage.

This frees up extra cash for a l andlord to cover maintenance costs. If you hold the property for 25 years, then the rise in its value should go a l ong way towards clearing the original sum you paid f or i t ( though this does mean selling up).

Buy-to-let is not covered by the tough new lending rules known as the Mortgage Market review, which banks make borrowers sit through. But that doesn’t mean you won’t have to pass stiff tests.

For example, while you might get a buy-to-let deal at 4 pc, you will

have to pass a check to ensure you could still afford your repayments if the rate happened to jump to 6 pc.

It is important to note that stamp duty land tax is payable on all buyto-let properties sold for more than £125,000 at the same percentage rates as for residential homes. GET THE RETURNS THAT YOU NEED I t WON’t be worth viewing potential properties unless you have crunched the numbers. that will give you an indication of how much you can spend on a property, the rent you hope to attract and the costs you will incur if it lies empty for some time.

As with any investment, you’ll need a yardstick of whether you are getting good value. With buy-to-let, this is known in industry jargon as a ‘rental yield’.

At its most simple, this is an estimated annual return on your investment, expressed as a percentage of your property value. Let’s look at an example. Say you’re a cash buyer and buy a property for £200,000. Let’s assume that the property brings in £1,000 in rent each month — in other words, £12,000 a year. You divide £200,000 by £12,000, which gives you the yield of 6 pc.

this looks pretty good compared with what you could get elsewhere. It’s three times what you’d get in a cash savings account and better than an investment fund that pays an income.

But this isn’t the end of the calculation, as there are other costs to take into consideration.

these will include maintenance costs, insurance, ground rent, service charges and possibly letting agents’ fees (which will have VAt on top).

Let’s go back to the same £200,000 property. Say you buy it with a 25 pc deposit, so you put down £50,000 and take a £150,000 mortgage. At a reasonable fixed-rate of 4 pc on an i nterest- only rate, that works out at £500 a month, giving you annual costs of £6,000.

Most brokers estimate that your maintenance costs and insurance will add up to about 10 pc of the rent you bring in — £1,200.

So, how does this affect your returns? tot up the extra annual costs — mortgage (£6,000) and maintenance (£1,200) and your returns are down to £4,800. Your yield is now 2.4 pc. this is still better than a savings account, but it’s much less attractive.

Add in fees from a lettings agent — costing another 10 pc, so another £1,200 — and it slips even further to 1.8 pc.

Of course, in one year you might spend hardly a bean. But it only takes a flooded kitchen, broken boiler or a tenant who goes missing owing you rent to scupper your financial plans. TELL THE TAXMAN AND PAY LESS TOO BuY-tO- Let will bring new pressures to bear, especially for newcomers, as it may mean filling in a self-assessment tax return for the first time.

With buy-to-let property income, you need to pay income tax on the profits you make. this income will be added to your existing income, which may mean you get pushed into a higher-rate tax band.

But before you calculate your income, you can deduct many of your costs. this includes repairs to properties — new windows, drainpipes and a washing machine, say — as well as letting agent fees, landlord insurance and even travel to and from your property.

You can also deduct the interest you pay on the mortgage from your income tax bill. So, what tax would you pay on your theoretical investment property?

Let’s assume that you already have an income of £25,000 a year — you’ll be paying 20 pc basic rate income tax.

Your property brings in £12,000 rent a year. From this you can then deduct mortgage interest of £6,000 and your costs of £1,200, and letting fees of £1,200. this leaves you with a profit of £3,600. You’ll pay 20 pc tax on this — about £720.

And there is one more tax to pay — capital gains tax (CGt), which may apply when you eventually sell up.

everyone has an annual capital gains tax allowance, which allows you to cash in up to £11,000 of profits tax-free a year. On profits above this, you pay 18 pc if you’re a basic rate taxpayer and 28 pc for higher earners. So, if you bought a house for £200,000 and sold it for £300,000, that’s a gain of £100,000 when you finally sell.

After your allowance of £11,000 ( as s u mi n g you haven’t cashed in anything else that year), tax is payable on t he r emaining gain of £89,000. As a basic- rate taxpayer, you would face a bill of £16,020; it would be £24,920 if you were a higher-rate payer. You can bring down your CGt bill by deducting some of the expenses associated with buying and managing a property. these include the stamp duty you paid when buying it and any fees for solicitors, estate agents and surveyors.

If you have a former home that you let and then sold, you may be able to further cut your CGt bill. If at any point a buy-to-let property has been its owner’s only or main residence, the last 18 months of ownership qualify for a tax break known as private residence relief.

this makes it free of CGt over that period, so any gains during that time can be disregarded. this tax relief was originally designed to protect those who had to move for work, but couldn’t sell their home.