How To Buy-To-Let

Buy-to-Let – A Helpful Guide To Buying A Property to Rent

Renting out your property in the UK

According to the Landlords’ Association, there are now 2.6 million buy-to-let landlords in the UK and the buy-to-let property market is worth an estimated £1.5 trillion.

Despite changes in the rules and laws regulating the buy-to-let sector, renting out property continues to be one of the most popular forms of property investment in the UK along with cash savings, bonds and shares.

The question is whether it is the right choice for you. This UK “How To Buy To Let” guide is designed to help you make that decision.

How to buy to let

If you are considering becoming a private landlord and wondering how to buy-to-let in the UK, our comprehensive guide to the buy-to-let market answers many questions you may have from financing your property purchase to your legal obligations as a landlord.

5 reasons to consider a buy-to-let property

If all or most of the following reasons apply to you, then buy-to-let is something that you should consider:

  • 1. You have inherited a property and do not want to sell yet.
  • 2. You wish to invest some money but dislike the idea of stocks.
  • 3. You have the available cash to purchase a second property.
  • 4. You have a good credit rating and earn at least £25,000 a year.
  • 5. You have the time to manage a buy-to-let property.

Remember, you should have the money to pay all the additional expenses such as Stamp Duty, surveying and solicitors’ fees and auctioneer’s fees (if you are buying through a property auction). You should also allow some money in your budget to make any necessary repairs to the property so that it is ‘fit and proper’ for tenants.

Image showing a buy-to-let property in England
Many people get started in the buy-to-let property market by inheriting a family home which they do not want to sell. Photo © Richard Dorrell (cc-by-sa/2.0)

How to get started with buy-to-let

Before getting started with buy-to-let, you have to weigh up the pros and cons of becoming a private landlord. In this way, you go into the situation with your eyes wide open before making a final decision.

Advantages of renting out a property

There are two ways that you make money from a property investment in the buy-to-let market. The first is that you will have a regular monthly income from your tenants’ rent payments. Demand for private rented accommodation outstrips present supply, and this trend seems set to continue.

By 2025, it has been predicted that only 40% of the 20-39-year-old age group will be homeowners (compared to 60% in 2000). The RICS (Royal Institute of Chartered Surveyors) has estimated that rents will increase by 15% by 2023 to reflect this growing demand.

The other way you make a profit is from the rise in property prices or capital growth. Although the UK property market may suffer the occasional slump, property prices are generally on the increase. On average property prices in the UK are over a third higher (34%) than they were 20 years ago.

Image showing houses bought as buy to let properties
Property owners not only make money from rent but also via the increase in the value of the property over time. Photo © Graham Robson (cc-by-sa/2.0)

Disadvantages of renting out a property

Buying a property to rent out is considered a medium to long-term investment. Selling property takes both time and money so it is not the right choice for you if you want quick and easy access to your capital.

Another drawback of renting out a property is the cost and time involved in managing the property. For example, making sure that the property is maintained or dealing with tenants. This can also have a psychological cost in that you may have problematic tenants who delay or even miss their rent payments or who create other problems.

Being a landlord also carries legal responsibilities. You must be aware of all the national regulations and local by-laws. Failure to abide by all these laws can result in stiff fines.

The financing for a buy-to-let property is an additional risk. If your property remains empty for long periods, you will not be earning any rent. However, you will still have to make the mortgage repayments to your lender.

When the time comes to resell, you may find that the UK property market is going through a slump. If you are forced to sell the property for less than you paid for it, you are financially liable for making up the outstanding balance on the mortgage.

If after careful consideration, you believe that buy-to-let suits your circumstances and your financial goals, then your next step is to buy the correct property.

Buy-To-Let FAQ

How can you work out the rental yield on your buy-to-let property?

To work out the rental yield, you should first add up how much rent the property makes annually. From this sum, you should then subtract all the costs of renting out the property (such as insurance or any repair work). You should then divide this sum by the value of the property. Multiplying by 100 gives you the rental yield as a percentage figure. The average rental yield in the UK now stands at 3.54% although it can vary widely from region to region.

