Invest in Buy-To-Let Property?

A friend recently said she was thinking about investing in a buy-to-let property.  This is where you buy a property such as a house or flat and rent it out.

She asked me for some guidance, given my experience as a landlady. 

This is what I told her.

Things to consider before taking the plunge

Securing a Buy-to-Let Mortgage

Are you a cash buyer? If so, you are in a great negotiating position to buy a property and you won’t need a mortgage. 

If not, you need to get a buy-to-let mortgage. 

To qualify, generally, you will need to be a homeowner and earn more than £25k a year. 

You will also need a good credit score to show lenders you are financially responsible. Check your score on Checkmyfile which provides a multi-agency report.

Some lenders do impose age restrictions, e.g., The Mortgage Works says your maximum age at the time of application must be 70 years old. 

The mortgage lender reviews the potential rental income of the property and generally wants to see that the rental income is between 25% to 45% greater than the monthly mortgage repayments.  So, if you could get a rental income of £1,250 a month on a property, you could get a mortgage where you are paying £1,000 a month.

Buy-to-let Mortgage Rates

Buy-to-let mortgage rates are roughly 6.5% currently. The greater your deposit the better the rates on offer. Shop around for the best mortgage rate for your investment property.

Mortgage fees

Some lenders charge massive amounts for their buy-to-let mortgage products. I’ve seen some for as much as £2,600! Generally, for lower mortgage rates you will pay a fee so weigh up the rate vs. the fee being charged. 

Interest-only mortgage

Generally, people who get mortgages on buy-to-let properties do them on an interest-only basis. The idea is that the cash flow is greater as the mortgage is lower than if it were a repayment mortgage. Also, as the property is expected to grow in value over time, it will eventually be sold to pay off the mortgage and you can take the remaining amount as profits. 

Deposit

You’ll need a minimum of 25% deposit on a buy-to-let property. Some lenders require a greater deposit depending on the type of property e.g., for a newly built one-bed flat. The amount of money you have saved as a deposit will be one of the main drivers as to where you can buy.

Legal

You will need to engage the services of a solicitor who will oversee the conveyancing process. They will ensure the successful transfer of the property to you. 

Fees are generally related to the value of the property and may be greater for leasehold properties. Shop around for quotes. Get at least three quotes then decide which solicitor you want to work with. 

What type of property are you looking to invest in?

A house or a flat?

Are you thinking of buying a house or a flat? A house is usually freehold.

However, a flat is usually on a lease. You need to check the length of the lease to make sure it is mortgageable. Criteria for lenders differ, but usually, it must be 70 years or more.  If the lease has only, say, 50 years left on it, it will be cheaper than other flats in the area because of this but you may have to pay a hefty bill to increase the lease and it’s highly unlikely you’ll get a mortgage for it.

Also, you must pay management fees if you buy a flat. The more facilities, the greater the fees, e.g., if the apartment complex has a lift, a gym and a pool, the management fees will be greater than if they don’t have these facilities.

What size property?

Some lenders will only lend on a property above a certain size e.g., 30 square metres.

New or old property?

Are you planning on buying off-plan, new build or previously owned? This has implications for the deposit you may be required to provide and the minimum lease acceptable to a lender e.g., for new build flats some lenders require a minimum of 125 years on the lease.

Condition of the Property

What condition of the property are you looking to buy? If everything has been modernised, you will pay a premium. However, if you buy a doer-upper, you can employ the BRR investment strategy (buy, refurb, refi). This is where you buy a property, renovate it, get it revalued, pull the equity out of the property, and use this as a deposit for another property. 

What return are you looking for? 

Cashflow (rental income less expenses) provides passive income. To calculate the rental yield on a property, take the cash flow figure and divide it by the purchase price to get the rental yield. So, if you purchase a property for £200k and the net cashflow is £12k/year, the yield is 6%.

You may expect capital growth on the property also. This is how much it may go up in value over time. However, if you sell, you will need to pay capital gains taxes on any profits. 

Taxes

Limited Company or your own name?

Are you buying the property via a limited company or in your own name? There are tax implications to both. Speak to a tax adviser before deciding which route you will take. 

Rental income

You will need to do a tax return each year and pay tax on your rental income. The amount of tax you pay depends on your relevant tax band. Note that you can claim some expenses against the rental income received.

Capital Gains Tax

You will need to pay CGT on your property if you make a gain on it when you sell. 

Stamp Duty

You will pay an extra 3% stamp duty on a buy-to-let property. You need to factor this in when calculating the upfront costs required to invest. 

