Thinking of investing in property? On the surface, buying a property to rent seems like a surefire way to generate extra income and build financial security. However, the reality is that it has never been more difficult to buy and let a property.
Yes, the property market has recovered significantly since the 2008 financial crisis, with the number of households occupied by private renters in England rising year by year between 2009 and 2019.
Today, changes to tax relief on mortgage interests and stamp duty have left many landlords out of pocket. At best, landlords can convert their properties to holiday lets to recover some of their losses. At worst, landlords have no choice other than to put their properties up for sale and exit the market.
But “why are landlords exiting the market?” we hear you cry. Well, despite rents rising by around 8.6%, many landlords have seen their income returns plummet significantly in just the last year alone. In some cases, income returns have more than halved. This begs the question of whether being a landlord is more trouble than it’s worth.
Having said that, being a landlord isn’t all doom and gloom. If you do it right, investing in a buy to let property can be an extremely profitable business. You just need to carefully consider the potential costs and fully understand your responsibilities as the landlord.
Read on for the full lowdown on how to buy a buy to let property.
Choosing the right property
If you’re hoping to make a decent profit from your investment – whether it’s to build a retirement fund or just to keep normal life ticking over for you and your family – it’s important to make sure that you choose the right property. Believe it or not, taking the time to find the right property could be the difference between improving your family’s standard of living and your investment going down the drain.
When it comes to choosing a property to rent, it’s wise to consider the following:
- Location – it’s fair to say that the location of your property is one of the biggest factors to consider before investing in a buy to let. After all, it will impact the kind of tenants you attract, as well as your rental income. For those looking to generate capital growth, it may be worth buying a property in a big city where house prices are expected to boom in the future. This is a watertight way to make money from a buy to let. If you’re hoping to generate a lucrative rental yield, however, it’s sensible to choose a large property in a smaller town
- Type of building – if you’re hoping to attract working professionals or students, it’s a good idea to invest in a flat. Opting for a house, on the other hand, is a smart choice for those looking to rent to families? Outdoor space – more than half of UK tenants value having an outdoor area. A garden or balcony can be a big selling point for many tenants
- Maintenance – buying a ‘fixer-upper’ that you can later sell for a property may be a good option for some. However, keep an eye out for serious damage that could result in hefty repair costs or even legal expenses
- Transport links and parking – it’s not always a priority, but more and more renters are looking for a property with good transport links or parking. It’s also worth looking out for any upcoming infrastructure changes that could impact your property later down the line
- Fixtures and fittings – Remember, your buy to let doesn’t have to be your dream house. At the end of the day, most tenants aren’t looking to rent a property with a swimming pool and a huge garden. As long as your property has all the essentials – electricity, water, gas, a kitchen, a bathroom – you should be able to attract the right tenants
A small tip for would-be landlords: it’s important to choose a property that has wide appeal and will attract a range of tenants. Keep this in mind when it comes to choosing furniture and decor.
Crunch the numbers
Before you buy a buy to let, it’s wise to get a good idea of how much will be spending and, more importantly, how much rent will be coming in. If you’re not realistic about your finances, you may not get the return on investment you’re looking for. After all, life is always better with a plan (and a budget). You need to think long and hard about the costs involved. Once you’ve considered the necessary costs, set a budget and stick to it!
Of course, there are the initial costs associated with purchasing a buy to let, such as:
- Property survey
- Stamp duty
- Legal costs
- Mortgage admin fees
- Income tax
- Class 2 National Insurance – if renting your property is considered part of running a business
Then there are the day-to-day running costs, such as:
- Safety checks
- Landlord insurance
- Maintenance and repairs
- Letting agent fees
These costs can quickly add up and pinch your pocket depending on the type of property you choose and where it’s located. Head here for a full breakdown of the cost of being a landlord in 2022.
Think about mortgage repayments
Most people do not have the funds to buy a second property outright. So, more often than not, you will need to get a buy to let mortgage before looking at a property to let. But keep in mind that a buy to let mortgage isn’t the same as a residential mortgage – there are a few key differences to note.
Firstly, instead of being calculated based on your income, a buy to let mortgage is determined by your projected rental yield. This means that you will usually need to set the rent at least 30% above your monthly mortgage repayment amount. On top of that, you will need to put down a deposit of at least 25% of the purchase price when you buy the property. Essentially, rather than paying off the debt, you pay the interest each month. You pay the capital in full once you decide to sell the property.
Consider getting landlord insurance
Although you’re not legally obligated to get landlord insurance, some landlords have no choice but to take out insurance if they want to start earning money from their buy to let. This is because mortgage lenders will usually insist that landlords have insurance before tenants move in. So, unless you have enough money in your savings account to buy your property outright, there is a good chance that you’ll need to take out landlord insurance.
That being said, getting landlord insurance is definitely something you should consider even if you don’t have a buy to let mortgage. Having landlord insurance essentially pays for itself as a comprehensive policy can cover your property sufficiently when your tenant is the resident. This includes property owners’ liability and alternative accommodation costs. Plus, landlord insurance can also protect the building itself against standard perils such as floods, fires, storms and burst pipes.
We hope you find these tips on how to buy a buy to let property useful.