What is consumer buy-to-let?

Consumer buy-to-let is when you buy a property to rent out to a family member. For example, parents buying a house for their child when they are studying away from home. A consumer buy-to-let mortgage is the only one to be regulated by the FCA.

How can I find a letting agent for my buy-to-let property?

Details of letting agencies can be found in the local press or through an internet search. When deciding on a letting agent, do not necessarily choose the one with the lowest fees. Ask other buy-to-let landlords for their personal recommendations or look at the agency’s online ratings and reviews. A good letting agency should be registered with a trade body and offer a Client Money Protection Scheme.

Can I take out a buy-to-let mortgage for a HMO?

Yes, but the criteria for being granted a mortgage for a HMO (Houses in Multiple Occupation) are much more stringent than for a single household buy-to-let loan. Mortgage providers would expect you to have experience of being a buy-to-let landlord and have managed at least one other buy-to-let property for at least 6 months. The mortgage interest rate and the rental cover for a HMO buy-to-let mortgage are both higher too.

Are there any differences in the buy-to-let market in England compared to Scotland and Wales?

Apart from the different rules regarding Stamp Duty, the biggest difference in the buy-to-let market in different parts of the UK regards the licensing of landlords. In England registering as a landlord is not compulsory and depends on the local council. In Scotland, it is a legal obligation for both buy-to-let landlords and letting agencies to join a register. In Wales, the new RentSmart Wales scheme requires prospective buy-to-let landlords to successfully complete an approved training scheme to receive a licence, or they must hire a licensed letting agent.

Buying a UK property for buy-to-let

Like buying your own home, you have to consider some important factors before choosing the right buy-to-let property.

Type of buy-to-let property

The vast majority of buy-to-let properties are residential, but it is also possible to buy retail, mixed-use or commercial properties to rent out. However, you should be aware that it is more difficult to take out a mortgage from mainstream lenders for certain property types. These include flats over shops, ex-Council houses, new developments and HMOs (Houses in Multiple Occupation).

Location of the buy-to-let property

Another factor to consider is where you wish to purchase your buy-to-let property. If you plan on being a hands-on landlord and taking over responsibility for all aspects of renting out the property, then it is much better to buy property locally to avoid expensive travelling costs. However, if you are going to use a letting agency, it is quite possible to buy property anywhere in the UK.

Image showing a house rented to tenants
Buying a property to let means carefully considering factors such as property type, location and the kind of tenants you are trying to attract. Photo © Roger Templeman (cc-by-sa/2.0)

Who is your ideal tenant for buy-to-let?

When considering where to purchase your buy-to-let property, you must always bear in mind the needs of your potential tenants. Are your ideal tenants families, young professionals or students? Each would expect something different from their rented home. Families would like to be near good schools whereas students would want to live somewhere relatively near their university and have easy access to public transport.

When viewing properties, consider the neighbourhood from a tenant’s point of view. Noisy neighbourhoods, rundown areas, houses located on busy main roads and residential properties in a commercial or retail district are always more difficult to rent out and reduce your potential rental yield.

The condition of the property

It can be very tempting to purchase buy-to-let property which is being sold for under its market value, perhaps through a UK property auction. However, rules about the habitability of private rented accommodation in terms of health and safety are extremely strict.

If the property does not meet minimum standards you cannot rent it out and might have to spend a fortune making it habitable. You might also find it difficult to take out a buy-to-let mortgage.

When buying a buy-to-rent property, use the same criteria that you would for buying your own home or allow for property repairs in your budget.

If you do not take all these factors into consideration when buying a property for buy-to-let, it will be more difficult to find and retain tenants. Long periods of non-occupancy can directly affect how much money you are making from your buy-to-let property. Money that will have to come out of your own pocket.

