Step-by-Step Property Investment Guide

With all those questions answered, now you have to find the right investment property to fit your needs.

There are several factors you should decide upon which will help you filter down what properties you are looking for.

• The type of tenant you are looking for – be it students, young professionals or a wider tenant class, decides what properties are suitable for you.
• What kind of property do you want to buy? There are several main types of buy-to-let property. These include HMOs (House of Multiple Occupancy) where multiple tenants share the same property, student property which is only for university students and standard buy-to-let properties where a small handful of tenants share the properties at most.
• If the property is a freehold or leasehold. A freehold property is one where you own the land where it is built, while a leasehold means you are signing a long-term lease for the land when buying the property.

To make sure you are buying a buy-to-let property that is likely to net a strong return, you should look for a combination of these factors:

• Location – You should look for buy-to-let properties in areas with high demand from tenants. These often include major cities, as the mix of employers and universities draws in demand from a wide variety of tenants.
• Rental Yields – Rental yields are a percentage indicator of how much of a return you will make on your investment on an annual basis. A yield between 4-5% is considered average, but you can find yields of 6% or higher to give yourself a better return quite easily.
• Affordability – Property can be expensive, especially in large cities, so finding something that is affordable for you is a priority. Many buy-to-let properties in popular areas are sold for below-market-value prices, and this helps you make a higher return.

Now you understand this, there are several routes you can go down when debating how to buy a buy-to-let property.

Property Investment Companies

Property investment companies work exclusively with developers to sell buy-to-let properties to their clients. Many properties sold through investment companies are available only through them and are not on the open market.

This allows them to sell buy-to-let properties for below-market-value prices, and offer higher rental yields through links with property management companies that are experts in handling the day-to-day running of a rental property.

Many property investment companies also sell off-plan properties, which are properties still in the early stages of development and construction. This allows them to sell the property for cheaper than those that are fully built, meaning you can often avoid the repayments of interest-only BTL mortgages.

Estate Agents

The traditional way of buying a property, estate agents can also be relied upon when searching for how to buy buy-to-let property.

Letting agents sell properties on the open market, so you will likely have to pay top dollar for properties you buy from them. You will also have to cover agent fees when purchasing a property.

However, on the plus side, they are going to be extremely knowledgeable and experienced in their local area, so can help guide you towards the best areas to invest in for what you are looking for.

Property Portals

If you prefer to find the right property for you from the comfort of your couch, you may choose to use property portals. These are websites like Zoopla and Rightmove where developers and estate agents can list the properties they have for sale.

You’ll find the widest range of buy-to-let properties for sale on portals, and you can use their filters and settings to narrow down your search to what you are looking for. This means you have more information than ever at your fingertips.

The downside is that portals lack the personal touch of property investment companies and estate agents, and you will have to rely upon the advertising information and what is online to help you make your decision.

Once you’ve found the right property for you, the next step is to buy it.

The process of buying a buy-to-let property is very similar to buying a traditional residential property, but there are some additional charges and taxes you will need to consider.

One of the first things you will need to decide is if you want to borrow a buy-to-let mortgage. Similarly to a standard mortgage, this is a sum of money that lenders give out to help purchase a property.

However, buy-to-let mortgages differ as the mortgage payments do not take away from the sum borrowed during the term of the mortgage. Instead, you repay the accrued interest every month and then repay the amount borrowed at the end of the mortgage.

You can either do this to own the property outright, sell the property to pay off the mortgage or remortgage the property to continue the arrangement.

There are lots of different types of buy-to-let mortgages on offer, so here are some questions you should ask when deciding if you need to borrow one and if so, which mortgage you want to borrow.

How Much Deposit Is Needed for a Buy-to-Let Mortgage?

Generally speaking, buy-to-let mortgages require a higher deposit than standard mortgages as there is a higher risk of defaulting on mortgage repayments.

Most mortgage lenders will require a minimum deposit of around 25% for a buy-to-let mortgage, although some specialist lenders will ask for more from certain investors.

First-time buyers and international investors should expect to pay a higher deposit due to the increased risks they bring to a buy-to-let investment.

How Much Profit Do I Need to Repay a Buy-to-Let Mortgage?

Mortgage brokers will assess your chosen investment property using an LTV ratio (loan-to-value ratio). This will assess how profitable the property will be, and if it is likely that you will be able to pay off the interest during the mortgage term.

To ensure you can make your mortgage repayments while seeing some profit, you should aim to have rental income that is 25-45% above the interest repayments.

Fixed-Rate Interest or Variable-Rate Interest?

Fixed-rate mortgages guarantee you the same interest rate throughout the entire mortgage term, even if rates rise during the term. This gives you extra stability and protects you in the event mortgage rates rise fast due to financial uncertainty.

However, fixed-rate mortgages are usually higher to start with than variable-rate mortgages, meaning you will have to pay a higher rate of interest to start with, and potentially throughout the entire term.

Variable-rate mortgages on the other hand can go up or down during the mortgage. You will likely have a lower rate of interest to start with, but this could go up or down.

If the Bank of England’s base rate rises, or if your lender chooses to, you might end up paying a higher rate of interest by the end of the mortgage.

Buy-to-Let Mortgages – How Much Can I Borrow?

How much you can borrow depends on your investing budget, the LTV as assessed by the mortgage broker and the purchase price of the property you intent to buy.

That being said, you shouldn’t borrow more than you can pay back, so be sure to talk with a mortgage advisor to ensure you are borrowing a reasonable amount.

Do You Even Need a Buy-to-Let Mortgage?

Many investors choose not to borrow a buy-to-let mortgage due to how it will eat into your rental income every month.

Depending on your budget, you could buy your chosen buy-to-let property outright and avoid any repayments, allowing you to earn pure income right away.

Alternatively, you may be offered the chance to purchase your buy-to-let property using a payment plan, where you pay a chunk of the cost at different stages of the buying process. While you will need more money in a shorter time than with a buy-to-let mortgage, this again will mean you do not need to worry about any repayments while collecting rental income.

Also, most BTL mortgages are not regulated by the Financial Conduct Authority (FCA), so your money is not as secure as it would be with a residential mortgage.

So while a BTL mortgage may be right for you, several other options are better for you.

Right off the bat, the first tax you need to worry about is stamp duty land tax or SDLT for short. This is a tax charged on any purchase of property, which is a portion of the purchase price of property.

As it is likely you already own property, you will need to pay a surcharge on top of the base stamp duty rate.

The stamp duty you pay depends on the valuation of the property.

Please note that stamp duty rates are different in Scotland, Wales and Northern Ireland.

While collecting rental income, you will have to pay income tax on whatever you earn. This will go up depending on how much income you make annually, with this including any money you make outside of buy-to-let investing.

Buy-to-let landlords will also have to be aware of capital gains tax if they want to sell their investment property, as this tax will be charged on any profit they make from the sale.

During the term of the tenancy, you will be responsible for any repairs and upkeep that the property has to undergo unless the tenant is at fault. If you provide furnishings, you’ll have to pay to keep them clean and in good condition.

There may be other charges you must account for during your ownership of a buy-to-let property, so be sure to keep some funds squared away for anything you need.