How To Start Investing in Buy-to-Let
Fundamentally, buying a buy-to-let property works in a very similar way to any residential property. You can either pay with cash or with a mortgage, although the type of mortgage will differ slightly.
The main difference is how the lender categorises your primary income source – usually they’ll look at your potential rental income over your personal income, which is usually a secondary factor.
Rental income will need to meet at least 125% of the monthly interest payments on the loan, a view known as ‘rental cover’. So if your mortgage interest payments equal £1,000 a month, you’ll need to be earning £1,250 in anticipated rental income.
At the same time, a deposit on a buy-to-let mortgage is typically bigger than the one on a standard mortgage. Most BTL lenders expect a deposit of 20% but this can fluctuate between 20% and 40% for those investing in UK buy-to-let property, depending on the dealer.
How to Choose a Buy-to-Let Location
Choosing a buy-to-let location is one of the most important parts of investing in buy-to-let and building a buy to let property portfolio.
You’ll need to find a location that suits your budget, features the demographics that you want to attract as tenants – such as young professionals – and has the market to support buy-to-let growth.
Emerging locations are always popular investment destinations as they’re more affordable initially but have the capacity for exceptional buy-to-let growth.
This growth is typically identified as rental yield growth and property price growth. Any city that is achieving a yield above the UK average rental yield of 4.71% is considered excellent. Investors can then use rental growth forecasts to see how prices could improve going forward.
If you’re looking for some of the best places to invest in the UK in 2022, you can read our roundup.
How to Find a Property Developer
Working with a trusted partner is vital for investing securely and safely. Choose an experienced property developer from the outset and be sure to ask them the important questions:
- What is your track record?
- How many projects have you delivered?
- Were they delivered on time?
- How do you provide project updates?
- How much communication is in place between investors and developer?
At the same time, perform your own research when building a buy to let property portfolio. Part of your due diligence is making sure that you’re regularly researching around your investment and a vital element of that is ensuring your partners can help you build success.
How To Get A Buy-to-Let Mortgage
The primary difference between a buy-to-let mortgage and a traditional mortgage is that many are interest-only. This means your monthly payments pay off the interest on the loan and the final sum is dealt with the at the end of the mortgage term. Typically, investors will either pay the loan in full, sell the property or remortgage.
In practice, this means you can buy the property and make rental returns during the mortgage term before selling the property to clear the mortgage at the end.
You may also find repayment mortgages in the buy-to-let industry, where the capital and the interest are paid back in monthly instalments. This usually results in higher monthly payments than an ‘interest-only’ mortgage but does mean that you’re paying off the final sum, leaving you with the property at the end to continue letting or selling for pure profit.
Buy-to-let mortgages also differ to residential mortgages in that the amount you can borrow also depends on the rental returns you’re expecting, rather than your salary. This means if you can demonstrate that your property will make more money, you can potentially get a better suited property for your strategy.
As buy-to-let grows in popularity, more high street lenders are offering buy-to-let mortgages. Likewise, there’s an increasing amount of specialised lenders that are providing buy-to-let products more suited to investment. This is especially useful for overseas investors.
Managing Your Buy-to-Let Property
Managing and sustaining a buy-to-let property over the long-term depends on your individual circumstances.
If you’re investing in buy-to-let, you need to work out whether you’re an active or a passive investor.
Active investors tend to do all of the day-to-day work on the investment themselves.
Passive investors typically work with external partners such as letting agents and property managers to handle daily tasks, leaving the investor to enjoy the benefits.
Managing a property investment involves finding tenants, maintaining the property and working through any emergency issues that arise.
Investing in a Limited Company
The process of buying a buy-to-let property through a limited company is also known as incorporation, which has been on the rise in recent years. At the root of its popularity is the flexible approach to property investment on offer, along with the possibility of tax savings.
Although the external market is a big consideration for those buying a buy-to-let property through a limited company, this investment process has become much simpler over time. As a result, we have seen more investors with larger portfolios setting up a company for their buy-to-let ventures.
The appeal of buying a buy-to-let property through a limited company lies predominantly with the tax benefits. A limited company will typically pay corporation tax on any profits at a rate of 19%, whereas individual investors can expect to pay income tax rates of up to 45%.
Setting up a company for your buy-to-let properties also gives the opportunity to save on capital gains tax, especially for those on a higher income tax bracket, but this benefit will only really be felt in the long-term.
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Selling Your Buy-to-Let Property
Selling a buy-to-let property is relatively easy and typically, will work in the same way as selling any other property. However, the ease of selling a buy-to-let property depends on whether or not it is still tenanted. While this doesn’t necessarily make the process more complicated, there are just more things to consider.
Tenants have rights, so first and foremost, you’ll have to give them plenty of notice. If the tenants want to stay in the property, then it is possible to sell a Buy-to-Let property tenanted, but this means that the only market that would be interested in the property is landlords. But buying a buy-to-let property already tenanted is often perceived as a prime opportunity, with it cutting out the process of marketing the property and sourcing tenants.
However, if you’re selling a buy-to-let property empty, you’ll be able to target both landlords and the residential market. As well as widening the pool of prospective buyers, an empty buy-to-let property minimises any complications that come with viewings.
Regardless of whether it’s empty or tenanted, selling a buy-to-let property is relatively straightforward. But as we mentioned earlier, any profit made on the sale will be subject to capital gains tax.
Are There Risks of Investing in Buy-to-Let?
All investments come with some degree of risk, including investing in UK buy-to-let property. But unlike other assets, a lot of the risks that come with buying buy-to-let property can be addressed with research.
Using trusted partners is one of the most important parts of property investment, and can significantly streamline the overall process. When choosing a developer, look for testimonials, completed projects and a consistent track record. If you’re investing in off-plan property, this is even more crucial, so be sure to pay close attention to previous completion times.
Another risk that comes with investing in UK buy-to-let property is void periods. Void periods occur when the property is not being rented out, and subsequently, isn’t generating a passive income. For those with an extensive property portfolio, void periods can be particularly worrying, especially if the investor has mortgages to cover.
However, thorough research can often minimise the risk of void periods. When buying a buy-to-let property, the future tenant should always be considered, choosing locations and property types that are in high demand in the current market.