Investing in Buy-to-Let Property

In this buy-to-let investment guide, we aim to provide a comprehensive overview of how investing in UK property using buy-to-let mortgages works and what you should consider before investing.

What is buy-to-let property investment?

A buy-to-let property investment typically involves acquiring a residential property to rent out to tenants. Buy-to-let property investors can profit through the receipt of rental payments and potential capital appreciation. Whilst property in the UK remains in demand, buy-to-let property is not considered a liquid investment and so investors should typically consider buy-to-let as a medium-long term investment.

Buy-to-let property investment differs from other mainstream forms of investment like stocks and shares or fixed income instruments in that it is a tangible asset which comes with important legal responsibilities.

Why invest in buy-to-let?

There are a number of benefits of investing in buy-to-let vs. other forms of investment:

  • Tangible asset – Some investors just prefer to invest in something they can touch and see. Buy-to-let investments can be personally managed, whereas when investing in stocks and shares you are relying on someone else to manage your capital.
  • Ability to leverage – When investing in shares, you typically pay the full price for those shares upfront. The return you generate on your capital is linked to the shares you have acquired. However, few people invest in buy-to-let property without using third party capital to part-fund the purchase. This offers the opportunity to significantly increase your returns. A simple example is that if you have £50,000 in savings, you could either purchase £50,000 in shares (and generate returns in the form of dividends and potential share price appreciation) or you could purchase a £200,000 house with a 75% buy-to-let mortgage (and generate forms in the form of rental payments and potential house price appreciation). Increased leverage brings higher risks – you will enjoy greater benefits when house prices are rising, but will lose more of your capital on sale of the property if house prices fall.
  • Potential for capital gain – House prices in the UK have risen significantly in price over the years driven by demand for housing outstripping supply and a prolonged low interest rate environment. This has meant that buying property as an investment has proven to be a solid method of generating capital gain. However, it’s important to remember that past results are no guarantee of future performance.
  • Ability to add value – Many buy-to-let investors purchase properties which they believe they can acquire at a discount and add value to. This value could be added through simple cosmetic amendments such as repainting/re-carpeting and better dressing the property, or through major works such as modernising throughout with a new kitchen, loft extension, addition of garage facilities and so on.

Determining your buy-to-let strategy

Your buy-to-let strategy will largely depend on your own personal investing goals and skills.

For example, investors may target different types of property / properties with different values, depending on their preference for:

  • Income vs. capital appreciation. Areas which are highly desirable for residential home owners are likely to generate lower rental yields but may have higher potential for further capital appreciation.
  • One investment property vs. multiple properties. Some investors may take the view that they do not want the administration of owning multiple buy-to-let properties and so acquire one more expensive property. However, other investors may view acquiring multiple properties as a sensible diversification strategy in buy-to-let.
  • Level of leverage willing to accept. Lenders typically require a minimum 25% deposit to grant a buy-to-let mortgage. However, some investors may not feel comfortable with that level of borrowing and instead focus on property where their deposit would equal 40% of purchase value.
  • Level of administration required. For example, a HMO may drive high yields but tenant turnover is likely to be higher and avoiding void periods will be of increased importance.
  • Type of property (e.g. houses, flats, student lets, commercial properties, HMOs).
  • Level of refurbishment or improvement work required.

Market research

Before looking at specific properties to purchase, it’s important to take a step back to consider the region you are considering buying in. For instance:

  • How much do suitable properties cost in the area? It’s important to be realistic and move on if house prices in a particular area exceed your budget.
  • How close is the property to offices, leisure facilities, schools and/or transport links? Remember that people often value convenience which can drive increased demand and reduced likelihood of lengthy void periods.
  • What demographic is housing in that area going to attract? If it’s a student area for instance, you may need to factor in a potential two month void period each year during summer break when doing your rental income calculations.
  • How active is the local property market? Check Rightmove to see how many rental listings there are in the area and what sort of rental prices they are commanding. Speak with local estate agents to get their view on the market. In addition, look at recently sold prices and volumes as this can give an indication of desirability.
  • What sort of rental yield is achievable? Rental yields can vary significant across different sections of the same town. Remember that you are not looking to find your perfect property, you are trying to find a good investment opportunity. Focus on finding areas with demand for rental properties and strong yield.

