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

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    Want to Get Involved With Buy-to-Let Investment?

    Buy-to-let is one of the most exciting and profitable investment strategies available in 2024. With affordable house prices, rising rents and exciting new developments, there are lots of possibilities for major profits in many of the UK’s biggest cities.

    However, buy-to-let property investment is one of the widest-ranging investment strategies in the UK and can be confusing to newcomers looking to get into property investment.

    This blog will help you answer the question of ‘what is buy-to-let’, by breaking down what sets it apart from other investment classes and explaining what is buy-to-let and how it works in a simple and easy-to-follow way.

    Sounds good? Let’s get into it.

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      What Is Buy-to-Let Property?

      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 9.9% in April 2023, 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.

      House prices rose by 7.1% throughout 2022 per data from the Land Registry and by 27.7% over 5 years, so you are likely to see the potential for some serious returns from capital growth over time.

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      How to Get Started with Buy-to-Let

      There are several ways you can get started with buy-to-let investing, but the sales process for buying a buy-to-let property is similar no matter what.

      We break it down in detail in our guide on how to buy buy-to-let, but when asking the question of what is buy-to-let investing, it’s still important to cover it briefly.

      The process of getting started with buy-to-let can be broken down into a few simple steps:

      1. Ensure your financial situation is as secure as it can be. This may include paying off high-interest debts, creating an emergency fund of cash or creating a manageable budget for investing.
      2. Find the right investment property for you. This involves researching investment properties through portals, letting agents or property investment companies to find one with high rental yields and an affordable price, in a location with high tenant demand.
      3. Make an offer on the property, while instructing your solicitor to begin the process. It’s here where you’ll apply for a buy-to-let mortgage if you decide you need one, as well as taking out landlord insurance.
      4. Arrange for a survey of the property by a mortgage broker, which will assess any issues or damage to the property you need to know about to help determine its value.
      5. Exchange contracts and transfer funds to the seller, then begin the process of finding tenants to live in your new buy-to-let property.

      We go into more detail about this process in our blog on how to buy buy-to-let property, where we explain the sales process in detail and give you extra information about what to expect.

      Here are a few tips for beginners to help you understand what to look for!

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      Rental Yield

      Rental Yields are Important

      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.

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        Liverpool

        Location is Everything

        When buy-to-let investing, where you choose to invest is very important. Cities have differing levels of rental demand, as well as changing property markets as a whole.

        When looking at where you want to invest in property, you should focus on cities with affordable property prices and lots of job opportunities. These will be attractive to young professionals and renters as a whole, looking to move for work.

        Liverpool and Manchester stand head and shoulders above the competition in England in this regard, as both cities combine below-average property prices with thriving rental demand thanks to the multitude of jobs available in the areas.

        For example, Liverpool has an average property price of £181,278 as of February 2023 according to the Land Registry, which is over £100k below the national average for the same time, meaning it is much cheaper to buy property in Liverpool than it is elsewhere.

        When researching the question of what is buy-to-let and how does it work, ensuring you choose the right place is vital, as otherwise you could be paying top-dollar for a property which won’t bring you back the same kind of returns.

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        Off-Plan May Be Right for You

        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.

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          Research is Vital

          No investment is risk-free, and while property investment is one of the safest and most stable investment methods it is still good to be on the safe side.

          By learning about property investment and buy-to-let investing, you can help protect yourself from any additional risks.

          Make sure you do your due diligence on any property you are interested in investing in, as no one wants to put their money into an investment which turns out to be a bad idea.

          The more you know about property investment, the less likely this is to be the case, as you’ll be able to understand what makes a good investment.

          Also, if you are borrowing a buy-to-let mortgage, your mortgage broker will survey the property, which will help you to find any hidden risks you might not be aware of when you are first seeing the property.

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          What is Buy-to-Let and How Does it Work?

          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 9.9% 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.

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            What Is a Buy-to-Let Mortgage?

            One thing we’ve already mentioned is the topic of buy-to-let mortgages, and when asking the question of what is buy-to-let, this is a topic that’s impossible to ignore.

            Buy-to-let mortgages are often used by investors to help them cover the cost of buying an investment property and to spread it out over time, much like how regular mortgages are used.

            However, buy-to-let mortgages stand out from regular residential mortgages in several ways:

            • Buy-to-let mortgages require a bigger deposit than standard mortgages, with most mortgage lenders asking for at least 25% of the property’s value upfront.
            • Rather than paying off the value of the mortgage during its term, you instead pay off the accrued interest with your mortgage repayments, instead paying off the amount borrowed at the end of the mortgage. Most buy-to-let mortgages are interest-only.
            • Interest rates of buy-to-let mortgages are usually higher than standard mortgages. They are also often variable-rate mortgages as opposed to fixed-rate mortgages, meaning interest rates can rise and fall.
            • If the Bank of England chooses to raise the base rate of mortgage interest, buy-to-let mortgage interest will rise higher.
            • At the end of the mortgage term, you have the option of paying off the mortgage entirely, or you can remortgage the property or sell it to make a profit from capital appreciation.
            • Mortgage brokers will assess your chosen property using an LTV ratio, or loan-to-value ratio, and will not approve the mortgage if the ratio is not high enough.

            You may not need a buy-to-let mortgage depending on the affordability of your chosen investment property, as you might be able to pay the entire value of the property outright.

            Alternatively, you could pay for a buy-to-let property using a payment plan, allowing you to spread out the cost of investing over time. With off-plan properties, this is a common way of protecting investors during construction.

            While buy-to-let mortgages are very common, it may not be for you. Be sure to compare lenders and mortgage brokers to see who can offer you the best rates.

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              What Is Buy-to-Let - How Are You Taxed?

              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 3% 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.

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              Invest with RWinvest

              As one of the UK’s premier property investment companies, RWinvest are experts at answering questions like ‘what is buy-to-let’ for any potential clients and for those who are interested in learning more about property investment.

              With over 18 years in the business, RWinvest has lots of experience in helping clients make their first steps into buy-to-let investing, guiding them every step of the way.

              Our sales team works day and night to find the best investment properties in UK hotspots like Liverpool and Manchester, working with some of the nation’s top developers to offer exclusive access to off-plan properties with high rental yields.

              For those unsure about where to go past their initial interest, our client care and post-sales teams make the hard work of investing in property into an easy and straightforward process, helping them achieve financial freedom through property investment.

              Contact us today to find out what our latest investment properties are, or if you want to learn more about buy-to-let investing.

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              Author

              Reece Pape

              Reece Pape is a property writer at RWinvest. Reece is passionate about keeping property investors updated on must-have information and housing market news, utilising the latest property market statistics and data.

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