For example, if you want to purchase a buy-to-let freehold property in your own name in England for £300k, you will pay £11,500 in stamp duty. 

In contrast, if you bought this property as;

• a first-time buyer you would pay no stamp duty. 

• an owner of a property previously you would still pay only £2,500 in stamp duty.

Buy-to-let Insurance

Buy-to-let landlord insurance can protect you from, for example, damage to fixtures and fittings, fire damage and/or loss of rental income.  Shop around for the best deals.

Location, location, location

Where are you looking to buy a property? To start your search, go to property portals such as Zoopla or Rightmove. You can put in the area or the postcode and add filters like type of property, number of bedrooms etc. and start your search. You will need to check for prices of the properties and rental amounts you can get for the properties.

Regional Price Variations

There are regional price variations in the UK.  Average prices as of July 2023 are:

England £308,633

Wales £215,632

Scotland £191,870

Northern Ireland £173,898

You need to determine what rent you can get for the type of property you have in mind and calculate the rental yield on the property to see if it is worth the investment.

London buy-to-let properties

Properties in London are very expensive. The average price of a London property is £534k.

£534k would get you, for example, a 2 bed 1 bath flat in Fulham, London. Rental for such a property would be, on average, £2,300. An interest-only mortgage at 6% over 25 years would cost £2,001/month. However, you would need to include other costs such as management fees, insurance etc. In this case, you may just break even or potentially be cashflow negative. 

However, London properties generally tend to retain their value and have historically performed well in terms of capital appreciation over time as the chart below shows.

Are you investing in the UK or abroad?

If you invest in the UK and the house isn’t near you, have you considered how you will manage the property? This is where a good property manager is required. A good one is worth their weight in gold. The same will apply if you buy abroad. Also, if buying abroad, have you considered local taxes, legislation, the political situation etc.? 

Buy-to-let Government Legislation

You need to keep abreast of government legislation in relation to your buy-to-let property. Failure to comply with requirements can lead to large fines. Also, keep abreast of any changes to how rental income and expenses are treated for tax purposes to ensure you are fully tax compliant.

Type of Tenant

Are you looking for a corporate tenant, students, single professionals, or families? Ensure you employ the service of a lettings agency who will thoroughly vet the tenants for you. You don’t want a bad tenant who will either not pay the rent, wreck the property or both!

Your duties as a Buy-To-Let Landlord

Tenancy Contracts

You must provide your tenants with a tenancy contract which sets out the terms and conditions of renting your property. It includes items such as names of landlord and tenants, the monthly rental amount and when it is due, the length of the tenancy, the deposit amount, the property address etc.

Tenancy Deposit Schemes

The tenant provides a deposit to cover damage to the property, unpaid rent, bills that have been left unpaid and cleaning if the property is left in a filthy state.

The TDP is a government-backed scheme that is a way to ensure that the deposit money is protected. 

You or the letting agent are required to put the tenant’s deposit into the scheme within 30 days of receiving it.

There are 2 types:

Insurance: you or the letting agent retain the deposit and you pay the scheme to insure it

Custodial:  the deposit money is paid into the scheme which holds it free of charge. 

Safety of the Property

You, as landlord are required to ensure that the property is safe and fit to live in.

Gas Safety Certificate 

You must ensure that:

• the gas equipment has been safely installed, checked, and maintained by a Gas Safe registered engineer.
• ensure a gas safety check is done each year.
• provide the tenant with a gas safety certificate.

You must carry out other checks such as electrical safety and fire safety checks.

Energy Performance Certificate (EPC) Rating

An Energy Performance Certificate (EPC) shows how energy-efficient a property is. EPC ratings are from A to G with A being excellent. 

Your property must by law have an EPC rating of E or more to enable you to let the property. What is the EPC rating of the property you are thinking of buying? If below E, how much money will it cost to upgrade the property to at least an E? In practice, tenants usually want to see at least a D before renting to keep their costs down. 

Buy-To-Let, In Summary

Buy-to-let property can provide a steady stream of income and you also benefit if the property rises in value too.

However, there are multiple things to consider before investing in buy-to-let property. Do your research, choose a good investment property, and manage your finances. Ensure you treat your tenants well and adhere to all of your legal obligations to ensure they are safe living in your property.

The items covered in the post are not an exhaustive list of everything you need to consider but hopefully, it will help give you some guidance in your buy-to-let ventures.

If you want to understand the benefits and potential downsides of investing in property, then you can read about it here.

Thanks for reading!

Have you buy-to-let experience? Do you have anything further to add in terms of what needs to be considered before investing in buy-to-let property? If so, please add it in the comments section.

DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up-to-date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.