Considering a buy-to-let for retirement? Read this.

You’ve just retired and suddenly have a pension pot to splash out on. Well, before you pack your bags and head off for a year-long cruise around the world, have you thought about ways to supplement your pension to make it go further?

Buy-to-let properties are a popular choice amongst retirees, or would-be retirees, to help secure a financial future post-work, have a steady and regular income and perhaps capitalise on property market growth in the long term.

Here QualitySolicitors provide a guide on the benefits of buy-to-lets, what factors you need to take into account before investing, a brief look at purchase and finance options, and what to expect post-purchase, including navigating tenancy agreements and landlord responsibilities. So, if you are considering investing in a second property, it would pay to read this.

Buy-to-let benefits

There are a number of benefits of including buy-to-let in your retirement plans. Regardless of how the housing market fluctuates, investment in property is long term and brings a high possibility of growth and profit if you come to sell years down the line.

Of course, the best benefit is that by renting your property out you will be able to continue generating income whilst meeting your mortgage repayments. Your tenant’s rent can pay for your mortgage, or to pay yourself back if you’ve dipped into your funds to buy the property, and leave you with extra spending funds. Simple… or is it?

What to consider before investing

Investing in a property is a big decision and there are several factors that need to be taken into account before you do so, both in terms of agreements and extra costs.

The market

The first factor – and one of the most important – is the property market. According to a report from Halifax, UK house price growth is accelerating and the average cost of a house has hit a record £230,280. The Bank of England last week raised the key interest rate from 0.5% to 0.75%. The good news, though, is that this isn’t expected to significantly affect mortgage affordability and investing in bricks and mortar may still be a sensible option for you to consider for retirement.[1] It goes without saying that it pays to do your research on the area well as well as the general market. The fastest growing area in the UK at the moment is Manchester.[2]

If someone still lives in the property

Once you’ve found the property you’d like to buy, you need to check whether it is already being let.

If the answer is yes, this is called ‘to sell subject to the tenancy’. This means if you make the purchase you will become responsible for the tenancy agreement currently in place. The tenant will continue to live there and pay rent to you. This might be an ideal situation to avoid paying marketing costs to find a tenant, but this is no cause to be lax; there are a number of steps that need to be taken.

Firstly, you will need to see a copy of the tenancy agreement so you can understand: the type of agreement in place (joint tenancy agreement or individual contract); how much rent is being paid and when; the tenancy period; how long the notice periods are for both parties; agreed obligations from either party; whether any items in the property, such as electrical equipment or furniture are included in the sale or are owned by the tenant; and any special terms or clauses of the agreement.

It’s essential to also request extra information on the tenancy and tenant, including confirmation that rental payments are up-to-date, as well as the amount of deposit paid and where it is being held. You should also enquire if any notices have been served or if there has been any recent correspondence about the property between tenant and owner. You’d also need confirmation that the person or persons actually occupying the property are the same persons that are named on the tenancy agreement.

Finally, check the energy efficiency rating of the place as listed on the Energy Performance Certificate (EPC). Recent regulation changes mean landlords cannot let a place or renew a tenancy agreement if their property has an EPC rating below ‘E’. If the property falls below the standard, landlords must do reasonable work to improve the property before a tenancy may be allowed. In short, if you buy a place and the rating is below ‘E’ it could cost you even more to make the improvements before you can start making money.

Conversely, the current owner may be selling the property with vacant possession on completion. In this case the seller will have to ensure that the tenancy can be terminated and the tenant leaves before the sale can be completed. This isn’t necessarily something to be overly concerned about, but it is important to bear in mind that if an existing tenant refuses to leave then it can considerably lengthen the completion process.

There is lot to consider before choosing to invest your life savings in a property nest egg. An experienced conveyancing solicitor will be able to highlight what needs to be considered for your situation and will be able to advise accordingly.

Extra costs

If you’ve ever rented a property in the past, you might remember the amount of times you contacted your landlord about broken furniture or appliances. Well, you will be on the other side of that!

On top of paying for basic maintenance, you will also need insurance. Building insurance will cover the structure of your property against fires, floods, storms and natural disasters. Contents insurance is also essential, as it will cover any belongings in your property, particularly if you rent it out fully furnished or with any white goods. The question as to who will be responsible for the contents insurance, though, is another matter. Landlords are increasingly choosing to include content insurance as an obligation on the tenant in rental agreements, which is something our team can help to advise on.

It’s also important to be mindful of void periods with the property – something that is often forgotten. Void periods are when the property is empty, meaning there’ll be no rental income from tenants, but you’ll still have to pay the mortgage, council taxes and any other associated bills. It’s best to allow for one void month per year when you work out your budget. A simple yet useful tool to find out how much you might have to spend on extra costs can be found on personal finance site This is Money’s ‘Buy-to-Let Costs Calculator’.

