What is a buy-to-let?
A buy-to-let (BTL) property is a residential property that you buy with the specific intention of renting it out to tenants. Unlike your own home, the primary goals are typically to generate a steady rental income and to benefit from the property's value increasing over time (known as capital growth).
Because the property is an investment, it's treated differently by mortgage lenders and the tax system.
How do I finance a buy-to-let property?
Financing a BTL property involves more than just the mortgage. The upfront costs are significantly higher than when buying your own home. You'll need to budget for:
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deposit - most BTL mortgage lenders require a larger deposit, often at least 25% of the property's purchase price
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tax - you must pay a second property surcharge on top of the standard stamp duty rates. This applies in England (stamp duty land tax), Wales (land transaction tax), and Scotland (land and buildings transaction tax). This surcharge applies even if it's your first rental property, as long as you already own a main residence. For more information, read Buy-to-let tax implications
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other fees - don't forget conveyancing fees, surveyor's costs, mortgage arrangement fees, and any initial refurbishments needed to make the property safe and appealing to tenants
What is a buy-to-let mortgage?
You can't use a standard residential mortgage to buy a rental property. You must get a specific buy-to-let mortgage. The lending criteria for these are different from a normal mortgage. Lenders will assess the property's potential rental income, which usually needs to be around 125% to 145% of the monthly mortgage payment. They will also assess your personal income to ensure you can cover the mortgage during any void periods (when the property is empty).
Should I buy as an individual or a company?
You have two main options for purchasing your BTL property: you can buy it in your personal name or set up a limited company to buy it. Buying through a company can offer tax advantages, particularly for higher-rate taxpayers, but it also comes with more administration and different mortgage rules. Buying as an individual is simpler, but changes to mortgage interest tax relief have made it less tax-efficient for many. For more information, read Setting up a property company as a landlord.
What's involved in buying the property?
Once your finance is in place, the process of buying is similar to any property purchase. You'll need a conveyancer or lawyer to handle the legal work. This includes conducting searches, reviewing the contract, and managing the legal side of the purchase.
You will also need to carry out a survey. Your mortgage lender's basic valuation is only for their benefit, and getting your own survey (eg by a Royal Institute of Chartered Surveyors (RICS) surveyor) is crucial for an investor. It identifies costly repairs, allowing you to budget or even renegotiate the price.
For more information, read Conveyancing and transferring property.
What are the main risks of buy-to-let?
While BTL can be profitable, you must be prepared for the risks. This is an investment, and like any investment, its value can go down as well as up. Key risks include:
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void periods - there will likely be times when the property is empty between tenants. During such void periods, you won't receive any rental income, but you'll still have to pay the mortgage, insurance, and any council tax or utility bills
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non-paying tenants - you may have to deal with tenants who fail to pay their rent or cause damage to the property. The process of evicting a tenant can be long, stressful, and expensive
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market changes - a rise in interest rates could significantly increase your mortgage payments. House prices can also fall, meaning you could end up in negative equity (owing more on the mortgage than the property is worth)
What about maintenance and repairs?
As the landlord, you're legally responsible for keeping the property in a good state of repair. This includes fixing any issues with the roof, gutters, and drains, as well as maintaining the installations for water, gas, electricity, and heating.
These costs can be unpredictable. A broken boiler or a serious leak can cost thousands to fix. It's essential to have a separate emergency fund set aside specifically for property maintenance, rather than just relying on the monthly rental income. For more information, read Legal obligations of a landlord.
How do I choose the right property?
The best property for you depends entirely on your target market. Researching the local area is crucial. Consider:
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who are you planning to rent to? The property you'd buy for students is very different from one for a young family or working professionals. Families often look for good schools and outside space. Professionals may prioritise modern fittings and good transport links
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what is the local demand? Is there a high demand for rentals in the area? Check local rental listings to see how quickly properties are rented and what the average rent is. A cheaper property with high, stable rental demand is often a less risky investment than an expensive one that's difficult to fill
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what is rental yield? This is a key calculation. It measures your expected return on investment by showing the annual rental income as a percentage of the property's value. A higher yield is generally better, but it needs to be balanced against the risks
What type of property should I buy?
Once you've decided to invest, you need to identify the right type of property for your strategy and your target tenant. You should think about:
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practicality - think practically when choosing the property. If you're aiming to rent to a single person, a one-bedroom flat with no garden may be better than a three-bedroom house
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resale value - select a property that can be easily resold if you no longer want it
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age and condition - think about the age of the property. An older property may have more character, but it might also need significant work carried out before you can let it out
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location - think about the location of the property. The needs of a student tenant (eg close to university, nightlife) are very different from those of corporate tenants or families (eg good transport links, schools)
What should I do if I buy a property with an existing tenant?
Sometimes, you might buy an investment property that already has a tenant living in it. This person is known as a sitting tenant (or a 'tenant in situ').
When you purchase the property, you become the sitting tenant’s new landlord and automatically take on the existing tenancy. You're bound by the terms of their original tenancy agreement, and so is the tenant. As the new landlord, you should:
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introduce yourself - it's good practice to meet the tenant and establish a clear line of communication
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inform the tenant - you must legally inform the tenant of the change of landlord and provide your name and address. In England, you must do this within at most two months of the change, using a section 3 notice. In Wales, you must do this within 14 days of the change, using Form RHW3. In Scotland, this must be done in writing within two months of the sale (or by the first rent day after the sale, whichever is later)
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manage the deposit - you must contact the relevant deposit protection scheme to have the deposit transferred to your name and provide the tenant with the new prescribed information
You can then either let the tenancy continue as it is or, if you want to change the terms or gain possession, you'll need to follow the correct eviction procedures for England, Wales, or Scotland, including serving the correct Eviction notice.
For more information on the financial and technical aspects, read Buy-to-let as an investment, Buy-to-let as an investment in Scotland, and Buy-to-let tax implications.
If you're ready to rent out your buy-to-let property, you can make a Tenancy agreement for your property type. If you have any questions about the buy-to-let process or your legal responsibilities, do not hesitate to Ask a lawyer.
