Buy-to-let explained: how to become a landlord

Buy-to-let explained: how to become a landlord

By Matilda Battersby

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Want to rent a home out rather than live in it yourself? Here’s our complete guide to the buy-to-let process.

This guide will help you to decide whether to become a landlord in 2022.

Property is usually a good investment, and a buy-to-let makes it possible to boost your monthly income while investing for the long term.

So long as the rent paid to you covers or exceeds your monthly mortgage payments, you could make a tidy profit.

You might also make a good return when it comes to sell up. But, like all investments, there are risks attached to buy-to-let.

Here’s exactly what to consider when purchasing a buy-to-let property.

Buy-to-let mortgages 

Unless you’ve got a big pile of cash in the bank, you’ll need a mortgage to buy a home to let out.

You can’t choose any old mortgage. You’ll need a specific buy-to-let mortgage.

1. How do I apply for a buy-to-let mortgage?

Like any mortgage, you’ll need to apply for one.

You can do this either directly to a high street bank or building society or via a mortgage broker. 

2. What’s different about a buy-to-let mortgage?

But, there is a key difference in how a bank or building society will work out what you can borrow for a buy-to-let mortgage compared to a residential one.

Instead of your salary, your lender will view the potential rental income of the property before deciding how much to lend to you. 

That said, many lenders will then take your personal income into account in addition to this.

Another thing to think about is that the majority of buy-to-let mortgages are taken out on an interest-only basis.

That means you’ll only pay the interest on your mortgage each month, rather than repaying the actual loan itself. 

With interest-only, at the end of your mortgage term you’ll need to repay the full amount, either from savings or by selling the property.

3. How much can I borrow for a buy-to-let?

Most banks or building societies will want your expected rental income to equal at least all of your monthly mortgage payments and a bit more. This is known as 'rental cover'.  

If your mortgage payments each month amounts to £1,000, you’ll need rental income of £1,250 a month.

You’ll need this financial leeway to reassure the lender you’d still be able to pay your mortgage even if the home is empty for short periods between tenants.

4. What type of deposit do I need for a buy-to-let?

You’re likely to need a sizable deposit to get a buy-to-let mortgage. 

Most buy-to-let lenders expect a downpayment of at least 25% and the very cheapest mortgage deals usually require a 40% deposit or more.

It may be possible to get a buy-to-let mortgage with a smaller deposit, of say 5%. But, you are likely to pay higher fees and interest on a higher loan-to-value mortgage.

5. What fees can I expect to pay for a buy-to-let mortgage?

Mortgages with low interest rates are likely to come with hefty upfront fees.

A fixed-rate mortgage could cost you thousands to secure in fees.

It’s important to weigh up the interest rate against any fees over the long term. In some cases, a higher interest rate might actually work out cheaper.

Still have questions? Find answers on buy-to-let mortgages in our comprehensive guide.

Pros and cons of buy-to-let 

As with any investment, there are good and bad reasons to go the buy-to-let route:

ProsCons
The housing market fluctuates, but property is usually a safe investment over the long term, accruing value by the time you sell up. Many lenders require rental cover of 145% and tax relief on mortgage interest is capped at the basic rate of 20% for all landlords.
There’s unlikely to be a shortage of people looking for decent private rented property in the medium to long term.If you’re buying an additional property that is not replacing your main residence, you'll pay an extra 3% on your stamp duty bill.
So long as your rent covers your mortgage and a little more, you could make a profit in the short term, too.Landlords can no longer pass on costs such as credit reference checks and inventories to tenants, but must cover these themselves.
Rental properties must have a minimum energy-efficiency rating of E on an Energy Performance Certificate. This is good news for you, your tenants and the environment. But it may be expensive in the short term.Insurance Premium Tax (IPT) is payable on all general insurance policies which includes buildings insurance for which landlords are responsible.
Having an income from a buy-to-let gives you the flexibility to live abroad, or in a location other than the one you can afford to buy in, all while taking advantage of market conditions.If you have more than one property, when it's time to sell you'll need to pay Capital Gains Tax on your buy-to-let (more information on which can be found below).

What sort of buy-to-let should I go for?

