In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property as it increases in value over time? The decision may affect the type of property you purchase, and the location.
When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 135% of the rental property's interest only mortgage repayments in order to cover your costs should anything go wrong.
These additional costs include:
- Property upkeep - maintenance costs for the property.
- Letting agent’s fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
- Ground rent / service charges - applicable to leasehold properties.
- Legal insurance - to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
- Insurance - building insurance and contents insurance for the items provided as part of the rental agreement.
- Furnishings - the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
- Gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
- Decorating costs - the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
When choosing a property to let it is wise to take advice from local letting agents to determine what type of properties are in need and in which parts of the town is best or most wanted, they can tell you if there is a university in the town and if students are looking for somewhere to live. The Association of Residential Letting Agents (ARLA) state that a property needs to be in the right area, close to transport and other facilities, and in good condition.
When choosing a letting agent to act on your behalf it is very sensible to choose one that is a member of the ARLA. The reason being all members of the ARLA must join in a bonding scheme to protect rent and tenant's deposits. The bond provides total compensation of up to £2 million a year.
There are a number of tax issues that need to be looked at in order to maximise your tax position, such as being able to offset your maintenance costs, letting agent fees etc as well as any interest paid on a buy to let mortgage against your tax.
You can visit the ARLA website at www.arla.co.uk for further information on becoming a private landlord.
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