Buy-to-let

This guide is for people who are thinking of buying a property to rent with a ‘buy-to-let’ mortgage and who may have little or no previous experience of investing in the private rented sector. 

It is not intended as a detailed guide, if you are thinking of purchasing a buy-to-let property you should seek expert advice on legal, tax, financial and property management matters.

• What is buy-to-let?
• Choosing a property 
• Managing your property 
• Choosing a mortgage 
• What will your costs be?
• Buy-to-let checklist

Buy-to-let is a form of residential investment where you buy a property, usually with the aid of a mortgage, and rent it out. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties and there has been a modest recovery in the private rented sector since then. The increased availability of loans at attractive rates of interest for buy-to-let purchasers has also increased the appeal of owning rental property. 

When you buy a property to let out, you are becoming a landlord. And owning investment property is not like owning your own home. Instead you are effectively running a small business. 

Before you choose a property and arrange the finance to purchase it, there are a number of factors you should look into, which are described below. 

Choosing a property

Researching your market

You should carefully research the market where you want to buy your property. You can either do this yourself or employ a specialist letting agent to help you find the area and property you are looking for. If you research the market yourself, you will need to gather information from estate agents, local papers, local employers and even the local authority, about the demand for and supply of, rented housing. 

Finding your tenants

You will also want to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements. It is important to remember your property should have features that are attractive to would-be tenants, rather than would-be purchasers.  

Choosing your location

You should also look at how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school-age children, how close the nearest schools are, will be an important influence on where they choose to rent. 

Choosing your property’s size and condition

Equally, you should think carefully about buying a property whose size is attractive to households looking for rented accommodation in that location. As well as the size, type and location of your property, what about its condition? Have you assessed whether the property will require expensive maintenance. Generally speaking, older homes require more attention.

Choosing a property you can afford.

Obviously, the size of mortgage you can afford will have a major influence on the size and location of your property. Choosing a mortgage is described in more detail in the section below. And finally, in considering how much to spend on a property you should bear in mind that as well as increasing in value, your property can also fall in value. 

Managing your property

Your responsibilities

When you have chosen a property, you will need to decide who will manage it for you.  

If you manage it yourself, you will be responsible for:

• finding tenants
• checking tenants’ references
• collecting the rent and maintaining the property
• and dealing with problems

Your legal responsibilities

You will also need to be aware of your legal responsibilities as a landlord such as -

• carrying out repairs
• ensuring the safety of gas and electrical appliances
• and ensuring that the furniture and furnishings meet fire safety requirements

You should also consider familiarising yourself with landlord and tenant law, to understand your responsibilities as a landlord, and the rights your tenants enjoy. This is an area you may wish to take legal advice about. The Department of Communities and Local Government (DCLG) have published a useful guide for landlords in England and Wales called "Assured and assured shorthold tenancies: a guide for landlords” which is free and can be downloaded online.  

When your property is empty

You should remember there may be periods when you are unable to find tenants for your property and it will be empty, with no rental income coming in. Obviously you will still be expected to continue repaying your mortgage so you will need to think about how you will meet your mortgage repayments in these circumstances. This could particularly apply if you choose a property in an area where the supply of rental property exceeds demand from tenants. 

Maintaining your property

As well as managing your property, you will be responsible for maintaining it. Besides repairs and regular maintenance, properties can benefit from routine improvements which maintain their attractiveness with would-be tenants. You may find that your property is in need of an overhaul after a tenancy finishes. Naturally, you will have to finance this yourself. What is more, your property is likely to be empty and you will not receive a rental income, while your property is being improved. 

Using a managing agent

Given the number of different responsibilities you face as a landlord and the limitations on your own time, you may wish to use a managing agent to look after your property for you. This will cost you approximately 10% - 15% of your monthly rental income. 

Choosing a mortgage

Paying for your property

Obviously, when you choose a property, you will need to ask yourself how much you can afford to pay, and how you will pay for it? If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow. The size of the loan is usually linked to the expected rental income. As a guide, your lender will expect your monthly rental income to be 25%-50% greater than your monthly mortgage payments. 

