Are you thinking about becoming a landlord? Joining the club isn’t easy – there’s a lot to learn.
Here at The Residential Mortgage Hub, we are firm believers that knowledge is invaluable, so we’ve put together this handy Buy-to-Let Guide to give you a little more confidence. In this guide, you’ll find all the information you need on financing your Buy-to-Let purchase, the tax implications and your responsibilities as a landlord.
A buy-to-let property is purchased with the intention of renting it out to tenants. It may provide rental income and potential long-term capital growth, but neither is guaranteed. Property values can fall, and costs or periods without tenants can reduce your returns. Consider the risks, ongoing expenses and tax implications before investing, and seek professional tax advice.
Like all investments, there are risks associated with buying-to-let. Increased taxes, greater regulation and higher costs are the new realities of today’s private rented sector.
Being a landlord requires a lot of time, planning and money. You don’t want to buy a luxury property that you can’t afford to manage. Equally, you don’t want to throw money at a subpar investment. You need a thorough understanding of your capacity, aims and finances to ensure that your venture is realistic and aligns with your budget.
To assess whether a Buy-to-Let property is a worthwhile investment, you should look at things like rental yield and potential capital growth. See below for more information.
Gross rental yield shows the annual rental income from a property as a percentage of its purchase price or current market value. It helps you compare potential buy-to-let investments, but does not account for mortgage payments, tax, maintenance, letting fees or periods without tenants.
You can estimate your gross rental yield using our rental yield calculator.
How to Calculate Gross Rental Yield
Gross rental yield (%) = (Monthly rental income × 12 ÷ Property value) × 100
To calculate it:
For example, a property worth £200,000 generating £1,000 per month in rent would have a gross rental yield of 6%.
Your actual return will depend on your costs, any periods without rental income and changes in the property’s value.
Capital growth, also known as capital appreciation, is the amount that the property increases or decreases in value over time. This is normally due to changes in the property market or improvements to the property.
Working out your potential capital growth can help you decide what work to do on a buy-to-let and when could be the best time for you to sell.
Not everyone has masses of savings neatly set aside, ready to invest in a new property by purchasing it outright with cash. But that’s not always an issue. In fact, a lot of people will take out a Buy-to-Let mortgage to reduce their initial cash outlay.
A Buy-to-Let mortgage allows you to borrow a large sum of money to purchase a property that you plan to rent out. They are similar to a typical residential mortgage; the main differences are that Buy-to-Let mortgages usually require a bigger deposit and have higher interest rates.
A deposit for a Buy-to-Let is around 25% of the property value. However, Buy-to-Let mortgages can vary greatly and the offers available are subject to many different factors; e.g. how much deposit you can put down, how much you can pay back every month, etc.
Lenders assess the expected rental income against the proposed mortgage using their own affordability calculation. The rental coverage required and the interest rate used depend on the lender, mortgage product and your circumstances, including whether you apply personally or through a limited company.
Personal income requirements vary between lenders. Your financial commitments, credit history, landlord experience and the property itself can affect eligibility. First-time buyers and first-time landlords may have options, subject to the lender’s criteria.
You will also need to budget for purchase costs, ongoing maintenance and periods when the property is empty.
If you buy an additional residential property, such as a second home or a buy-to-let, you will usually pay a 5% surcharge on top of the standard Stamp Duty Land Tax rates in England and Northern Ireland. Exceptions apply, and the amount payable depends on your circumstances.
If you purchase a residential property that’s not your main residence, e.g. a second home or a Buy-to-Let, you pay a 5% surcharge on the standard Stamp Duty rates.
Our Buy-to-Let Stamp Duty calculator will give you a clearer idea of how much Stamp Duty you’ll need to pay when you purchase a buy-to-let property. Or visit our Stamp Duty guide for more information about this tax.
Owners of Buy-to-Let properties also need to pay Income Tax on rental income. You’re permitted a £1000 allowance, or you can deduct certain expenses.
Most Buy-to-Let mortgage lenders demand that you have buildings insurance in place. It’s important that you select insurance with your long-term plan in mind. If you think you’ll extend your property portfolio in the future, you might find it useful taking out a policy that allows you to add additional properties later.
What’s more, depending on the terms of the contract you supply to your tenants, you may be responsible for covering contents insurance and liability insurance. Thinking ahead when you take out your policy will help make sure you don’t limit yourself later on.
Survey fees can include everything from the cost of a simple property valuation to a full structural survey. The necessary level of investigation into your property will depend on your lender, the mortgage you’re applying for and the type of property you’re purchasing.
As a rule of thumb, a standard valuation will do just that – confirm the value, give a rental assessment and judgement if the property is suitable security for lending. A homebuyer’s report will give all that is on a valuation as well as a report on the actual state of the property.
Buy-to-Let maintenance costs can sneak up on you. Landlords are responsible for the upkeep of the property, as well as managing the rental income. This can become hectic. You may want to consider hiring a letting agent to manage the property for you, especially if you’re often juggling multiple investments/properties.
Letting agents obviously come with additional costs; they tend to charge a percentage of the rental income plus VAT. Nonetheless, they can seriously reduce some of the day-to-day hassles associated with Buy-to-Let investments.
