With tax increases squeezing landlords profits here are 6 tips to help reduce buy-to-let costs
After Chancellor George Osborner’s crackdown on the buy-to-let-sector, landlords are feeling increasing pressure on their portfolios.
The most significant change for landlords has been the extra 3% Stampy Duty they need to pay on purchases, along with changes to the wear and tear allowance. All of this before April 2017, when mortgage interest relief will be scaled back.
So is there a way of saving money on your buy-to-let portfolio before giving it all to the taxman?
1. Review your portfolio
The key to a successful buy-to-let portfolio is income. You need to make sure you are getting a decent rental yield. This means snapping up a bargain property where you can charge decent rents.
Keep an eye on areas where rental yields are on the up and property prices are more affordable. There are plenty of areas outside of London and the South East where house prices have stabilised. Areas often tipped to benefit are those on the commuter belt into London or where infrastructure projects are scheduled.
Research from peer-to-peer platform Landbay tips areas such as Luton and Swindon, while according to buy-to-let crowdfunding platform LendInvest, between 2010 and 2015, Manchester and Liverpool offered the best yields, with 6% in Manchester and 5.15% in Liverpool. This contrasts with just 4.86% in outer London and 4.71% centrally.
Also, rather than using your own cash savings, consider building your portfolio and any increase in property values to remortgage and use this to boost your spending power.
The Bank of England base rate has been at a historic low of 0.5% since March 2009. This has helped buy-to-let rates fall to record levels and landlords can now snap up some of the cheapest-ever deals.
This could save money by lowering your monthly repayments, meaning you could hold on to more of your tenants’ rent. You could also release some equity to build up your portfolio with new purchases.
An average two-year, fixed-rate buy-to-let loan has fallen from 5.21% in April 2011 to 3.32% today, according to financial website Moneyfacts. Five-year deals have fallen from 6.24% to 4% over the same period.
The actual pricing on the market is even lower. Landlords can access a two-year fix at 1.89% from Santander for Intermediaries for a 40% deposit, or a five-year deal from Accord Mortgages for 2.74% at the same loan-to-value.
3. Shop around for insurance
Insurance is important for landlords to protect their property and ultimately the returns on their buy-to-let portfolio, but make sure you aren’t overpaying for the right cover.
Insurers tend to make the most of apathy and inertia so check your renewal quote against previous years to see if you are paying more. Often insurers will offer better rates to hold on to customers.
Check what your policy covers to ensure you are not over- or under-insured. For example, are you and your tenants both paying for contents cover? If you are just using buildings insurance, check the rebuild value is accurate to ensure you are paying the right premium.
Installing security measures such as alarms and window locks can help push premiums lower. You should also consider your target tenant, as certain professions or age groups may be deemed more risky.
Another way to cut costs is to increase the excess you are willing to pay as this could reduce the monthly premium.
The perks of mortgage interest relief may be getting scaled back, but don’t forget to claim for other expenses.
Any fees associated with running your buy-to-let can be offset against your tax bill as can mortgage arrangement costs, insurance premiums and lettings charges.
Don’t forget items that may seem small at the time but can add up, such as stationery travelling to and from the property for business purposes or your phone bill when dealing with queries.
5. Reduce letting agent fees
Lettings agents can help save the time and hassle of finding tenants and managing a property such as collecting rent and dealing with repairs.
But fees can vary from fixed rates to a percentage of the rent, which in some cases can be more than 10%.
Landlords could reduce the costs by downgrading the service they use. For example you could use a lettings agent to help find tenants but then do all the property management yourself, or even consider online-only firms that charge flat fees.
Alternately, you could ditch the lettings agent and manage the whole process yourself. This would obviously be more time-consuming but would work out cheaper.
6. Consider incorporating
There are two ways landlords can run a buy-to-let portfolio.
You could be a sole trader and report any income through a self-assessment tax return, or the buy-to-let business could be run through a limited company.
Using a company could be cheaper as you would pay Corporation Tax, currently 20% and reducing to 17% by 2020, compared with Income Tax that can be as high as 40 or 45% if you are a higher rate or additional rate taxpayer.
Additionally, the clampdown on mortgage interest relief only applies to individuals, so a company can still get the full relief.
However, there are more reporting obligations with being a company and if you are already a sole trader you would need to weigh up the costs of making a capital gain by transferring your portfolio into a company structure.