Before you buy to let – does it make financial sense?

If you’re thinking of becoming a landlord, here’s what you should consider before you put your hand in your pocket.

  • What sort of costs are involved?

    What sort of costs are involved?

    Unless you're particularly cash rich, you’ll need a Buy to Let mortgage if you are looking to invest in a Buy to Let property. Most people don't have a bottomless pit when it comes to money, so a mortgage that facilitates this sort of investment is generally a must have. 
    When you're buying a home to live in, you can generally borrow up to 95% of the property's value, meaning that you'd only need to put down a 5% deposit.

    In the case of a Buy to Let, however, it's entirely likely that you'll be required (at the very least) to put down a 25% deposit as lending is usually restricted to a maximum of 75% of the investment property's value. So, and in light of that, it might be a good idea to work out the following calculations before you get started:

    • The amount of deposit you have to put down. If you have less of a deposit than you originally thought, you may need to consider purchasing a less expensive property
    • The cost of your legal fees. A solicitor will need to act on your behalf to take the property purchase right through to completion, and they don't come cheap. Shop around for a few quotes and try to get a good deal based on cost versus reputation and service delivery
    • Stamp Duty. You pay taxes and duties on second homes. HMRC has a table of all Stamp Duty rates for the current tax year, but check out our table below for the percentage rates
    • Get a rough idea for how much your mortgage payments will be by contacting any reputable bank or building society. The Buy to Let products available from them will vary, so make sure you do the ground work by researching a package that suits you
    • You'll need to consider the cost of paying the following too (whether it's you or the tenant): rates, ground rent, and other fees (see below), so that you can understand the rent you should be charging. Of course you'll want to make a profit too, but you'll also need to be guided by the rental demand of the area you're buying in, as well as considering the quality and overall finish of the property itself. The better shape it's in, the higher the rent (as a general rule) you can charge.  If you're in any doubt, chat to a Letting Agent or local Estate Agent
    • You’ll also need to make sure you can keep up with the mortgage repayments and any other bills during periods of ‘rental void’, which means periods where you have no tenants occupying the property at all. In some cases these periods can last for many months. 
    • Finally (and trying to balance being realistic without actually putting you off!), it may be a good idea to keep a cash reserve handy to cover anything from breakages to the mistreatment of your property. Unfortunately not every tenant will look after it in the way you'd like them to, and not every appliance you have in it will last forever, which is why it can be reassuring to have a pot of money to hand - and work with a letting agency who can organise regular visits to check the property and help to fix things, as and when required.
  • Tax implications

    Tax implications

    As nothing in life comes free (unfortunately!), any rental income you receive will count towards your overall income for the tax year you're currently in, so dependent on your salary (and any other income you may receive), your rental income may well be subject to income tax at the normal HMRC levels.

    There aren’t as many allowances as there used to be for landlords, which makes it more difficult to offset particular expenses, but everything depends on your own personal circumstances. You should see GOV.UK for more details.

    Example of tax on rental income:

    Any income you receive from an investment property is usually classed as 'earned income'. Earned income is subject to income tax and NI deductions at the usual HMRC limits. So if, for example, you have a paid job in addition to the income you receive from the Buy to Let property, you'll need to add both of those amounts together to calculate your overall income tax liability. It can be complicated if you're new to this, so it may be a good idea to seek some professional advice from an accountant or other qualified professional.

    Another thing to bear in mind is that the rental income, added to your day to day, salary might even push you into a higher HMRC income tax bracket. Say for example, that your current income sits at £2,000 under the higher rate tax band, and you earn £5,000 income from your investment property, not only will the entire £5,000 rental income be subject to income tax - £3,000 of that income will also be subject to income tax at the higher rate of tax which is 40%.

    That's why getting proper accounting and financial advice is of paramount importance. Not only will it help you understand the real cost of investing in a property to let out, it will also keep you right in the eyes of the law.

  • Decoration


    When you’ve got the house, remember you can’t please everyone so it’s best to stick to neutral colours throughout – magnolia or white walls, plain carpets in muted colours.

    Obviously the décor you choose depends on how you position the property on the rental market: if it’s designed for six students, there’s little point installing waterfall showers and brushed aluminium worktops. If you’re aiming for the more high-end customer, then it might be worth splashing out on premium furniture if you’re confident you can reclaim the cost.

    But overall if the walls are smudged, the carpet is worn and the appliances are ancient, you’re only going to be able to charge towards the lower end of the rental spectrum. If the property is clean, tidy and dry, then you’re much more likely to find yourself a tenant.

    An example

    Let’s say you buy a second house for £260,000 with the intention to let it out.
    You would be charged 3% on the first £125,000 of its purchase price (which works out at £3,750),
    5% on the portion from £125,001 to £250,000 (£6,249.95) and 
    8% on the rest (in this case £800). 
    So you’ll pay a total of £10,799.95. 
  • I'm still interested, but I need to find a property

    I'm still interested, but I need to find a property

    While you might be swayed to choose a property that you personally would like to live in, investors wouldn't usually apply the same criteria when buying to let. Like most things in life, buying a property is subject to budget, so look in areas that your budget covers, then start to make your inquiries.

    Tenant: Consider the type of tenant you’d like to have. Will they be students, young professionals or families? Whoever your target market, make sure you choose a property that fits their needs.

    Location: what is the demand for properties in the area you're considering? Are there hospitals or airports nearby, business parks or places where there's a hive of commercial activity? If so, the demand may be higher in locations like that. Another consideration is that you may have to travel to your property, so you may want to buy in your local area? That's your call. The most important aspect is that you choose somewhere that’s going to make you money. Isn't that was a Buy to Let is all about?

  • Maintenance


    You might want to employ a management company to look after the day-to-day running of the house. So they’ll deal with the phone calls, carry out inspections and routine maintenance, and send the contractors round when something goes wrong. In exchange for this they'll take a set percentage of your rental income, so shop around for the best deal.

  • Finding your tenants

    Finding your tenants

    You may want to advertise the property yourself, but this will mean you’ll have to be onsite to show prospective tenants around. If you’d rather leave this to someone else, many estate agents specialise in the rental market. If you're using a management company (see above) they should be able to find your tenants for you. 

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