Things to consider when buying a holiday buy-to-let

A holiday buy-to-let is slightly different from the usual UK buy-to-let property market because holiday lets are much shorter. Also, you will probably be using the property for family holidays too (for up to 3 months of the year).

The location of the property will dictate who will be interested in your holiday let. For example, a rural location might appeal to older people while coastal properties would attract more families with young children.

You need to apply for a specialised mortgage for a holiday buy-to-let property and the interest rate will be higher than for a conventional buy-to-let mortgage. Your lender will calculate the rental cover by averaging out the expected prices paid over the low, mid and high season.

Holiday lets can earn you a lot more money in a shorter period of time. However, there is the risk factor of having a bad holiday season which can affect how much money you earn from the property. You should consider this if buying a rural property for sale.

Image showing a buy to let holiday cottage
Buying a cottage as a holiday buy-to-let in an attractive area can make more money in a shorter period but may also have long periods without rental income. Photo © Michael Jagger (cc-by-sa/2.0)

Financing a buy-to-let property

There are a number of ways that you can finance your purchase of a buy-to-let property. These are:

  • A cash payment from existing savings
  • Remortgaging your own home
  • Getting a buy-to-let mortgage

The first option is of course the easiest as you do not have to worry about borrowing. However, don’t forget to draw up a budget so that you have sufficient funds for all the associated expenses of buying property such as Stamp Duty fees and conveyancing fees.

If you already have a mortgage on your primary residence, then you could release some of the equity in the property by taking out a second mortgage. Before making this decision, remember that if things go wrong financially, there is a risk that you could lose both your buy-to-let property and your family home.

In such cases, it is worth consulting a financial advisor, who should be registered with the FCA. They will be able to talk you through your options to decide whether a second mortgage or a buy-to-let mortgage is the best choice for your personal and financial circumstances.

Buy-to-let mortgages are available from mainstream lenders as well as from specialist lenders and mortgage brokers.

A buy-to-let mortgage is not the same as a mortgage you take out to buy a home

What are the differences between a residential and buy-to-let mortgage?

Residential and buy-to-let mortgages differ in a number of important ways:

  • Fees charged by the lender are higher on buy-to-let mortgages.
  • The interest rates on buy-to-let mortgages are higher than on mortgages for primary residences.
  • Lenders expect a larger deposit when you take out a buy-to-let mortgage. Although it can vary from 20%-40%, the best mortgage deals are for buyers putting down at least 40% of the property purchase price.
  • Most buy-to-let mortgages tend to be interest-only mortgages, so you need to find a lump sum to pay off the whole mortgage when its term comes to an end.
  • For a residential mortgage, lenders consider your income and expenses when judging affordability. However, for a buy-to-let mortgage, their primary concern is your rental cover or how much money you will make in rent. They will be prepared to lend 125% of your monthly rental income although the PRA recommended in 2017 that lenders should add some extra leeway and test affordability on a rental cover of 145%.
  • Buy-to-let mortgages are not regulated by the FCA.
Image showing a house purchased with a buy to let mortgage
Obtaining a buy-to-let mortgage can prove difficult and criteria for buy to let mortgages are stricter than residential financing. Photo © Christine Johnstone (cc-by-sa/2.0)

Who is eligible for a buy-to-let mortgage?

To be considered for a buy-to-let mortgage, you must meet lenders’ eligibility criteria. These may vary slightly from lender to lender, but usually you must:

  • Be at least 21 and under 70 or 75 when the mortgage reaches the end
  • Be a current homeowner (either with a mortgage or outright)
  • Earn at least £25,000 a year
  • Have a good credit score

What are buy-to-let mortgage rates?

Buy to let mortgage interest rates are around 3%. One of the factors that buy-to-let mortgage providers consider is how much of a risk you represent as a lender. The higher your credit score, the better your prospects of borrowing money and the better deal you will be offered. Another way to get a favourable buy-to-let mortgage rate is to put down a higher deposit, preferably 40% or more.

