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    Purchasing Buy-to-Let Properties

    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.

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      How Does Buy-to-Let Work?

      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:

      • Rental income which you collect from tenants who live in your properties. This gives you a consistent stream of passive income every month.
      • Capital appreciation/growth, which is a term referring to the price growth property sees over time. You can make a profit from this by selling your buy-to-let property after the price has risen.

      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?

      How to Buy-to-Let – What to Do Before Investing

      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.

      1. Pay Off High-Interest Debts

      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.

      2. Set Up an Emergency Fund

      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:

      1. What are Your Investing Goals?

      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.

      2. Are You Investing Short-Term or Long-Term?

      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.

      3. What is Your Risk Tolerance?

      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.

      4. What is Your Investing Budget?

      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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      How to Buy-to-Let - Finding the Right Investment Property

      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.

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      Off-Plan vs Completed Property

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      How to Buy-to-Let - The Purchase Process

      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:

      1. Make an Offer

      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.

      2. Reserve Your Investment Property

      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.

      3. Instruct a Solicitor

      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.

      4. Arrange Your Mortgage (If You Need One)

      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).

      5. Arrange a Survey

      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.

      6. Exchange Contracts

      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.

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        How to Get a Buy to Let Mortgage

        How to Buy-to-Let - How to Buy a Buy-to-Let Property

        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.

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          How to Buy-to-Let - How to Manage a Buy-to-Let Property

          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:

          • Organise viewings and contracts.
          • Collect rental income.
          • Deal with any issues tenants have.
          • Advertise the property.
          • Ensure any repairs and renovations are performed.

          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.

          Is a Property Management Company Right for Me?

          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:

          • More free time to earn income through other streams.
          • The knowledge that experts are handling the management side of owning a buy-to-let property.
          • Property management companies use the services of experienced and trusted contractors for any repair work.
          • You don’t have to deal with any unruly tenants.

          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.

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          Taxes and Interest Rates Explained for Buy to Let Mortgages

          What Taxes and Charges Will I Have to Pay?

          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.

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          How to Buy-to-Let with RWinvest

          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?

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          Author

          Jessica Ferris

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          Jessica Ferris is a property writer at RWinvest, helping our readers stay ahead of property market trends with the latest news and statistics.

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