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.
However, your bank might have a few more requirements to get a buy-to-let mortgage. Many banks will require you to earn above a minimum salary threshold and to own your own home before granting a buy-to-let mortgage, and you may have to be a British citizen or ordinarily resident in the UK.
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). You’ll also find specialist mortgage brokers for HMOs and short term lets.
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.
A buy-to-let property is a long-term investment. You are likely to own and let out the property for at least 10 years: it’s harder to liquidate property investments 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, but this time can also allow your property to appreciate in value.
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 of 6-18 months and is then renewed or rolls on a monthly basis. Your tenants should pay rent directly to your bank account every month.
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.
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 rental income can be much higher. Some properties provide double the annual rental yield through a series of short term lets compared to ASTs.
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 unless you have a loan-repayment mortgage.
Most buy-to-let investors manage to make a net profit when they sell as the resale value of the house is much higher when they sell than they 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.
It’s best to sell when property prices are high, but this isn’t always possible if you need to repay your mortgage sooner or need ready cash at a particular time. Even if house prices are rising across the UK as a whole, a derelict property or an undesirable location can diminish your profit.
But that doesn’t mean you have no control over the capital growth of your investment. Savvy investors will try to buy a property cheaply – because it’s in a poor condition or during an economic slump – and sell when it’s valued much more highly.
Capital gains tax is payable when you sell your property. If it’s your second property, this is likely to be 18% or 28% 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 Booking.com are making these increasingly profitable.
Assured Shorthold Tenancy (AST):
Under an AST agreement, the property is rented by a family or group under a single contract, so there can be one or multiple people on the contract. If multiple people (e.g. a group of friends) are renting your property, they pay rent as a group and are jointly and severally liable for the rent – so if one person in the group leaves and stops paying rent, the other tenants can be legally liable to pay.
There’s a lot more flexibility over what you provide under an AST agreement. You can let your property furnished or unfurnished, and you can leave utility bills to your tenants or cover them yourself (and increase your rent to cover this). You set the terms of the tenancy out yourself.
However, ASTs tend to be very competitive for both the tenant and the landlord, so the rent you charge will generally have to be in keeping with other rates in the area.
‘Assured Shorthold Tenancy’ is the name of the contract. You don’t strictly need a contract if you’re letting your property out to a family or single household, but it’s always better to have a contract to protect both you and your tenants.
Home of Multiple Occupancy (HMO):
HMOs have several tenants with individual tenancy agreements within a single property. They rent a bedroom each and share facilities like the kitchen and bathroom.
The landlord typically pays the utility bills and council tax, but 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 only one night to a newly-relocated family.
As a landlord, you should cover all the utility bills and council tax, and you may also want to offer the property fully furnished.
Rental income from short term lets tends to be less regular and 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. But rental income can be much higher per annum – sometimes double or more what the same property can yield as an AST.
Short term lets are becoming increasingly profitable as online platforms like AirBnB and Booking.com have made it much easier to connect tenants to landlords. 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.
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 pay back the amount you borrowed as a lump sum when you’re ready to sell the property, unless you can raise the cash elsewhere.
Buy-to-let mortgages also tend to have higher interest rates because the bank expects you to rely on your rental income to pay the interest.
To get a mortgage, you’ll also have 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. Generally speaking, you can get lower interest rates if you can provide more as a deposit.
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.
Short term lets and HMOs need specialist mortgages and these might not be available from the major high street banks. You’ll want to speak to a specialist broker to find out how much you can borrow and get the lowest interest rates.
Your first step should be to work out your exact financial situation. This will give you an idea of how much you can borrow and what your investment options are.
How much can you invest upfront? This will usually be your savings but you might also be able to raise cash elsewhere – from family or from other investments.
How much do you earn? Your yearly income helps mortgage providers to work out how much they’re willing to lend you. You also need to be sure you’ll be able to keep up interest payments and cover unexpected expenses if your property is empty.
You should also have a clear idea of the type of investment you’re seeking. If you’re hoping to make a net profit from your rental income, you’ll want to look properties with the highest rental yields. If you won’t have much time to managing your property, you’ll want to focus on new-build or refurbished properties and hands-off investment opportunities.
See our step-by-step guide to getting started in property investment.