Finding the best area to purchase a Buy-to-Let property depends on your budget, plan and location. You can use the UK House Price Index to find average house prices across the UK or in particular regions. The government also publish statistics on rental prices each month, so you can estimate how much rental income your property will likely generate. What’s more, possibly the best research will come from visiting the area and talking to a variety of both sales and letting agents to see what that area is really like.
In addition to the financial considerations, it’s worth thinking about the demand for rental properties in the areas where you’re looking to buy. The population, the institutions, the businesses – these are all terrific indicators landlords can use, e.g. in areas where there is a high population of young people you’ll likely find people looking to rent, thereby providing plenty of opportunities for buy-to-let property investments.
Unless you intend to be completely hands-off when it comes to managing the property, it makes sense to buy a property you can easily reach – either in the case of an emergency or simply to fulfil your responsibilities as a landlord.
It’s easy to let your personal preferences influence the types of property you buy. Why wouldn’t it? You’re buying a home. It’s important to remember you won’t live in your Buy-to-Let property yourself. Consider what would be beneficial as an investment and who your tenants would be.
We’ve outlined some tips below to help you choose the right Buy-to-Let property.
Local estate agents will be able to tell you about the property market in their area. They can direct you towards suitable properties, give you valuable information about the local rental market and help you narrow down your search.
Your budget will often determine the types of properties available to you and their locations. Take some time to work out what you can afford and what you can realistically earn from rental income. This will give you a clearer point of reference for when you research the house prices and rental rates in the areas where you plan to buy.
Take care to include the cost of your Buy-to-Let mortgage in your financial calculations. Most landlords take out a Buy-to-Let mortgage to fund their investment, which means they have to budget for a deposit – this is usually at least 25% of the purchase price. If you want to read more about buy-to-let mortgages, read our guide on the different mortgage types.
Make sure you have the financial capacity to pay for any unexpected costs. It’s best practice to budget for periods when the property might be empty, e.g. when you’re in-between tenants. Thinking ahead may force you to alter your plans, but it will give you a more solid place to start from.
Think about the type of tenant you want to attract. Families will want to live close to schools, while young professionals will focus on the distance to and from transport hubs. If you want to rent your property to students, consider investing in suitable accommodation and buying properties close to university campuses.
In addition to assessing your affordability, Buy-to-Let mortgage lenders will base your loan on the expected rental income of your property.
Lenders often ask for rental income between 125% and 145% of the interest repayments – not the capital repayments. Requirements will vary from lender to lender. They may also adapt their criteria depending on your financial position. Lenders will usually conduct a “stress test” to establish if you’ll be able to keep up with repayments, interest rate fluctuations and possibly other expenses. They need to ensure that this transaction will be a good investment for them.
Buy-to-Let mortgages typically require a minimum deposit of 25%. The larger your deposit, the greater the range of mortgage products you can choose from and usually the cheaper the rate lenders charge.
As with any mortgage, seeking the advice of a broker will help you find a financial route to best suit your situation.
You have a responsibility as a landlord to ensure all property is safe for your tenants and that it’s energy efficient. You also need to make it clear that you’re holding your tenants’ deposit legally.
We give a little more detail on the legal obligations landlords must fulfil below.
If your rental property has gas appliances or flues that you are responsible for, you must arrange an annual gas safety check by a Gas Safe registered engineer.
You must provide existing tenants with a copy of the gas safety record within 28 days of the check and give new tenants a copy before they move in. You must also ensure that gas installations and appliances you provide are safely installed and maintained.
In England, landlords of rented properties covered by the electrical safety regulations must arrange for a qualified person to inspect and test the electrical installation at least every five years, or sooner if the previous report requires it.
Landlords must obtain an Electrical Installation Condition Report (EICR), provide a copy to tenants and complete any required remedial work within the applicable deadline. Requirements differ across the UK.
In England, landlords must provide at least one smoke alarm on every storey containing living accommodation. A carbon monoxide alarm is also required in any room used as living accommodation containing a fixed combustion appliance, such as a gas boiler or wood-burning stove, excluding gas cookers.
Landlords must check that the alarms work at the start of each new tenancy and repair or replace faulty alarms as soon as reasonably practicable once informed. Requirements differ across the UK.
If you’re letting your property out to 3 or more tenants who form 2 or more “households” which share a kitchen and bathroom, you may need to apply for an HMO license from your local authority. Lenders will likely have different mortgage products for HMOs so you should check with your broker regarding this first.
As a landlord, you must put your deposits in a deposit protection scheme authorised by the government. The tenancy deposit scheme is designed to protect tenants and landlords by acting as a mediator in the case of a dispute at the end of a tenancy.
It’s a good idea to think about advertising your property on the UK’s largest letting portals – Rightmove, Zoopla and Prime Location. They give you the means to easily self-manage your property which can sometimes help you save more money than if you used a property agent.
Self-managing gives you direct responsibility for tenant communication, maintenance and the day-to-day running of the property. Before choosing this approach, make sure you understand the rules that apply to your tenancy, including permitted payments, deposit protection and your responsibilities as a landlord.
Before choosing to self-manage your buy-to-let investment, you should ask yourself:
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount will depend upon your circumstances.
There is no fee for initial mortgage advice before application. A fee may be payable if you decide to proceed, depending on your individual circumstances. Any fee will be discussed and agreed with you before you proceed.
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