Where to find the perfect buy-to-let property

There’s no one ‘perfect’ outlet from which you can select buy-to-let property. We suggest searching via the following platforms:

  • The Property Portals – The largest portal is Rightmove, but you should also check out Zoopla, On The Market and Purple Bricks. The vast majority of independent estate agents list their properties on at least one of these portals.
  • Local estate agents – Not all properties find their way onto the property portals. If property in the area you are looking at is in high demand, estate agents may find that they are able to sell the property without incurring the cost of listing via the portals. To ensure you don’t miss out on the best deals in your local area, be sure to register with prominent local estate agents.
  • Auction houses – There will undoubtedly be a property auction house located within 50 miles of your home. Use Google to find out where the nearest property auction houses are. Properties can be sent to auction for a number of reasons, including bank repossessions, investors looking to free up capital, probate sales or simply home owners who have struggled to sell via the more conventional routes or are desiring a quick sale. Before buying via auction, make sure you understand the costs involved (e.g. buyers premium) and the mechanics of purchasing via auction (e.g. bringing the correct documentation, having your deposit and mortgage in principle ready). If possible, try to attend an auction without any ability/intention to buy, before you go with that ability/intent. This will help to overcome some of your first time auction nerves.
  • Sourcing companies – If you are short on time to conduct your own research, you may find it beneficial to use a property sourcing company. Property sourcing companies can specialise in finding property that meets criteria (e.g. desired yield) set by you.

Property inspection checklist

We would not recommend purchasing a property without inspecting it in person. There are countless examples of hidden problems you would not be able to see when viewing a property online. For example, you wouldn’t necessarily spot a broken broker, exposed wiring or damp issues hidden behind a sofa.

With that in mind, here are some key items (not exhaustive) you may wish to look out for when visiting a potential property:

External condition

  • Condition of property externally – is there any obvious external damage to roofing, guttering, windows or doors.
  • General curb appeal and whether there would be any easy-wins to boost its appeal.
  • Quality of the nearby housing. Whilst you may be able to improve the exterior of your own property, you will be unable to do anything about the quality of neighbouring property.
  • Number of nearby properties for sale or for rent. If there are lots of signs visible, this could be seen as a potential warning sign.
  • Size and condition of any external space, including parking spaces and garden space. If in poor condition, estimate the costs/time required to improve condition. Consider the type of tenant you are trying to attract and whether it makes sense to convert the garden into a low maintenance space.
  • Consider whether there is potential to increase value by adding a parking space (subject to obtaining planning permission) or extending the property.
  • Check the parking situation. If the area features permit parking, ask the agent / research how many permits will you be able to secure.

Internal condition

  • Condition of doors in the property
  • Condition of windows. Check that windows are properly opening/closing. If the property has old Victorian windows, for example, it may be expensive to fix or replace.
  • Condition of flooring and presence of underlay. Consider whether the current flooring requires replacement or professional cleaning.
  • Condition of walls and ceilings. Consider whether the walls are painted or wallpapered, which rooms would need to be redone and whether any rooms would require re-plastering.
  • Quality of kitchen and bathroom finishes. Given kitchens and bathrooms often feature more fitted units than other rooms in the house, they are often the rooms which show signs of their age first. Gauge whether (and when) any of these rooms will need to be redone and form an estimate of the likely costs.
  • Consider the size of each of the bedrooms. This is important as a two bed flat with two good sized rooms will typically rent for more than a two bed flat with one good sized room and one box room. By having two good sized bedrooms, you widen your potential tenant base.
  • Check for damp by paying attention to both visible signs (flaking, damp walls, cracks) and damp/musty smells.
  • Age and brand/model of boiler. Certain models are prone to issues when they reach a certain age. Consider when the boiler is likely to need replacing.

