Buy-to-let property investment in the UK refers specifically to the buying of a property for the sole purpose of renting out to tenants. Investors can make money this way by generating an income through the rent charged, making a capital gain on selling, or both. But, like all investments, there are risks attached to buy-to-let. For example, you could be hit by rising interest rates, stuck with difficult tenants or unable to sell if the housing market changes.
How does buy-to-let property investment work?
To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit. Keep in mind that a mortgage comes with risks of its own. For instance, if you need to sell the property for a loss, the sale price might not cover all that you owe on the mortgage and you would therefore need to make up the difference. Also, bear in mind that if your tenants leave and there is no rent coming in, you will still need to make your mortgage repayments.
Is buy-to-let still a worthwhile investment?
Largely, the answer to this question depends on the type of investment you’re looking for, and the ultimate goal of your investing activities (i.e. why do you need the money?).
Here are some pros and cons of buy-to-let as a way to generate a return:
Advantages of buy-to-let:
You’ll earn rental income, though these are not guaranteed to increase year-on-year. In some areas of the UK, such as Liverpool, Glasgow and Leicester, rental yield is as high as 8%, while other areas are around the 3% mark.
At the same time, you could generate capital growth as your investment grows with the rise in value of your property.
You can take out insurance to cover against loss of rental income, damage and legal costs.
Disadvantages of buy-to-let:
Your tax bill will be higher than it once was, and this will eat into your profits.
If you don’t have the right insurance in place, you might not generate an income for any period of time that the property stands unoccupied.
If property prices fall, your capital will reduce, and if you have an interest-only mortgage, you’ll need to make up for any shortfall if the property sells for less than you bought it for.
You’ll need to factor in the costs of stamp duty, insurance and wear & tear.
Being a landlord is a big responsibility.
Lots of people choose buy-to-let as a retirement income, often taking tens of thousands of pounds out of their pension pot to do this. If you are looking into this possibility, it is vital you speak to a financial adviser first. Touching your pension pot can have significant implications and potential tax penalties.
What is a buy-to-let mortgage?
If you can’t buy your investment property outright, then you will need to apply for a mortgage. However, in this instance it will have to be a specific buy-to-let mortgage as a standard or ‘residential’ loan is only relevant when you also plan to live in the property.
There are various differences between a residential and buy-to-let mortgage, and they start with the way your affordability is calculated.
How to get started with buy-to-let?
Your journey to becoming a landlord will typically involve five steps:
- Get your finances in order. Now is the time to speak to a financial adviser, to decide how much money you should be investing and the kind of returns you should be aiming for. Also speak to a mortgage broker to get the best deal or mortgage in principle, so that you’re ready to make offers when you find the right property.
- Find your property and get your offer accepted. This may well be quicker than buying a home if the property is already rental, but that is not always the case. Allow a good few months for the process.
- Take out insurance. Along with buildings insurance, you’ll want to protect against unexpected costs like injuries to tenants, damage, and loss of rent.
- Find tenants. You can go through an agency or find your tenants privately. The right option for you depends on how involved you want to be. But remember: even if you hand-pick your own tenants and already know them well, draw up a legally binding contract.
- Buy-to-let is a hands-on investment. You’ll need to review your mortgage when your current deal expires, and conduct any necessary maintenance on the property. You should also make sure that your income from buy-to-let is handled in the most tax-efficient way, an accountant can help you do this.
What sort of buy-to-let property should you buy?
Finding the right property in the right location is important enough when searching for your own home. But it’s just as important when looking for a buy-to-let property investment in the UK. So, before you start your search, think about what kind of tenant you are targeting.
If you get the location or type of property wrong, rents will be lower and tenants will be harder to come by.
Keep in mind that some properties are more difficult to secure a mortgage on. These can include former council houses, new developments and flats above commercial premises.
Does the type of tenant matter?
The type of tenant renting your property can really impact your plans. For instance, many lenders have restrictions on mortgages for student lets and Houses in Multiple Occupation (HMOs). An HMO building is defined by having three tenants or more, that form more than one household and who share a toilet, bathroom, or kitchen facilities.
How do you choose the location?
If you are a beginner in the buy-to-let sector, buying a property near your home could be an option. Aside from being a familiar place, you will be able to attend to any call in case of an emergency. However, if you plan to use a letting agent to manage the property you can cast your net wider.
Once you have decided on an area, you can speak to the local agents who will be able to advise on the right kind of properties as well as the prevalent rental prices in the area.
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Please remember that investments of any type may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.