Seven things to consider if you plan to use Buy-to-Let to fund retirement

Almost half of all landlords in the UK’s Buy-to-Let sector view their property portfolio as a retirement investment, according to a survey from Your Move. But with regulations and market changes, what should you consider when making property a core part of your retirement income?

Despite the challenges of operating a Buy-to-Let, it’s still an appealing option to many. With the right property and strategy, Buy-to-Let can generate an income now and fund your retirement.

Your Move dubbed those purchasing and letting property with retirement in mind ‘pension pot’ landlords. The research found:

  • Four in ten Buy-to-Let owners are investing as a pension
  • 23% have been investing in the Buy-to-Let sector for over 15 years
  • 53% invest in more than one property
  • Less than three in ten see their properties as a business
  • Four in ten live within five miles of their rental properties

Reflecting the long-term nature of investing with retirement in mind, ‘pension pot’ landlords are more likely to value building a personal rapport with tenants. 53% felt it was important that tenants view the property as their own home, while 18% like to meet and talk to new tenants before signing a contract.

But buying and renting a Buy-to-Let property isn’t simple and there are many things to consider before you decide to take the plunge. Among them are:

1. Accessing a Buy-to-Let mortgage

Unless you’re able to buy a property outright, one of the first challenges you’ll face is obtaining a Buy-to-Let mortgage.

Much like being approved for a standard mortgage, you’ll need to prove that you can meet repayments and have a good credit record. However, you’ll usually need a much larger deposit. Minimum deposits vary but 25% of the property’s value is average. Fees and interest rates on Buy-to-Let mortgages also tend to be higher.

To be approved for a Buy-to-Let mortgage, you’ll also usually need to show that the rental income the property will generate is around 25% higher than your mortgage payments.

2. The additional costs of a Buy-to-Let

As well as the mortgage repayments, it’s crucial to factor in the other costs of having a Buy-to-Let property, as these will dictate whether you can afford to go ahead with your plans

You’ll be responsible for the maintenance of the property, which can be costly. Do you have an emergency fund you could use if the boiler needed replacing, for example?  Landlord Insurance can help cover the cost of unexpected outgoings in some cases. However, it’s a good idea to have a fund you can dip into when necessary.

3. Choosing an area to invest in

Becoming a landlord isn’t as simple as finding a property at a bargain price and then letting it out.

While the research shows that many ‘pension pot’ landlords opt for properties close to home, this might not be the best move. It’s important to understand the current market and the tenant it’ll be best suited to. Here, research is important.

Purchasing a one bedroom flat in an area that’s popular with families and has little to offer professionals, could mean it takes longer to fill the property and reduce your potential gains.

4. Will you self-manage the property?

When you think of being a landlord, do you imagine taking a hands-on approach or would you rather let someone else handle the day-to-day tasks?

Whether you choose to self-manage or work with an agency, there are pros and cons with both. Self-managing means you won’t have to pay fees and retain control. But it also means you’ll need to find and vet tenants and act as a point of contact.

There’s no right or wrong answer for how you’ll manage your Buy-to-Let property. However, setting expectations for how involved you want to be and at what cost this may come at is important.

5. How will you overcome void periods?

The research found that ‘pension pot’ landlords are keen to forge personal relationships with their tenants. It’s a positive step that can help reduce how long the property is empty for and also reduce the admin burden if tenants are frequently moving out.

But there will likely be void periods. While no one is in the property, you’ll still need to meet mortgage payments and other associated costs of the home, such as utility standing charges and maintenance work. Make sure you have a plan for covering the periods when your Buy-to-Let isn’t generating an income.

6. Understanding legal responsibilities

Becoming a landlord means you’ll have to take responsibility for the property and well-being of the tenants. You’ll need to obtain gas safety and energy performance certificates, for example, showing that your property is in good condition. You’ll also need to carry out legionnaires disease checks and ensure any furniture provided is fire resistant, as well as taking other steps to comply with regulations. Depending on the local authority, you may also need to obtain a landlord licence.

Regulations can change, so it’s important to make sure you stay up-to-date with landlord requirements too.

7. Tax liability

Having a Buy-to-Let property can significantly impact on your tax liability both now and in the future.

First, it’s important to note that landlords need to pay an extra 3% of Stamp Duty when they purchase a Buy-to-Let property.

If you receive a rental income, it’s likely that you will need to pay Income Tax on this. There are certain expenses that you can deduct on your tax return, reducing the amount you need to pay, but it’s a cost to keep in mind and calculate when doing the maths on taking out a Buy-to-Let mortgage.

Should you decide to sell your rental property, you’re likely to need to pay Capital Gains Tax (CGT) on the profits you’ve made through the sale.

If you’re searching for a Buy-to-Let property and could benefit from advice, we’re here to help. With experience in helping property investors find the right mortgage, we can support you in taking the next step in your plans to become a landlord.