Buy To Let – A Beginner’s Guide
Buy To Let (BTL) also known as a Single Let is where you own a house that you let out to one tenant. The one tenant might be family or an individual. They are often considered to be less work and hassle than a house which is rented out room by room, also known as a House of Multiple Occupancy (HMO). As a landlord, you are responsible for looking after the property and making sure everything works. This is as well as paying the ground rent and service charge if it is a leasehold property. The tenant is responsible for paying all of the utility bills such as water, gas, electric, broadband internet, TV licence and council tax - plus their own personal content’s insurance.
BTL is basically exactly what it says on the tin – you purchase the investment property and let it out to tenants. This is a very common strategy amongst investors in the UK and should be considered medium-long term.
What exactly is a BTL?
A BTL property will often have a BTL mortgage on the property. It is different from owning and living in your own home because this investment cannot be lived in by yourself. If you purchase a BTL, you become a Landlord and with that comes various considerations. You can purchase the property in cash or use a mortgage. You then rent it out and create profit from the monthly cash flow from the rent. It really is as simple as it sounds.
Capital growth or rental yield?
Before you get started, you will need to decide how long you are able and willing to keep the money tied up in the property for. You will also need to decide if you are buying for capital appreciation or yield. Rental yield is what your tenants pay in rent, minus any maintenance and running costs, like repairs and agent fees. In Liverpool where we operate, we always aim for upwards of 8% yield. Liverpool has some of the highest yielding postcodes in the country, so this is something we have always been able to achieve to date. If you are buying for capital growth, you will want to ensure you are able to sell when you want to for a price higher than that of which you paid for it and therefore make a lump sum profit.
Most single-let properties work best with a minimum of 7% + gross rental yield and multi-lets are often upwards of 12%.
In order to understand the capacity of capital growth in the area, you will have to review local council plans, development in the area, popular growth, regeneration plans and a number of other indicators.
Along with capital growth, if you want to know how to become a successful property investor, you’ll need to focus on trends like rental demand.
The number of people in the UK living in rental accommodation is higher than ever, with major increases over the last few years. Due to a lack of social housing and the difficulties faced by people wanting to buy their first home, there are a record number of people looking for rental accommodation, leaving more opportunity for buy to let investors.
You may often find that you have a variety of different investment areas to achieve high yields and capital growth, as they do not always exist in the same place.
A good rental yield is generally benchmarked at around 5% a year. However, some properties might reap yields as high as 7%-plus, while HMOs can achieve between 12% and 15%.
What is a BTL mortgage?
If you are unable to buy the invest property outright in cash, you will need to purchase with a BTL mortgage. Instead of your salary which is what lenders consider on a standard residential mortgage for a home you live in, the lender will view the potential rental income of the property as your primary income source. Many lenders will then take your personal income into account as a secondary factor.
A deposit on a buy-to-let mortgage also tends to be bigger than the one required for a standard loan. Most buy-to-let lenders expect a down-payment of at least 25% and the very cheapest deals usually require 40% or more.
Although they often come with low interest rates, there will often be bigger fees upfront. This makes it important to weigh up the interest rate against any fees when taking a buy-to-let mortgage as, in some cases, a higher interest rate might actually work out cheaper.
Why should I consider BTL?
BTL is well-suited to investors who prefer tangible assets as opposed to maybe bitcoin or stocks and shares. These are investments that you can’t see and might be higher risk. With a property investment, you can see it and touch it and visit whenever you like. Before you make any decisions, you must research your area in detail and ensure the demand is strong. You might consider using a fully compliant sourcing agent like ourselves, to help you achieve your property investment goals and advise on where and how to buy a BTL property investment.
Finally, exit strategy - This is something you must consider before purchasing any investment property.
We always aim to have at least 2 exit strategies on each of our houses, this means you will not get caught out if circumstances change. Can you sell the property if you can no longer rent the house? Can you rent the house and still be making money if you are unable to sell?
Pros and Cons
Zoopla outlines the ultimate pros and cons to consider in 2019 when buying a BTL investment property:
What are the pros and cons of buy-to-let in 2019?
PRO: long-term, property is a winner: The housing market fluctuates but according to Zoopla data, average property values are still 34% higher than they were 10 years ago and 212% higher than this time 20 years ago. So long-term, property is a good bet.
CON: things have got much tougher for buy-to-let: As things stand right now however, mortgage lenders, HMRC and the Government have all turned the screws on landlords' borrowing and profit potential.
Many lenders require rental cover of 145% and tax relief on mortgage interest will be capped at the basic rate of 20% for all landlords, from April 2020.
Insurance Premium Tax (IPT) rates also now stand at 12%, up from their previous 10%. IPT is payable on all general insurance policies which includes buildings insurance for which landlords are responsible.
Bear in mind that lettings agency fees to tenants are set to be banned from June 1, 2019 so landlords will need to find other means of funding costs such as credit reference checks and inventories.
All landlords starting new tenancies will have to prove their property has a minimum energy-efficiency rating of E on an Energy Performance Certificate. The law will apply to existing tenancies from April 2020.
PRO: some areas could still be tipped for growth: There may still be opportunities to profit from property. Keep an eye on Zoopla's latest Cities House Price Index where you can track which of the UK's cities are seeing the biggest increase in house price growth.
CON: new landlords will need to pay more tax: Since April 2016, if you’re buying an additional property that is not replacing your main residence – such as a buy-to-let – you'll face a 3% loading on your stamp duty bill.
Unlike regular stamp duty, the extra 3% is charged as a flat rate on the entire cost of the property. This would amount to an extra £9,000 on a £300,000 home, for example, bringing the total stamp duty payable to £14,000.
PRO: Rents tend to rise over the long term: There’s unlikely to be a shortage of people looking for decent private rented property in the medium to long term as, unfortunately, Generation Rent – those who will never be able to afford to buy – is growing.
Just 40% of 20-to-39-year-olds living in the capital will own their home by 2025, according to figures from PwC. This compares to 60% in the year 2000.