Your choice of mortgage

When you choose a mortgage, your choice will be between a repayment mortgage or an interest-only loan. With an interest only mortgage, some lenders may require you to have a suitable investment product. If you have a repayment mortgage, some lenders may also advise you to arrange life insurance alongside your loan. You may be able to choose between fixed rate and variable rate mortgages. Fixed rate loans will give you some certainty about your mortgage repayments whilst variable rate loans could move up or down. You should also remember that your mortgage payments could rise if interest rates rise, depending on the type of mortgage you have. But before choosing your mortgage, you should consider taking advice from your lender or a mortgage intermediary. 

What will your costs be?

As well as your mortgage payments, you will need to pay for:

• buildings insurance
• consider contents cover, if your property is furnished
• maintenance costs
• periods when you are receiving no rental income because the property is empty or the tenants have fallen behind with their payments
• mortgage repayment increases because of interest rate rises, which you may not be able to recover immediately from rent increases

Your tax liability

Before you can calculate what your income from your property will be after taking into account all necessary expenditure, you should recognise that the profits from renting property are taxable. However, you will be able to offset some of the costs you incur as a landlord against tax. You will have to pay the following taxes:

• Income tax
• Stamp Duty when you buy your property
• and Capital Gains Tax when you sell it

You can find out more about the tax treatment of income from rented property in Taxation of rents: A guide to property income published by HM Revenue and Customs.  

Checklist for investing landlords

This checklist is a simple introduction highlighting the types of questions you should be asking yourself before buying a property to let out. It is not intended as an exhaustive list, merely an introduction for new buy-to-let investors, to a range of issues they should consider before entering the residential lettings market for the first time.

You should consider the following points before making any financial commitments:

Making your investment

• Are you investing to generate an income or hoping to see your capital grow and are your expectations realistic?
• Do you have sufficient capital of your own to invest in a property?
• Are you prepared to tie-up your capital for a considerable period?
• Will you have sufficient savings and other forms of capital after you have made this property investment?
• Have you taken specialist tax advice about the implications of buying and selling a Buy-to-let property, and the tax treatment of all income and expenditure from renting? 

Choosing and managing your property  

It is equally important that the property you buy is appropriate for the purpose and is properly managed thereafter.  

You should consider the following points before deciding to proceed:

• Are you regarding this as a medium to long term project?
• Have you consulted a professional, qualified local letting agent before beginning your search for a property?
• Have you thought about the type of household which will want to rent your property?
• Have you considered that demand for this type of property may change from year to year?
• Have you made independent inquiries to confirm a likely rental figure?
• Is the location of the property attractive to tenants?
• Most lenders will require you to have an Assured Shorthold Tenancy agreement with your tenants. Are you aware of the legal implications of this?
• If you are thinking of buying a leasehold property, what is the length of the lease remaining and is sub-letting allowed?
• Have you consulted a solicitor about the legal implications of renting out your property?
• Have you investigated the running costs of the property (e.g. ground rent, service charges, repairs, letting and management fees, etc)?
• Have you allowed for furnishings and other start-up costs in your calculations?
• Have you considered how you will repay your mortgage if you have no tenants paying rent?
• Are you aware that your property could decrease, as well as increase, in value?
• Are you aware of all the safety regulations applying to rented property?
• Have you considered the likely costs of dealing with tenants who do not pay their rent or damage your property, including the costs of evicting a tenant in court?
• Have you considered using the services of an agent to let and manage your property on a day-to-day basis or will you be doing this yourself?
• If you are using a letting agent, have you assessed how much they will charge you for their services?
• Will the net rental yield i.e. the rent remaining after you have paid your running costs, be sufficient to meet your monthly mortgage payment?

Choosing your mortgage

If you are thinking of raising a mortgage to help fund the purchase of a property, you should consider the following:

• Have you considered what type of mortgage to buy your property with?
• Would you welcome assistance from a mortgage consultant?
• Have you considered the impact of any future rises in interest rates?
• Could you meet the monthly mortgage payment from your own resources, if the rent was not paid or the property was empty? 

If you are unsure of any of your answers to the questions in this checklist, you should seriously consider taking appropriate independent professional advice. In particular, you may need to take specialist legal and tax advice from suitably qualified professionals.

This page is for information only. The responsibility for purchasing a buy-to-let property rests with the investor.