What exactly is a Buy to Let - How does a Buy-to-Let work?

Buy-to-let property is any property owned to use for income by renting it out to tenants.

Buy-to-let property can come in many forms, with the most common looking something like these:

• Student property, where you rent out a buy-to-let property to university students. This gives you consistent tenant demand but also consistent void periods over the summer.
• HMOs or Houses of Multiple Occupancy, where multiple tenants share the same buy-to-let property. They are similar to student property but have a wider range of tenants you can advertise to.
• Traditional buy-to-let property, where between 1-3 tenants live in a property, each renting their bedroom and sharing communal areas.

No matter what kind of buy-to-let property you own, you make profits from them in the same two ways.

Rental income is collected from your tenants on a monthly basis, which gives you a regular stream of passive income every month. Homelet’s Rental Index has reported that rents rose annually by 1.3% in December 2024, showing that you are likely to make more rental income as time goes on.

Capital growth/appreciation is where the value of your property rises in time, which allows you to sell the property over time to get a large sum of money on top of the initial selling price. According to Savills’ capital growth forecasts, the UK is predicted to see capital value growth of 23.4% leading to 2029.

Rental yields are an indicator of how much of a return you are likely to make on an investment property every year. If you are learning about what is buy-to-let property, rental yields are an essential aspect to understand fast.

This percentage value is based on your annual rental income divided by the purchase price of the property, multiplied by 100. This gives you a percentage value which will tell you how much of a return you’ll make each year.

There are two kinds of rental yields, one of which is more accurate. NET yields take into account your outgoing expenses on the property such as running costs, repairs and other costs that come with owning a property.

Gross yields do not take this into account, meaning they are less accurate than NET yields. When researching properties with assured yields, be sure to check if they are gross yields or NET yields to make sure you are accurate about what you are investing in.

Where possible, go for investment properties with assured yields above 6% as this means you will get a good return, although many properties offer yields around 4-5% and still bring their owners a solid profit.

Off-plan property refers to developments which are being sold while still being constructed. There are various advantages and disadvantages to investing in off-plan properties compared to already-built properties.

For one, off-plan properties are usually sold for below-market-value prices, so you can find top-quality properties for less than you should really be paying for them. You can also secure which units in a development you want, allowing you the chance to own the best units in the building.

As well as this, off-plan developers work closely with property management companies to ensure you have the best options available if you don’t want the work of managing a buy-to-let property.

This means quite often, you are buying a rental property with assured rental yields for a guaranteed amount of time, helping you to plan ahead. For many, this makes off-plan buy-to-let a good investment.

However, off-plan properties are sold before they are completed, so you could be waiting a while before seeing any income coming in from the fully-built development. Many off-plan properties take years to be completed, so be prepared to invest for the long-term if you do choose off-plan property.

As well as this, there are added risks to buying off-plan as compared to a completed property, as you could see the construction fall through due to financial issues, leaving you at a loss. The risk of this happening is very low, however.

Buy-to-let investment, as mentioned earlier, gives investors returns through two different methods, rental income and capital appreciation.

In recent years though, buy-to-let has become one of the best investment classes due to the rapid growth the UK property market has seen since the COVID-19 pandemic.

In the three years since February 2020, property prices have risen by 24.6%, skyrocketing to all-time highs in late 2022 before beginning to even out in 2023. This is great for investors as it shows that even in a period as short as three years, you can make major profits from capital appreciation.

If you were to buy an investment property for £200,000 in 2020 for example, you’d likely be making a profit of £49,000 before tax by selling it in 2023, clearly a major profit!

As well as this, rental income has risen substantially over time, meaning you’ll be collecting more passive income every month. Homelet reports that rents have risen by 1.3% over the last 12 months, with more growth expected to follow.

Once you own a buy-to-let property, you are responsible for it in several ways. Here are a handful of jobs that buy-to-let landlords have to keep up with:

• Finding tenants to live in their property – including marketing costs and solicitor fees to organise contracts
• Keeping the property repaired and clean, covering any costs for repairs
• Ensuring tenants are looked after and any issues they have are dealt with during the tenancy
• Paying for any renovations or extensions you want to make to help keep the property up-to-date.

Buy-to-let is a long-term investment strategy, that can be quite hands-on if you want to put in the work.

If not, you can hire a property management company to handle the running of your investment property for you, allowing you to treat your investment property like a source of passive income.

You won’t have to pay council tax for your property, and depending on what you offer the bills may be paid by the tenant as well.

You will be taxed in several different ways throughout your time investing in buy-to-let property.

The first way is stamp duty land tax or SDLT. This is an additional charge taxed on the price of the buy-to-let property you are buying, which depends upon how much you are paying.

While first-time buyers and those who don’t own property will pay the basic rate, investors who already own property will have to pay a 5% stamp duty surcharge.

Stamp duty rates differ in England, Scotland, Wales and Northern Ireland, so be sure to check what the rates are wherever you are buying property.

When collecting rental income tax, you will have to pay income tax on anything you earn. Income tax is decided by how much money you make annually, including any income you make outside of property investment.

Additional rate taxpayers will have to pay a higher rate of income tax, and it is likely property investment will take you over to this additional rate. Base rate taxpayers will be taking home a larger amount of their rental income.

If you choose to sell your buy-to-let property, you’ll have to pay capital gains tax on the profit you make. Again, this will rise depending on if you are a higher or additional rate taxpayer.

Your inheritor will have to pay inheritance tax if you choose to pass on your investment property, but these are the main taxes you will need to pay when investing in buy-to-let.