Are you thinking about becoming a landlord? Joining the club isn’t easy - there’s a lot to learn. In this guide, you’ll find all the information you need on financing your buy-to-let purchase, the tax implications and your responsibilities as a landlord.


What's a Buy-to-Let and How Does It Work?

A buy-to-let is a property purchased with the intention of renting it out to tenants. You can make a hefty profit as an investor of a buy-to-let property, you just need to make sure you plan appropriately and weigh up the income with the costs. It’s also fundamental that you seek tax advice before you take the plunge.

Successful buy-to-let investing in the current housing market is not without its issues. Like all investments, there are risks associated with buying-to-let. Increased taxes, greater regulation and higher costs are the new realities of today’s private rented sector. 

Being a landlord requires a lot of time, planning and money. You don’t want to buy a luxury property that you can’t afford to manage. Equally, you don’t want to throw money at a subpar investment. You need a thorough understanding of your capacity, aims and finances to ensure that your venture is realistic and aligns with your budget. 

To assess whether a buy-to-let property is a worthwhile investment, you should look at things like rental yield and potential capital growth. See below for more information.

Rental Yield

Rental yield measures the ongoing return on investment for a property. You should always consider your potential rental yield before purchasing a buy-to-let. Get an idea of the potential rental yield of your buy-to-let investment by using our simple rental yield calculator

Capital Growth

Capital growth, also known as capital appreciation, is the amount that the property increases or decreases in value over time. This is normally due to changes in the property market or improvements to the property. Working out your potential capital growth can help you decide what work to do on a buy-to-let and when could be the best time for you to sell.

Example:

  • You purchase a property for: £250,000
  • It’s current market value is: £300,000
  • The capital growth is: (£300,000 - 250,000) = £50,000
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Deposits for Buy-to-Lets, Costs and Tax Relief

Not everyone has masses of savings neatly set aside, ready to invest in a new property by purchasing it outright with cash. But that’s not always an issue. In fact, a lot of people will take out a buy-to-let mortgage to reduce their initial cash outlay. They’re quite straightforward and specifically designed for buy-to-let property investments.

A buy-to-let mortgage allows you to borrow a large sum of money to purchase a property that you plan to rent out. They function similarly to a typical residential mortgage; the main differences are that buy-to-let mortgages usually require a bigger deposit and have higher interest rates. A deposit for a buy-to-let is around 25% of the property value. Buy-to-let mortgages can vary greatly and the offers available are subject to many different factors, e.g. how much deposit you can put down, how much you can pay back every month, etc. 

Lenders use a rental affordability calculation to determine whether they think your buy-to-let mortgage is financially feasible. They’ll likely use an affordability calculator which sometimes takes into account your personal income and potential rental income against the amount of money you wish to borrow. Most lenders will insist that the monthly rental income must be at least equal to 145% of the monthly mortgage payments on an interest-only basis using a nominal rate of around 5%. For basic rate taxpayers this can be 125% rather than 145%. Some lenders can take personal income into account as well to support this calculation.

You must meet certain eligibility criteria to successfully receive a buy-to-let mortgage. For instance most lenders have a minimum personal income requirement, often at least £25,000 per year. You need to prove that you can comfortably cover the costs of the investment. This can include survey fees, solicitors’ fees, Stamp Duty Land Tax and other expenses. Lenders generally do not accept applications for buy-to-let mortgages from first time buyers, but a few do.

Stamp Duty Land Tax on Buy-to-Let Properties

You pay Stamp Duty Land Tax on properties and land in England and Northern Ireland that cost over a certain amount. Stamp Duty applies to both freehold and leasehold properties, purchased outright or through mortgage financing.

If you purchase a residential property that’s not your main residence, e.g. a second home or a buy-to-let, you pay a 3% surcharge on the standard Stamp Duty rates.

Our buy-to-let Stamp Duty calculator will give you a clearer idea of how much Stamp Duty you’ll need to pay when you purchase a buy-to-let property. Or visit our Stamp Duty guide for more information about this tax.