Mortgage rates also depend on whether you opt for a fixed-rate mortgage (where your payments stay the same) or a variable rate, which can go up or down depending on any changes made in the Bank of England’s base rate. Fixed-rate mortgages usually have a higher interest rate.

Buy to let UK mortgage calculator

Use our UK mortgage calculator to work out payments on a buy-to-let property

Monthly Repayment: Total Interest Paid:
Please note: This calculation is a guide to how much your monthly repayments would be if you financed a property purchased at auction. The exact amount may vary from this amount depending on your lender's terms.

What are your responsibilities as a UK landlord?

There are over 140 laws regarding the responsibilities of a buy-to-let landlord, most of which are intended to ensure the safety and well-being of your tenants.

Tenant health and safety

Safety regulations stipulate that as a buy-to-let landlord, you should ensure:

  • All gas and electrical appliances supplied with the buy-to-let property are safely installed and regularly maintained by a qualified engineer
  • Smoke and carbon monoxide alarms are safely installed and tested regularly
  • All furnishings and fittings provided with the home are safe, meet regulations and do not represent a fire hazard
  • An Energy Performance Certificate (EPC) is provided for the buy-to-let property. This is valid for 10 years and must have a minimum E rating (since April 2020)
  • Repairs to the structure of the home as well as to the sanitary, heating and hot water systems are carried out promptly

Tenancy agreements and deposit schemes

You also have legal responsibilities regarding the rights of your tenants. You must draw up a legal tenancy agreement which sets out the rights and responsibilities of both you and your tenants regarding the rent, what is exactly included in the rent (such as utilities, Council Tax, etc.), the rules and restrictions of the tenancy and so on.

The tenancy agreement also states what happens in the case of a tenancy finishing early and in cases of late rent payments.

In England, you are also liable for checking that your tenants have the ‘Right to rent’ (for non-UK citizens only) by examining documents such as visas.

Within 30 days of receiving your tenant’s rent deposit, you are responsible for protecting it in one of the government-approved tenant deposit schemes such as My Deposits. These schemes also offer a dispute resolution service.

Image showing flats with landlord insurance
It is critical for any landlord renting property to have buy to let property insurance as well as landlord insurance cover. Photo © Ross Watson (cc-by-sa/2.0)

Buy-to-let property insurance

There are three types of insurance you might need if you are renting out a buy-to-let property in the UK: buildings insurance, home contents insurance and a specialist landlord insurance.

Buildings insurance

If you are taking out a buy-to-let mortgage, buildings insurance is required by your mortgage provider to protect their loan. This type of insurance covers any damage to the structure of the property as the result of vandalism, subsidence, a burst water pipe, etc. You also have to estimate the rebuild value of the property if it is totally destroyed. For example, in the case of a fire.

Home contents insurance

This insurance policy covers any damage to the fittings and contents of the property. This type of insurance is only necessary if you are renting out a furnished property. If you are renting out an unfurnished buy-to-let property, then home contents insurance would be the responsibility of your tenants.

Landlord insurance

Landlord insurance is not compulsory, but it is advisable as it protects both you and your investment. Landlord insurance is an umbrella term which includes public liability insurance, rent guarantee insurance and a number of add-ons such as home emergency cover and the cost of replacing keys or fitting new locks.

Public liability insurance will cover you for any damage, injury or death which occurs on your property. In cases when you are sued, this policy will pay for any legal fees as well as any compensation awarded by a court.

Also known as tenant default insurance or rent receivable insurance, rent guarantee insurance will pay out when tenants fall into arrears or for periods when the property remains vacant. In the case of eviction, tenant default insurance will also cover the cost of any legal fees.

Home emergency cover is a policy which pays out for the cost of calling out a tradesman to deal with any domestic emergencies such as a burst water pipe.

In your tenancy agreement you can stipulate whether your tenants requires their own tenants insurance policy or contents insurance for renters.

How much does landlord insurance cost?

