Let to Buy tends to be seen as a Plan B

Let to Buy tends to be seen as a Plan B – a product for reluctant landlords who have entered Buy to Let accidentally, and usually because they could not sell their previous residential property prior to buying another. Let to Buy, the conventional wisdom goes, is what you do with the house you could not sell.

The trouble is that the conventional view misses a huge opportunity for homeowners in an improving housing market – and passes up a valuable source of business for both brokers and estate agents. Far from falling out of favour when the housing market starts moving, Let to Buy should be near the top of the agenda for anyone with sufficient equity or savings.

The time is now
For canny investors, the next few years are exactly the right time to think about turning an existing home into the beginnings of a Buy to Let portfolio. When prices are rising, spreading available capital over several properties increases potential returns from the housing uplift, whilst reducing borrowing costs (through the option of paying only tax-deductible interest on a Let to Buy loan).

And of course, rental properties should deliver a monthly cash flow to cover the Let to Buy mortgage and provide an on-going income stream. The fact that demand for rental property is projected to remain strong whilst house prices rise makes this an ideal time for generating returns through both rent and capital appreciation.

Doing more with residential equity
Let’s take the example of a homeowner with a 75% residential mortgage who has accumulated savings equivalent to an additional 25% of the value of their home. Those savings are currently earning very little interest and the homeowner wants to turn them into a healthier income stream – but they also want to trade up to a larger home for themselves. Can they do both?

In taking the Let to Buy route, they can use the savings as the deposit on their new home, find a tenant for their existing property and then switch that property to a Let to Buy mortgage. In doing so, they gain both an on-going monthly rental income and the potential to benefit further from rising house prices as both properties could increase in value in a rising market. As capital appreciation makes more equity available, they can then choose to expand their Buy to Let portfolio – or sell the Buy to Let property, to pay off the remainder of their residential mortgage.

In this way, Let to Buy provides an accessible route into Buy to Let and a means of generating a monthly income whilst still trading up in property. However, it’s important to bear in mind that these homeowners will be approaching Buy to Let from a different starting point, and this should influence their approach to becoming a landlord.

Considerations for Let to Buy landlords
The most obvious consideration is that they originally selected their property as a home for themselves rather than a rental opportunity. Their tenant target market may therefore have been pre-defined as people like themselves. They have the advantage of a good understanding of this potential market, but they will need to translate this into realistic predictions about the amount of rent that they can charge – and how their Let to Buy property should be marketed. Aligning their strategy with their most likely target market could involve offering longer-term lets to families, for example, which can provide security of tenure whilst ensuring a dependable income stream.

As first-time landlords, Let to Buy customers may need greater guidance about letting a property. Whilst an attractive option in the current economic climate, Let to Buy may not fit within their risk appetite so make sure they understand the risks as well as the benefits. For those that are comfortable, they may require additional guidance on areas such as landlord insurance, the possibilities for rental protection, and the importance of planning for void periods. They also need to bear in mind the tax implications of selling Let to Buy property, in particular the capital gains tax liability on any increase in the property’s value, although one of the benefits of the Let to Buy approach is that they may well qualify for some degree of Private Residence Relief. 

They will also need a clearly defined exit strategy for when their Let to Buy mortgage term ends. Since one of the great benefits of Let to Buy in the current market is the additional opportunity it provides for capital appreciation, it’s important that the value of the property isn’t compromised by a rushed, last-minute sale.

Developing a plan from the outset for whether, when and how they will eventually sell their Let to Buy property is an important aspect of unlocking its potential.

More information can be found on these Blog articles; 'Why do people Buy to Let?' and 'What is a Buy to Let Mortgage'.

For more information, speak to an advisor on 01628 507477.