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Buy-to-let property is one of the most exciting and profitable investment strategies in 2023. With the high demand for high-quality rental property across the UK, rising house prices and rents as well as the major regeneration schemes happening all over the country, there’s never been a better time to get into property investment.
However, there are many methods of investing in buy-to-let, and it can be confusing for beginners who are looking to begin their investment journey.
In this blog, we’ll break down how to buy buy-to-let property, offering you a step-by-step guide to the process to help you understand how to buy-to-let from various starting points.
It’ll also break down how much deposit is needed for buy-to-let investing, as well as how buy-to-let works, to help give you a clear understanding of the entire process from start to finish.
Let’s get into it.
Buy-to-let investing is when you use investment properties to earn additional income. You make money from buy-to-let in two main ways:
This way, you get two different income streams from one investment, allowing you the benefits of both regular monthly income and also a large payout, making buy-to-let a good investment for many.
However, before you start earning any money, you need to ask yourself a question – how to buy buy-to-let property?
There are several important things you need to do before you consider investing any money. No investment is risk-free, so you want to make sure you are in a healthy place financially before you put any money down.
Here are some useful ways you can help secure your finances before you invest.
While you don’t need to be debt-free completely to begin investing, paying off high-interest debts like credit cards is a good idea, as they generate compound interest which stacks over time.
These kinds of debt can eat into your savings fast, and due to the high-interest rates, can be hard to shake. Paying them off while you have funds available is highly recommended for this reason.
As we mentioned earlier, no investment is risk-free. If the worst should happen and your investment falls through, you need to ensure you have enough left aside to look after yourself and your loved ones while your finances recover.
As a rough estimate, putting together savings of between three to six months’ worth of your expenditure will allow you to cover essentials like housing, bills and food while you get back on your feet.
Luckily, buy-to-let is one of the safest and most stable investment classes in the UK, but it’s still a good idea to prepare for the worst-case scenario to be on the safe side.
Once you have set up some safety precautions, you need to ask yourself some very important questions about what you want from your investment:
The first thing you need to ask yourself is what you are looking for from your investment. Every investor has different goals and is in it for their own reasons.
Maybe you are looking to start a buy-to-let business to break out of the 9-5 cycle, or maybe you’re investing to have some extra income for things like holidays or big expenses.
Decide a reasonable goal to work towards, which can help inform the rest of your decisions moving forward.
The next thing to decide upon is how long you want to be investing for, which your investment goal should help you decide.
Short-term investments are generally considered any investment over 12 months or less, while long-term investments often take several years to fully reap the rewards.
Investing in buy-to-let for the short-term means focusing more on collecting rental income from tenants, and benefiting less from capital appreciation. This is not the ideal method for buy-to-let investments, but can still net you some strong returns.
For those looking for a long-term investment with high returns, buy-to-let property is ideal as you can make a consistent passive income through collecting rents, while capital growth allows you to benefit from rising house prices over time.
While every investment strategy comes with its own levels of risk, investors have to decide how much risk they are willing to accept. This is what is known as risk tolerance, and can decide what kind of investment you want to make.
Some investors are fine accepting a higher level of risk with the hopes that they will win big, while others choose a smaller level of returns in exchange for a safer investment.
Property is one of the safer investment classes due to being a physical asset, while the high potential for returns makes it ideal for any level of risk tolerance.
Once you have answered all of the previous questions, the next stage is to decide how much you are willing to invest in buy-to-let.
You shouldn’t bet the house on any investment, so deciding on a sensible budget is a must.
Many high-quality investment properties can be bought with a budget as small as £100k, and there are ways of spreading out the cost of investing so you’re not spending such a huge amount in one go.
You could borrow a buy-to-let mortgage to pay it off over time or use a payment plan with a property investment company to buy in sizeable chunks.
Thanks to the wide array of buy-to-let properties on the market, you don’t need to worry about how to buy-to-let with a smaller budget as there are many ways of making it work.
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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.
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:
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 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.
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.
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.
There are several steps to purchasing a buy-to-let property, similar to the standard process.
Here is a step-by-step guide to help you understand how it works:
You may need to negotiate the price of your chosen property, depending on how you are buying it. This is traditionally done when buying a property through an estate agent.
If you are buying through a property investment company, you will pay a reservation fee to secure your unit or property to ensure no one else can buy it while you are going through the process. Buy-to-let properties are popular, so you’ll need to make sure you secure your chosen unit.
The next step no matter what is to hire a solicitor to help with the legal side of the process. Property investment companies will often give you a trusted solicitor to work with, which may give you discounted rates.
If you choose to use a buy-to-let mortgage, this is where you arrange to borrow one. You may be able to find mortgage deals from different providers, so be sure to try and find the best one for you (we’ll go over this in the next section).
If you are using a buy-to-let mortgage, you’ll need to have your mortgage broker conduct a valuation survey before approving your offer. This will look at issues within the property you should know about before you buy.
The final step of the process is to exchange contracts, once all formal paperwork has been completed and the funds have been sent and received.
Many property investment companies have a dedicated client care team to help navigate this process, a massive benefit of using their services.
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.
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.
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 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.
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.
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.
Once you have purchased your buy-to-let property, the next stage is to manage it. Many acts as buy-to-let landlords and run their property themselves, but this can be a lot of work.
You will need to:
This is a lot of work, and so many landlords choose to use the services of a property management company to help take the hassle of being a landlord off their hands.
Property management companies handle the everyday running of an investment property for a monthly fee, acting on behalf of the property’s owner.
There are several benefits to using a property management company, including:
With all this in mind, property management companies might be the best choice for you, especially if you have little to no experience as a landlord.
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, with the current rates being shown here:
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.
Hopefully, this blog has helped you to understand how buy-to-let works, as well as how to buy buy-to-let property.
Here at RWInvest, we are experts in the UK property market with over 18 years of experience in the industry.
As one of the UK’s leading property investment companies, we have a range of high-quality buy-to-let properties available to investors right now, in some of the UK’s best cities for investors like Liverpool and Manchester.
Why not contact us today for more information about what we can offer?
John is a property writer here at RWinvest. With a close eye on property market news and updates, John writes detailed and informative articles on a range of topics that are helpful for anybody looking to invest in UK property.