£120-£220 a year depending on the number of add-ons and exclusions. The cost of landlord insurance also depends on a number of factors, such as

  • The postcode, condition, type and history of the property
  • Your prospective tenants (you may be charged more if renting to students, for example
  • The installation of security measures to prevent fire, burglary, etc
  • Your home insurance claim history
  • How much excess you pay (your contribution to any insurance claim)
  • How many add-ons and exclusions in the policy

If you are using a letting agency, you should check with them because some will include certain types of insurance as part of their service. Avoiding doubling of insurance cover in this way can save you money on your premiums.

Some insurers will offer you a discount on your insurance if you take out all of your policies from them or if you wish insurance cover for more than one buy-to-let property. You might also be entitled to a discount if you are a member of a recognised landlord accreditation scheme.

Shop around for landlord insurance and don’t take the first quote you are given. Use the leverage of other quotes to bargain for a better deal with your preferred home insurance company. If possible, try to obtain a favourable quote from your existing home insurance provider who are already familiar with you and your circumstances

Image showing rented flats in Liverpool
There are many things to consider as a landlord when renting out a buy to let property in the UK, from legal responsibilities to property issues. Photo © Richard Hoare (cc-by-sa/2.0)

Things to consider when renting out a property

When renting out a buy-to-let property, you must take some factors into consideration when making the property ready for the tenants to move in.

Preparing the property for rent

You must ensure that the property is structurally sound and that all fittings have been checked by professionals. You should also ensure that you have full insurance cover.

Registering as a landlord

Registering as a landlord depends on the location of your buy-to-let property so you should check with the housing department of the local council. As part of the registration process, the property might have to undergo a health and safety inspection.

Setting the rent and the deposit

Determining how much to charge for rent is a balancing act. You should set a rent which is low enough to attract potential tenants but is high enough to cover all your expenses.

To get an idea of the private rental market in the area where your buy-to-let property is located, you should check the local press and online portals to find out the monthly rent on similar properties. If you are using a letting agent, they will be able to advise you on this.

Bear in mind monthly rental payments should be sufficient to cover your expenses such as your mortgage repayments, insurance premiums, letting fees as well as maintenance of the property.

The size of the rent dictates how much you can charge tenants as a deposit. If you will be receiving under £50,000 a year in rent, you are allowed to request 5 weeks’ rent as a deposit. For buy-to-let properties making over £50,000 per year, the deposit is capped at the equivalent of 6 weeks’ rent.

Setting up an emergency fund

You should set up a landlord emergency fund as soon as possible. Ideally, this should be the equivalent of 6 months’ rent. This fund will be available to cover your mortgage payments if tenants delay in their rent payments or in periods of non-occupancy between tenancies.

This emergency fund can also be used to pay for maintenance and any emergency repairs. It is better to maintain the property regularly and you should allocate a minimum of £250 a year for ongoing maintenance. For refurbishment or renovation of your buy-to-let property, you should allocate a minimum of £2,000 over every 5-year period. This amount depends chiefly on the type of tenants you have and how fast the turnover is.

Using a letting agency to rent your property

Whether to maintain the property yourself or use a letting agent depends on how much time you have to deal with your legal and financial responsibilities as a landlord as well as how near the buy-to-let property is to your home.

A letting agent has all the necessary expertise about the legal requirements of renting out property and can take away the stress of meeting all the local and national regulations. However, it is an additional expense to factor into your budget.

How much you pay for a letting agent depends on what type of service you require. If you want them to find and vet potential tenants, letting agents usually charge a one-off fee of a month’s rent. However, if you prefer a full ongoing service, including rent collection and maintenance, then they usually charge 10%-20% of the monthly rent payment.

Since June 2019, it is illegal for tenants to pay letting agency fees so this might be an additional expense for you when it comes to vetting prospective tenants.

If you decide to use a letting agency, you can choose a local or online agent. Local agencies have better knowledge of the area where your buy-to-let property is situated, but online letting agencies have fewer overheads and so tend to be cheaper.