Income Tax on Buy-to-Let Properties

Owners of buy-to-let properties also need to pay Income Tax on rental income. You’re permitted a £1000 allowance, or you can deduct certain expenses. To learn more, see our comprehensive guide on Rental Income and Other UK Landlord Taxes.

Insurance

Most buy-to-let mortgage lenders demand that you have buildings insurance in place. It’s important that you select insurance with your long-term plan in mind. If you think you’ll extend your property portfolio in the future, you might find it useful taking out a policy that allows you to add additional properties later. What’s more, depending on the terms of the contract you supply to your tenants, you may be responsible for covering contents insurance and liability insurance. Thinking ahead when you take out your policy will help make sure you don’t limit yourself later on.

Survey Fees

Survey fees can include everything from the cost of a simple property valuation to a full structural survey. The necessary level of investigation into your property will depend on your lender, the mortgage you’re applying for and the type of property you’re purchasing. As a rule of thumb, a standard valuation will do just that – confirm the value, give a rental assessment and judgement if the property is suitable security for lending. A homebuyer’s report will give all that is on a valuation as well as a report on the actual state of the property.

Maintenance Fees

Buy-to-let maintenance costs can sneak up on you. Landlords are responsible for the upkeep of the property, as well as managing the rental income. This can become hectic. You may want to consider hiring a letting agent to manage the property for you, especially if you’re often juggling multiple investments/properties.

Letting agents obviously come with additional costs; they tend to charge a percentage of the rental income plus VAT. Nonetheless, they can seriously reduce some of the day-to-day hassles associated with buy-to-let investments.


Best Areas for a Buy-to-Let Property

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Finding the best area to purchase a buy-to-let property depends on your budget, plan and location. You can use the UK House Price Index to find average house prices across the UK or in particular regions. The government also publish statistics on rental prices each month, so you can estimate how much rental income your property will likely generate. What’s more, possibly the best research will come from visiting the area and talking to a variety of both sales and letting agents to see what that area is really like.

In addition to the financial considerations, it’s worth thinking about the demand for rental properties in the areas where you’re looking to buy. The population, the institutions, the businesses – these are all terrific indicators landlords can use, e.g.  in areas where there is a high population of young people you’ll likely find people looking to rent, thereby providing plenty of opportunities for buy-to-let property investments. 

Unless you intend to be completely hands-off when it comes to managing the property, it makes sense to buy a property you can easily reach - either in the case of an emergency or simply to fulfil your responsibilities as a landlord. 


Choosing the Right Buy-to-Let Property

It’s easy to let your personal preferences influence the types of property you buy. Why wouldn’t it? You’re buying a home. It’s important to remember you won’t live in your buy-to-let property yourself. Consider what would be beneficial as an investment and who your tenants would be.

We’ve outlined some tips below to help you choose the right buy-to-let property. 

Talk to a Local Estate Agent

Local estate agents will be able to tell you about the property market in their area. They can direct you towards suitable properties, give you valuable information about the local rental market and help you narrow down your search. 

Set a Budget

Your budget will often determine the types of properties available to you and their locations. Take some time to work out what you can afford and what you can realistically earn from rental income. This will give you a clearer point of reference for when you research the house prices and rental rates in the areas where you plan to buy.

Factor in Your Mortgage

Take care to include the cost of your buy-to-let mortgage in your financial calculations. Most landlords take out a buy-to-let-mortgage to fund their investment, which means they have to budget for a deposit – this is usually at least 25% of the purchase price. If you want to read more about buy-to-let mortgages, read our guide on the different mortgage types.

Check Your Financial Forecast

Make sure you have the financial capacity to pay for any unexpected costs. It’s best practice to budget for periods when the property might be empty, e.g. when you’re in-between tenants. Thinking ahead may force you to alter your plans, but it will give you a more solid place to start from.

Appeal to a Certain Type of Tenant

Think about the type of tenant you want to attract. Families will want to live close to schools, while young professionals will focus on the distance to and from transport hubs. If you want to rent your property to students, consider investing in suitable accommodation and buying properties close to university campuses.


Getting a Buy-to-Let Mortgage

In addition to assessing your affordability, buy-to-let mortgage lenders will base your loan on the expected rental income of your property.