Other factors

  • Ask the agent whether the property is sold freehold or leasehold. If leasehold, it will be important to understand the leasehold conditions to ensure there are no conditions which would impact resale value.

Buy-to-let mortgages

Buy-to-let mortgages are mortgage products catering specifically for investors acquiring property solely for the purpose of renting it out to tenants.

What deposit is required to get a buy-to-let mortgage?

Buy-to-let mortgage providers typically require a minimum 25% deposit when purchasing a buy-to-let property. For example, a property costing £200,000 would require a £50,000 down payment, with the remaining £150,000 covered by the mortgage provider.

Interest only vs. repayment mortgages

Traditionally, buy-to-let investors looking to build a portfolio of properties opt for interest only mortgages. This is because interest free mortgages enable greater free cash flow, which can then be used to reinvest in further buy-to-let properties.

However, the choice is entirely yours as repayment buy-to-let mortgages are widely available. By choosing to pay off the mortgage, your interest repayments will decrease over time thus boosting the net rental income you receive from the property.

Why are buy-to-let mortgage rates higher than residential mortgages?

Mortgage providers deem buy-to-let mortgages as higher risk than traditional residential mortgages for owner-occupiers. This is because landlords fund payments of interest/principal through the receipt of payments from tenants. However, there is a risk of void periods and tenant issues causing non-payment of rent. To compensate for this increased risk, a higher interest rate is payable.

Buying personally or via a limited company

Investors can opt to purchase buy-to-let property personally or via a limited company. In years gone by, acquiring property personally was the more popular option. However, multiple tax advantages of following this approach have come to an end which is now driving an increasing number of landlords to invest via limited companies.

The suitability of investing personally or via a limited company will depend on each investors own personal financial circumstances. The biggest difference between the two approaches relates to how rental income and capital gains on sale of property are taxed. We provide a brief summary of these differences below:

 Personal ownershipCompany ownership
Tax on rental incomeTaxed as normal income. The rate you pay will depend on whether you are a basic, higher or additional rate taxpayer.Taxed as normal company profits. Subject to corporation tax. Cash can be extracted through dividend payments.
Capital Gains TaxIf you sell your property for a gain, that gain will be subject to Capital Gains Tax.Any gain on sale of property will be subject to corporation tax.

In addition to income and capital gains tax considerations, the vehicle through which you choose to invest can also impact future inheritance tax. We would recommend that you discuss the pros/cons of each approach with a qualified financial advisor to get advice personal to your circumstances.

Costs to consider when buying buy-to-let property

Many of the costs involved in purchasing buy-to-let property are similar to those incurred when buying your own personal residential property. However, some costs are higher when investing in buy-to-let and there are some extra costs to be aware of. See below for an overview of the main one-off and ongoing fees:

One-off fees

  • Deposit – BTL mortgage providers typically require at least a 25% deposit.
  • Stamp duty land tax – The higher the purchase price, the more stamp duty land tax you will pay – see our buy-to-let stamp duty land tax calculator.
  • Surveyor fees – When buying a property, it is typically recommended to engage a qualified surveyor who will be able to advise whether the property has any underlying issues. The cost of property surveys range from £250 for a basic home condition survey up to £600 or more for a full structural survey.
  • Valuation fees – Depending on the lender you are using, you may be charged ‘valuation’ fees. The valuation is an assessment of the property valuation (which may or may not involve inspecting the property internally) and can range from £150-£1,500 based on the value of the property.
  • Legal fees – You will need to engage the services of a solicitor or licensed conveyor to ensure that all of the right legal boxes are ticked. Legal fees typically range between £800 and £2,000.
  • Initial refurbishment – Consider the costs of any refurbishment required before the property can be tenanted.