Although virtual viewings are becoming increasingly popular, many tenants still prefer to see the property they want to rent in person before they sign on the dotted line. You should take this into account when deciding on the right letting agency.

Drawing up a tenancy agreement for buy-to-let

The most common tenancy agreement in England and Wales is an assured short-hold tenancy which usually runs for a term of 6-12 months. The Scottish equivalent is called a private residential tenancy. These agreements are intended to protect both landlords and tenants so that both sides know their legal and financial obligations.

If you are not using a letting agent, you can download a template of a tenancy agreement from this website. This template can then be modified to suit your own preferences and reflect the type of property you are renting out. Once you have completed the tenancy agreement, it is advisable to have it checked by a legal expert to make sure it is valid and legal.

Tax on buy-to-let property

Like any other investments, renting out your property in the UK requires the payment of a number of taxes and could have implications for your status as a taxpayer.

Stamp Duty Land Tax (SDLT)

Stamp Duty is calculated as a percentage of the cost of the buy-to-let property and is on a sliding scale. In England and Northern Ireland, it is 3% higher across the board depending on the value of the property. The Scottish equivalent (Land and Buildings Transaction Tax) is charged on any buy-to-let property worth over £40,000. In Wales stamp duty is known as LTT, Land Transaction Tax.

UK Stamp Duty Resources:
Stamp duty calculator for England and Northern Ireland
Stamp duty in Wales (LTT) Calculator

Insurance Premium Tax

Any house or landlord insurance policies are liable for the Insurance Premium Tax (12%).

Council Tax

Whether you or your tenants pay Council Tax depends on the terms of your tenancy agreement. If it is not included in the monthly rent, you should budget for this sum as an additional expense of owning a buy-to-let property.

Income Tax

You are allowed to earn £1,000 a year tax-free on any property you rent as part of your property income allowance. If you share ownership of the buy-to-let property with a partner, this allowance is doubled to £2,000.

If you earn between £1,000 and £2,500 a year in rent, you should notify the HMRC to be aware of your changed situation regarding income tax.

For buy-to-let landlords who earn over £2,500 after the allowable expenses are deducted (such as Council Tax, property maintenance and letting agency fees), they are liable to pay income tax on the rent they earn. The amount of income tax on your clear profit from renting out property is 20%, 40% or 45% depending on your tax bracket. You will need to complete a self-assessment tax return and should register with HMRC by the previous October.

Since 2017, Mortgage Interest Tax Relief, which used to be very preferential for buy-to-let landlords, has gradually been phased out. It is now calculated as a flat rate of 20% whatever tax bracket you fall into.

Because of the serious repercussions of making a mistake when dealing with the HMRC, it is recommended that you consult a tax advisor when making your first self-assessment tax return.

Capital Gains Tax in the UK

Capital Gains Tax is calculated on the profit you make on selling any property over the allowable threshold. The annual tax-free allowance for CGT is £12,000 a year (or £24,000 for couples who share joint ownership). The percentage you pay is 18% or 28% depending on your tax bracket.

You can reduce the amount you pay in capital gains tax by offsetting your expenses in both maintaining and selling the buy-to-let property such as Stamp Duty and any repairs carried out. For this reason, it is imperative that you keep meticulous records and receipts for any work done on your buy-to-let property.

National Insurance

If your profits from your buy-to-let property are over £6,475 a year, you might be liable to pay Class 2 National Insurance contributions. The criteria for paying NICs are that being a buy-to-let landlord is your full-time occupation and you are in effect running a business. To prove this, you should have more than one property and are buying new properties to add to your investment portfolio.

Conclusion: Renting out your buy to let property in the UK

Rental yield and capital growth are both ways that renting out a property can earn you money and compares favourably to the annual 1% interest rate offered by banks and building societies on cash deposits.

However, owning a buy-to-let property in the UK also carries legal and financial obligations. Before deciding if it is the right choice for you, do the market research and consult financial advisors, mortgage brokers, tax experts and letting agents. Making a mistake can be very costly – always take professional legal advice.

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