A buy-to-let investment is a property that a landlord buys to rent out to tenants.

Buy-to-let properties can provide you with an extra monthly income from the rent your tenant pays. You can also profit from capital growth – if your property increases in value over time, you’ll make a profit when you sell it.

They tend to be long-term and hands-on investments – you should expect to own and let out the property for several years and manage it closely. There are risks associated with buy-to-lets, but they’re usually considered a fairly safe investment.

Most buy-to-lets are residential homes. But more and more people are now investing in HMOs, commercial properties and holiday homes.

Who can invest in buy-to-let properties?

The short answer is anyone. Most buy-to-let landlords are private individuals and couples, and they tend to start by buying a second home to invest in alongside their ‘normal’ careers and salaries. But you’re also likely to meet professional and portfolio landlords, housing companies, foreign investors and expats in the real estate market.

You don’t need to be able to buy the whole property entirely in cash. Once you’ve got enough capital saved up for a deposit, you can apply for a mortgage to pay for the rest of the property.

However, your bank might have a few more requirements to get a buy-to-let mortgage. These are some things your bank might require:

  • You need to own your own home
  • Your salary needs to be above a minimum threshold e.g. £25,000 pa
  • You must be a British citizen or ordinarily resident in the UK
  • You must be older than 18, 21 or 25 and younger than 70 or 75

There are also different mortgage products for different categories of investor. For example, many banks offer specific mortgage products for portfolio landlords (people with four or more mortgaged properties) and professional landlords (people who have borrowed more than £2 million in buy-to-let mortgages).

Profiting from your investment

Buy to let investments can provide a return on your investment in two ways: by rental yield and through the resale value of your property.

Most residential tenancies are Assured Shorthold Tenancies (ASTs). This is a type of long-term let in which a family or a household (e.g. a group of friends) lives in the property. The contract is usually for a fixed term, such as 6 months, or renewed on a rolling monthly basis. Your tenants should pay rent directly to your bank account every month, or pay in cash or by cheque.

The rent you can charge will largely be determined by the type and condition of the property, the location and local demand, but you could get a rental yield of up to 5% of the property price annually.

A buy-to-let property is a long-term investment. Bear in mind:

  • You’re likely to own and let out the property for at least 10 years
  • Property investments are not easily liquidated because the processes of buying and selling can be lengthy and costly.
  • You might not see a net profit from your rental income until the second year after you factor in the other costs. However, these years should also provide time for your property to appreciate in value.

Property investors are also increasingly turning to short term lets instead of ASTs. These are properties let out as temporary accommodation for periods under 6 months – though they can even be let out for just a weekend at a time for tourists and visitors. Short term lets require more work from landlords to regularly find new tenants and maintain the property, but the annual rental yield can be much higher. Some properties provide double the annual rental yield through a series of short term lets compared to ASTs.

Capital Growth

Capital growth is a major factor in the returns you can gain from your investment. You’re likely to sell your property eventually to repay the amount you borrowed as most mortgages are interest-only.

Most buy-to-let investors make a net profit by selling the house for much more than the amount they paid.

House prices have usually increased over time in the UK, but they can fluctuate and some locations can be particularly volatile. Many forecasters have predicted that house prices will fall in London in 2019.

Your profit can be reduced by:

  • An undesirable location
  • A derelict property
  • Outdated furnishings and amenities
  • National economic slump
  • Local economic slump
  • Selling at the wrong time (e.g. if you need to repay your mortgage sooner or need ready cash at a particular time.

That doesn’t mean you have no control over the capital growth of your investment, however.

Tip: Buy a property cheaply – because it’s in a poor condition or during an economic slump – and sell when it’s worth much more

Capital gains tax is payable when you sell your property. If it’s your second property, this is likely to be 5% or 8% of the profit you make when you sell. These figures are based on today’s Capital Gains rates, but those rates may have changed by the time you’re ready to sell.

Long and Short Term Lets

There are a number of different tenancy options for a buy to let investor. Most long term residential lets are Assured Shorthold Tenancies, but you can also set your property up as an HMO. Many landlords are now turning to Short Term Lets as new digital platforms like AirBnB and Spare Room are making these increasingly profitable.

Assured Shorthold Tenancy (AST):

  • The property is rented by a family or a group under a single contract, so there can be one or multiple people on the contract.
  • Everyone on the contract is jointly and severally liable for the rent. They pay rent as a group directly to you so if one person in the group leaves and stops paying rent, the other tenants can be legally liable to pay.
  • The rent you charge needs to match the local rates. That’s because ASTs tend to be very competitive for both the tenant and the landlord
  • You can let your property furnished or unfurnished
  • You can leave utility bills to your tenants or cover them yourself (and increase your rent to cover this).
  • Formal contracts aren’t mandatory but they’re very important to protect both you and your tenants.

Home of Multiple Occupancy (HMO):

HMOs have several tenants with individual tenancy agreements within a single property.

  • Each person (or a couple) rents a bedroom
  • They share facilities like the kitchen and bathroom – their contract gives them the right to access these at any time
  • The landlord typically pays the utility bills and council tax. You should increase the rent you charge to cover these.
  • You have to find tenants individually. But this can sometimes be easier than finding a large family or group – especially if you have a larger property.
  • You can also evict a single person if they stop paying rent or things don’t work out.

Short Term Lets:

Short term lets provide temporary accommodation for up to six months. Your tenants could range from tourists staying for just one night to a family that’s just relocated and looking for a more permanent home.

  • rental income can be much higher per annum – sometimes double what the same property can yield as an AST.
  • Rental income from short term lets tends to be less regular
  • There’s a bigger risk that you’ll have an empty property. Demand can be more limited or seasonal in remote holiday locations and much more regular in cities like London.
  • The landlord pays all the utility bills and council tax
  • It’s best to offer the property fully furnished – because tenants won’t want to spend the time and money furnishing a place they’re only staying in briefly

Short term lets are becoming increasingly profitable as online platforms like AirBnB and Spare Room have made them much easier for tenants to find. Many landlords have been converting AST properties to short term lets to increase their rental yield.

Getting a Mortgage

Most buyers will need to get a mortgage to help pay for their property. Banks provide mortgages specifically for buy-to-let investments, and these are different to standard residential mortgages for a home you’re going to live in.

  • You need to provide part of the cost upfront in cash as a deposit. Banks will normally ask for between 25% and 40% of the property price – which is higher than for residential mortgages. You can usually get lower interest rates if you can provide a bigger deposit.
  • Buy-to-let mortgages tend to have higher interest rates because the bank expects you to rely on your rental income to pay the interest.
  • Most buy-to-let mortgages are interest-only – which means each month you only pay a percentage of the amount you borrowed as interest.
  • You repay the amount you borrowed as a lump sum when the mortgage term ends – but you can renew the mortgage until you’re ready to sell your property, unless you can raise the cash elsewhere.

Your bank might advertise mortgage products it can offer, but it’s a good idea to shop around for the best deal with web searches and a mortgage advisor. You can also use an online mortgage calculator to get an idea of the kind of mortgage products you could access.