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Buy to Let

Buy to Let Property Investment

In recent years buy to let has been a popular way of investing in residential property. Many investors still retain memories of how the values of their endowment policies and pension funds fell dramatically during the last market downturn and are reluctant to expose themselves to volatile stock markets. Property has provided a more consistent return and has generally continued to rise in value. Interest rates remain at low levels and mortgage finance is readily available on competitive terms from major banks and building societies. This brings property investment within the means of more investors than ever before. In these notes we will take the example of a foreign domiciled person, a non-resident of the United Kingdom, buying a property in London with the benefit of loan finance, but the general principles can apply to many other markets.

Buying to let pre-supposes that there is a tenant willing to rent the premises and provide the cash flow, which will service the borrowing and is only one of the factors, which need to be taken into account before entering into a commitment. These can be summarised under three main headings.

The Property

It has been said that the three most important matters to take into account when buying property are location, location and location and this maxim holds just as true for investment property.

• It should be situate in an area where tenants are looking to rent
• It should be attractive to tenants and be, for example, an apartment, penthouse or a period or modern house. Listed buildings or converted churches may have their appeal but it is to a narrower market
• It should be in, or brought into, good condition
• It should be in an area where property is in demand, making a resale easier in the future

The Finance

For the right property mortgages are available both onshore and offshore, at competitive rates, from many of the major lending institutions and the terms can be negotiated. It is possible to obtain a loan on a repayment or interest only basis and for an agreed period. Whilst higher percentages are sometimes available we suggest not borrowing more than say 70% of valuation to avoid a cash flow crisis if interest rates rise and to allow for periods when the property is vacant. The lender will also be looking for a monthly rent of the order of 130% of the monthly repayment.

Taxation

In the United Kingdom the investor will need to take into account the three main direct taxes.

• Income tax, which is payable on rents. Loan interest and the costs of repairs and maintenance are deductible
• Capital gains tax, which is not payable by a non- resident on the sale of a property held only as an investment and not as part of a trade or business
• Inheritance tax, which is charged at 40% on the amount by which the aggregate value of chargeable assets exceeds a threshold

Exposure to taxation can be limited if, instead of the property being registered in the name of the investor, the title is held in the name of a company formed in a tax free area, the British Virgin Islands for example.
 

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