Lenders often ask for rental income between 125% and 145% of the interest repayments - not the capital repayments. Requirements will vary from lender to lender. They may also adapt their criteria depending on your financial position. Lenders will usually conduct a “stress test” to establish if you’ll be able to keep up with repayments, interest rate fluctuations and possibly other expenses.  They need to ensure that this transaction will be a good investment for them.

Buy-to-let mortgages typically require a minimum deposit of 25%. The larger your deposit, the greater the range of mortgage products you can choose from and usually the cheaper the rate lenders charge.

As with any mortgage, seeking the advice of a broker will help you find a financial route to best suit your situation. Start now by using our free buy-to-let mortgage calculator. It’ll give you an estimate of how much money you can borrow. 


Buy-to-Let Cost-Saving Advice and Other Tips

It’s a good idea to think about advertising your property on the UK’s largest letting portals - Rightmove, Zoopla and Prime Location. They give you the means to easily self-manage your property which can sometimes help you save more money than if you used a property agent.

Self-managing your property also gives you more control over things like tenant fees, which may benefit you in the long run as you can make changes to entice your selected tenant type. If you use a property agent, make sure you ask them about any potential tenant fees.

You could also relax some of your policies, like allowing tenants to keep pets.

If you’re not sure whether self-managing your property is the right move, read Self-Managing Your Property below. We outline who it does – and doesn’t – suit.

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Your Obligations as a Landlord

You have a responsibility as a landlord to ensure all property is safe for your tenants and that it’s energy efficient. You also need to make it clear that you’re holding your tenants’ deposit legally.

We give a little more detail on the legal obligations landlords must fulfil below.

Do Landlords Need to Get a Gas Safety Certificate?

As a landlord, it’s a legal requirement to have a gas safety certificate – you’ll need to get in touch with a Gas Safe-registered engineer to carry out a check. You’re legally obliged to get a gas safety check every 12 months and provide a certificate to your tenants. Furthermore, you must have a gas safety inspection within 12 months of installing a new gas appliance in your property.

Do Landlords Need to Carry Out an Electrical Safety Check?

It isn’t a legal requirement to have an official certificate for electrical safety, however there’s legislation in place which outlines your obligations as a landlord to ensure the electrical equipment in your property is safe to use.

Are Landlords Responsible for Smoke Alarms?

Since 2015, landlords have been required to oversee the instalment of at least one working smoke alarm on every storey of their property. Landlords must also have carbon monoxide detectors in any room containing a solid fuel burning appliance e.g. a coal or wood burning stove. Every time a new tenant moves in, it’s the landlord’s responsibility to make sure all alarms are in working order.

What is an HMO License?

If you’re letting your property out to 3 or more tenants who form 2 or more "households" which share a kitchen and bathroom, you may need to apply for an HMO license from your local authority. Lenders will likely have different mortgage products for HMOs so you should check with your broker regarding this first.

What Should Landlords Have to Do with Deposits?

As a landlord, you must put your deposits in a deposit protection scheme authorised by the government. The tenancy deposit scheme is designed to protect tenants and landlords by acting as a mediator in the case of a dispute at the end of a tenancy.


Self-Managing Your Property

Self-managing your property can help ensure a long-lasting, friendly and professional relationship between you and your tenants.

Before choosing to self-manage your buy-to-let investment, you should ask yourself:

  • Do you have time?

It’s hard balancing a full-time job, loving family and busy social life. Adding a buy-to-let property investment to the mix isn’t always feasible. However, you don’t need to write off your ability to self-manage just yet. Self-management is an option worth considering if you can be available by phone and email, despite your busy lifestyle. If not, then think about incorporating a letting agency into your buy-to-let strategy.

  • How far do you live from the property? 

If you can’t attend viewings, inspections or maintenance calls because of the travel distance, it may not be economical to do everything yourself. You could ensure you have a list of trusted tradespeople in the local area to deal with any issues when you’re unavailable.

  • Do you like dealing directly with tenants?

Maybe you’re not really a people person or you simply prefer hands-off approach. It doesn’t really matter; craft a buy-to-let strategy you’re comfortable with and hire a letting agent to handle the tenants for you.

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