Ongoing fees

  • Maintenance costs – Buy-to-let investment properties will inevitably require ongoing maintenance work. Many new buy-to-let investors underestimate the likely expenditure on maintenance, which averages 28% of annual rental income according to a recent article by Property Reporter.
  • Letting agent fees – If you want a local estate agent to source new tenants or fully manage your buy-to-let property portfolio, you will likely incur fees of 3/4 weeks rent or 8-15% of monthly rent, respectively. Alternatively, this cost can be bypassed if you source your own tenants and act as the point of contact for your tenants. If you use an online letting agents such as Open Rent to source your tenants, you can make significant savings vs. using local estate agents. For example, sourcing a tenant might cost £50 rather than 3/4 weeks rent.
  • Buildings insurance – Required in order to obtain a buy-to-let mortgage. Price will vary based on the value and location of the property. Typically between £120-220 per annum, though could be as high as £1,000.
  • Landlord license – Certain areas require landlords to obtain a selective license so that the council can check whether they are a ‘fit and proper’ person. The price varies depending on the location/borough. Bristol, as an example, charges £470 per property for a 5-year license. The charge is only applicable in certain areas in the region.
  • EPC (Energy Performance Certificate) – An EPC is a legal requirement before prospective tenants are shown a property. The approximate cost for an EPC is £65 and once obtained, it is valid for 10 years.
  • Gas safety certificate – A landlord gas safety check is another legal requirement, which much be done annually. The approximate cost for obtaining a gas safety certificate from a Gas Safe registered engineer is £80 per annum.
  • Empty/void periods – Important to keep the potential for empty/void periods in the forefront of your mind.

In addition, if you intend to sell the property at some point, there will of course be fees associated with selling the property.

Calculating buy-to-let returns

When calculating potential buy-to-let returns, Microsoft Excel should be your best friend. Without calculating the expected annual cash outflows/inflows, it is impossible to evaluate a prospective investment opportunity.

Buy-to-let returns example

Wondering how much you can make from a buy-to-let property investment? In the below example, I will aim to give you a rough idea. We will use a property valued at £160,000, which is expected to generate rental income of £800 per month (£9,600 per annum, representing 6.0% rental yield before costs). Our deposit of £40,000 will represent the typical minimum 25% required.

  • Mortgage of £120,000 at 2.5% (interest only), which is £250 per month.
  • Initial costs:
    • Deposit – £40,000
    • Stamp duty – £5,500
    • Surveyor fees – £500
    • Mortgage product fees (includes valuation) – £1,000
    • Legal fees – £1,000
    • Total initial costs = £48,000
  • Ongoing rental income:
    • £800 per month / £9,600 per annum
    • For the purposes of this example, we will assume no void periods. However, you must ensure you make an allowance for void periods.
    • Total annual income = £9,600
  • Ongoing costs:
    • Mortgage interest payments – £250 per month / £3,000 per annum.
    • Maintenance costs – £2,400 (estimated using 25% of £9,600).
    • Tenant sourcing – £50 (assume Open Rent used rather than a local estate agent)
    • Buildings insurance – £150 per annum
    • No landlord license required in the area.
    • EPC – £65, but will last 10 years once obtained. Included in annual costs as a measure of prudence.
    • Gas safety certificate – £80.
    • Total annual costs = £5,745

The initial costs of purchasing the property totaled £48,000. Our net rental income is expected to be £3,855 (£9,600 – £5,745). Our net rental yield is therefore 8.03% based on our capital outlay (£3,855 / £48,000) or 2.41% based on the total property value.

In addition to the expected income outlined above, we will also hope that our buy-to-let property will generate capital growth through future house price increases. Property in the UK market has generally increased in value, though it’s important to remember that past results do not guarantee future outcomes.

This is just a typical example of the sort of buy-to-let returns you can expect in the UK market. However, obtainable rental yields vary significantly depending on the where in the country you are based. Speak with local estate agents to understand the yields you can expect in your local area. Don’t take their word for it – come away from those conversations and do the math yourself.

If you can, try to purchase properties at below market value. This will both increase your rental yield and reduce your downside risk on reselling the property.

