A buy-to-let property is a great way to enjoy short-term income while seeing your asset increase in value. That’s why it should come as no surprise that it’s still the most popular investment type in the UK, even with changes to stamp duty on second homes and less flexible rules around tax relief.
To navigate the world of buy-to-let, investors will need to make sure they have every aspect of the market covered. There’s a lot to unpack when it comes to investment properties, from identifying the right postcodes to getting your property rental ready.
If you’re a potential landlord who is thinking of buying (or has just bought) a buy-to-let property and is planning their next move, you’ve come to the right place. In this article, we’ll teach you how to set yourself up for buy-to-let success so that you can navigate the market with total confidence.
Understanding how the buy-to-let market works is fundamental to your success. It all starts with research, and investors typically look for two key aspects when buying a rental property: overall house values and yields.
House prices depend on market conditions and the property’s location. In London, for example, the average house price is around £485k. However, it’s still possible to pick up properties as low as £280k, which is why potential investors should research the current housing landscape and look at property portals like Rightmove and Zoopla. Doing so will help to get a better understanding of the market.
The yield is perhaps the most vital part of investing and is the amount you achieve in rental income compared to the property’s overall value. To work out a property’s yield, you need to multiply the monthly rental income by 12, then divide it by the property value and times that figure by 100
Example: Monthly rental income: £1,500 x 12 divided by property value of £500,000 x100 = a yield of 3.6%
Of course, you can’t work out the exact yield until it’s rented. In the meantime, it’s worth looking at similar properties in the area and seeing their rental listing price.
There are other elements to take into account when looking for a buy-to-let property, including your own location. Many prefer to buy close to where they live as they’re familiar with the area and are nearby in case they need to attend the property. However, if you’re using a management company, they will maintain the buy-to-let on your behalf, so location won't be as crucial.
There are a few other financial aspects to work out, including monthly outgoings associated with your rental property. If you're a cash buyer, you won't have any monthly mortgage repayments. However, if you've purchased the investment with a buy-to-let mortgage, it’s important to factor in the repayments in comparison to the monthly rent received
Use a buy-to-let calculator to get a rough idea of how much monthly mortgage repayments might cost. A calculator can also give you a rough estimation of the amount you would be able to borrow from a lender for the buy-to-let property.
Other costs include service charges if it’s an apartment, as the landlord (not the tenant) is expected to pay these outgoings. It’s also worth keeping some money aside for potential maintenance issues, such as broken boilers and washing machines
You should also expect to be charged on a monthly basis if you’re paying a traditional property management company to maintain your buy-to-let. Considering all of these factors will help you understand how much you will be left with in rental income each month.
Rental income is at the top of the priority list for most landlords. But having the right type of tenant can be equally as important. A good tenant will go a long way to making sure the rent is paid on time and that they look after the property.
Before letting the property, all tenants should be professionally vetted to see if they are suitable to rent the buy-to-let investment. This is done through professional referencing and a reference letter from the previous landlord.
Landlords also need to decide on the type of let. Some options include a long-term lease (in which case an Assured Shorthold Tenancy is the most viable option) and a short-let of under six months. There is also the number of tenants to take into account. If more than three people are sharing a bathroom and kitchen, they’re forming an HMO (Houses in Multiple Occupation), which requires a specific HMO license.
As a landlord, you have certain legal responsibilities to your tenants. As well as the need for a legal contract, you will be required to look after their deposit in an official scheme and ensure that all tenants have the right to rent in the UK.
Familiarising yourself with the responsibilities involved with letting a property is vital for complying with UK law around buy-to-let homes. For a more in-depth look at landlord responsibilities, check out our article covering the topic.
Buy-to-let insurance, which is also referred to as landlord insurance, covers a range of options that safeguard you against potential problems. Some of these insurance types are mandatory. Others are optional.
Landlords with a mortgage are required to take out buildings insurance by their mortgage lenders. Buildings insurance covers you against the property being damaged or destroyed and includes the cost of rebuilding or repairing the home.
Contents insurance covers the furniture inside the property, as well as things like carpets, wood floors, curtains, so it’s a good idea even if the property is advertised as unfurnished. Tenants are responsible for covering their own belongings.
In the event that a tenant or visitor to your property experiences an injury (or even death), landlord liability insurance will cover you. It’s an optional insurance cover in most cases, but can sometimes be mandatory if you’re renting to students.
Rent guarantee insurance protects you if your tenant stops paying the rent for any reason, either through the loss of their job or as a result of an injury. You will carry on receiving the monthly amount while you sort the issue out with the tenant.
It’s highly probable that you will need to pay taxes on your earnings once the buy-to-let home is let. Recent changes have made the tax due on investment properties more thorough, so it's important to know what you might be liable for.
The tax you’re charged on your buy-to-let property depends on your UK tax band, which is combined with other sources of income. However, there are certain things you can claim back, such as fees for the property, services charges, insurance costs, council tax, and maintenance.
If you decide to sell your property, you will need to pay Capital Gains Tax. This is a tax on any increase in value the property has seen since you first bought it. There are some allowances, with the first £12,000 you make as a profit being capital gains free.
Buying an investment property in the UK is likely to constitute a second home. All second homes are liable for an extra three percent stamp duty land tax, meaning you would pay £15,000 on a property worth £500,000 instead of £10,000 if it was your first time buying.
Historically, landlords would employ the service of a high-street letting agent to find a qualified tenant for their property. The agent would take a fee (often between 10% and 15%) of the annual rent for their services.
In the last few years, more options have cropped up, offering a greater depth of choice. As well as high-street agents, landlords can use an online letting agent, which is often cheaper but more hands-on, with elements like viewings. Short-term options like Airbnb have also increased in popularity, though there is a strong element of DIY. It’s completely up to the property owners themselves to find and vet tenants, ensure the home is habitable and manage everything and everything that may arise.
Here at Blueground, we take the hassle out of finding tenants by renting the property from the owner directly. You won’t need to worry about many of the trickier elements involved with being a buy-to-let landlord, such as contracts with tenants, security deposit management, and finding high-quality inhabitants, as we do it for you!