Finally, you should also bear in mind that there is a proposed ban on letting fees charged to tenants, which is most likely to come into play in early 2019. This means that tenants will no longer be charged by letting agents, which could result in agents increasing their costs to landlords. Deposits will also be capped at six weeks rent, whilst holding deposits will be capped at one. Landlords not compliant with the new law risk a fine of £5,000.[3] All these details would be covered in the fine print of a well-drafted tenancy agreement, which our network of solicitors are highly experienced in.

Finance options

Unless you’re lucky enough to be in a position to pay the full amount for your property outright, you will need a mortgage. There are a great variety of mortgages available on the market today, including specific buy-to-let mortgages.

Typically, a buy-to-let mortgage is more expensive than a standard one as they are considered a higher risk. The deposit needed will also be higher. On average the deposit is over £20,000 more.[4] With this in mind, if you have a standard mortgage and rent out your property without the bank’s knowledge, you could be committing mortgage fraud. You also need to be aware that since April 2017, the way landlords declare their rental income has been changing, meaning a significant increase on tax bills.

Previously landlords could deduct all mortgage interest payments from their tax bill, so that they only paid tax on profits not turnover. As an example, if you earned £1,500 from monthly rent and paid £750 on your mortgage, then you would only have to pay tax on the difference – in this case £750. However, from April 2017 to April 2020, the proportion of mortgage interest deductible is decreasing each year. Currently it is 50%, next tax year it will lower to 25% and then from April 2020 onwards you will be taxed on the full rental income.[5] In our earlier example, this would be on the full £1,500.

How would you like to pay?

The obvious way to find and buy your property is to work with an estate agent. They market and sell property, but they also deal with the paperwork, negotiate on your behalf, work with your solicitor and make sure the sale runs smoothly. If the type of property or area you want is specific, then estate agents will be able to identify and share suggestions as and when they become available on the market.

An alternative option to the traditional sales process is to buy at auction. This avenue might be an attractive choice to find a great deal and speed up the conveyancing process; for a straightforward purchase the conveyancing process usually takes a minimum of four to six weeks, while at auction you will become the legal property owner once you have paid the full purchase price within the required 28 days. We have developed a helpful guide specific for those looking to buy at auction, which you can read on the QualitySolicitors website.

Another option is to buy off-the-plan, which means buying a property before it’s been built. This sounds risky, but the long-term investment could bring great rewards. The property could be worth significantly more by the time you start to let it out, and you could also get a discount of up to 5% on the purchase price through government schemes.[6] But be wary, buying off-plan influences mortgages as most lenders don’t offer specific off-plan property mortgages. Also, mortgage agreements are only valid for six months, so you may have to re-apply if the property won’t be finished by then. Click here for more information on buying off the plan.

Post-purchase

Regardless of how you buy, there are still things you need to consider once you own your desired property.

We’ve already touched upon tenancy agreements and letting fees bans, but we cannot stress the importance enough of having a valid and up-to-date Will. An improperly drafted or out-of-date Will compromises your position as it will be treated the same as having no Will at all in the eyes of the law. Any major life changes, such as adding a substantial asset like a buy-to-let property to your estate, should be recorded in your Will. For our guide on the importance of Wills and what you should include, click here.

Where to go for more advice

When looking at different buy-to-let mortgages or insurance, have a look at online comparison sites such as Compare the Market or Money Super Market for the best deals and interest rates. For unbiased advice and tips, read personal finance media like Which? Money, Money Saving Expert or This is Money. Finally, visit the likes of Rightmove or Zoopla to see what is available in your desired area. A reputable local estate agent will also be invaluable as they’ll be able to advise on deals and locations that suit your budget and will have a good return on investment.

For all legal aspects of buying property, it is best to speak to a solicitor specialised in conveyancing. At QualitySolicitors our team carry out more conveyancing in the UK than anyone else. With a network of over 100 offices, we understand your local area. We’re open six days a week and provide a same-day response so that you can focus on your plans in retirement.

Contact QualitySolicitors for a conveyancing quote today by using our online contact form, speaking with one of our agents on Live Chat or phoning 0808 250 2258.

 

[1] BBC, ‘UK house price growth accelerates, Halifax says’ (August 2018)

[2] Hometrack, ‘UK Cities House Price Index’ (June 2018)

[3] Gov.uk, ‘Government action to end letting fees’ (May 2018)

[4] Money Super Market, ‘Buy to Let Mortgages’

[5] Which?, ‘Buy-to-let mortgage interest tax relief explained’ (July 2018)

[6] Which?, ‘Buying off-plan’ (May 2018)