Finding tenants for your buy-to-let property

Landlords have multiple options to find tenants for their buy-to-let properties. The conventional route is to engage the services of a local estate agent. However, other options are available and will often save you money.

  • Listing on property portals like Rightmove through an online letting agent – Online letting agents such as Open Rent allow you to list on all of the major property portals at prices far lower than local estate agents. For an additional fee, many of these services will also help you with arranging the required contract paperwork and accepting customer deposits. This is a popular and cost-effective approach as most local estate agents generate the majority of their leads through these property portals.
  • Other online marketplaces such as Gumtree or Facebook Marketplace – It’s currently free to list property for rent on both Gumtree and Facebook Marketplace. Both sites are extremely popular and can be a valuable source of leads for your buy-to-let property.
  • Engage with your own personal connections via social media – Another free option is social media. You would be surprised how many of your connections may know someone who is looking for housing. Try posting a status along the lines of ‘2 bedroom flat for rent in Southville for £900 per month. Anyone interested or know anyone who may be interested?’
  • Contact your local council to find DSS tenants – DSS tenants are those who claim housing benefits to pay for private housing due to financial difficulties as a result of unemployment, disability and/or being a single parent. There is no shortage of DSS tenants and thus tenants can usually be found very quickly. Not all landlords will feel comfortable renting to individuals with poor credit records – this will be a personal decision. If considering this route, we advise that you conduct further research to understand the advantages and disadvantages of accepting DSS tenants.

Risks of investing in buy-to-let

  • Decrease in property value – Investors benefit from leverage when property values rise but suffer where property values fall. Lets take the example of a property acquired for £200,000 with £50,000 cash and a £150,000 buy-to-let interest-only mortgage. An investor has held this property for three years, generating rental profits of £6,000 p.a, but now wishes to exit the investment. If the value of the property has fallen to £180,000 (a 10% decrease), the investor would need to repay the mortgage provider £150,000, leaving just £30,000 cash (a £20,000 / 40% decrease of the initial deposit amount). The loss in this case would be mostly offset by the £18,000 rental profits generated over the three year period, but the negative return means that the investor would have been better off holding his £50,000 in cash.
  • Void periods – It’s inevitable that at some point in your buy-to-let investment journey, you will experience void periods. A void period is a period of time where your buy-to-let property is untenanted resulting in no cash inflows, but continued cash outflows. Minimising the number and duration of void periods is therefore essential for professional landlords.
  • Decrease in rent – When seeking a new tenant, there is no guarantee that you will be able to find someone willing to pay the same rate as the previous tenant. Whilst rental income may rise, external factors such as an increased supply of rental stock in your area may impact the price you are able to command.
  • Tenant issues – As a landlord, you can only legally evict a tenant through the courts. You may end up in the situation where your tenant is contracted to stay for six months, but decides to remain past their contractually agreed tenancy. Another scenario may be a tenant who simply stops paying their rent. As a landlord you will be unable to remove such tenants in any way except through the courts which will inevitably involve time, effort and legal fees.
  • Changing legislation – The Government may change legislation at any time to your detriment as a buy-to-let property investor. For example, landlords could previously (until the 2016/17 tax year) deduct mortgage interest and other allowable costs from rental income, before calculating their tax liability. However, the rules applicable to the 2020/21 tax year now state that tax relief for buy-to-let mortgage costs is restricted to the basic rate of income tax (currently 20%).
  • Rising interest rates – The interest rate of your initial buy-to-let mortgage is unlikely to be the same as the rate you receive when you remortgage. Interest rates have been far higher in the past than they are currently and so it is important to consider the potential for rising rates in the future. Further, if interest rates rise significantly then house valuations may fall as the amount banks would be willing to lend based on customer affordability calculations may decrease.
  • Major repairs / maintenance – Unexpected costs relating to major repairs / maintenace works have the potential to erode profitability. Tenants may cause damage to property in excess of their deposit payment.

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