Finding the right property in the right location is important when searching for your own home. But it's equally important when looking for a buy-to-let. 

So, before you start your search, think about what life stage you’re targeting in terms of the people who will rent it out.

A student, for example, is likely to want to live in an affordable property close to the university and nightlife.

While families will be interested in being near good schools and having a garden.

If you get the location or type of property wrong, the rent you can charge will be lower and occupants harder to come by.

Does who you rent to matter?

Yes and no. You should feel happy to rent your home to anyone who is able to put down the deposit and available to move in.

But, if you’re targeting a specific type of renter, such as students or professionals in a house share, it can make a difference to your plans.

Some lenders are more careful about giving out mortgages for student lets and Houses in Multiple Occupation (HMOs). 

An HMO is defined as three tenants or more who form more than one household and share a toilet, bathroom or kitchen facilities. For example, three young professionals in a flat share.

Where should I buy a buy-to-let?

A property close to your own home could be a good bet. As well as being familiar with the area, you'll be on hand should anything go wrong. 

But, if you plan to use a letting agent to manage the property, buying further afield can present a wider range of options.

When you’ve settled on an area, make sure you speak to local letting agents. They can advise on what kind of properties are in demand and how much they rent for.

Make sure you are getting a good deal by checking the average property values for the area and take a look at how much properties are renting for in the area.  

Bristol terraced townhouse with a bright red front door, pale pink exterior paintwork and Georgian style windows

How can I make money on a buy-to-let?

To make money on a buy-to-let, you will either rely on an increase in the value of the property over the medium to long term, or profit from your rental income.

Your ‘rental yield’ is income generated from the property expressed as a percentage of the property value.

Property value or rental yield could see you make or lose profit. Part of your decision-making when looking at buy-to-lets should be working out which of these has the greater advantage.

A good rental yield is generally benchmarked at around 5% a year. But, some properties might reap yields as high as 7%-plus. While HMOs can achieve between 12% and 15%. 

What taxes will I pay on a buy-to-let?

There are various taxes to pay on your buy-to-let home.

1. Tax on your rental income

The rent you receive will be taxed at your relevant tax band. Bear in mind that it could push you into a higher tax bracket.

You can deduct some costs against the amount of tax you pay. 

These costs include letting agent fees, buildings and contents insurance, council tax and utility bills (if you pay them on behalf of the tenant).

Essential maintenance, such as a roof repair or new boiler, can also be set against tax.

You can also claim for costs of any damage to furniture or fixtures once a tenancy is up.

Relief on mortgage interest is capped for all landlords at the basic rate of 20%, regardless of whether you are a higher rate (40%) or additional rate (45%) taxpayer. 

Find out more about your tax liabilities as a landlord here.

2. Capital Gains Tax

Buy-to-let property is not exempt from Capital Gains Tax (CGT).

This tax is paid when you come to sell the property on any increase it's undergone in value. In other words, on your profit. CGT is paid at 18% or 28% depending on your tax bracket.

You can work out what you might owe with this handy tax calculator.

You do have allowances, though. For the 2021/2022 tax year, the first £12,300 profit is CGT-free. For couples with joint assets, this doubles to £24,600. 

You can also offset the cost of stamp duty and solicitors and estate agents' fees against your CGT bill. 

3. Stamp Duty

You’ll pay an extra 3% stamp duty on any second or additional homes, which includes buy-to-let.

The tax applies to all investment property of over £40,000. That's lower than the £125,000 starting threshold for residential homes.

The 3% stamp duty is also charged on the entire property price, not just the value over a certain tax band. 

What are my responsibilities as a landlord?

Being a landlord comes with certain legal responsibilities. 

The people who rent from you must be protected by a tenancy contract and you must show that you’re keeping their deposit in safe hands.

There are several types of tenancy contract, but the most popular is an assured shorthold tenancy (AST). 

An AST gives renters a legal right to live in your property for a fixed duration, or a rolling term.

This kind of contract lasts for a set period, normally six or 12 months. 

It includes information about how much your renters must pay in rent during that time, who is responsible for repairs and notice period for eviction.

An AST should also include details about when rent can be increased, how long the tenancy lasts and their deposit protection scheme.

Deposit protection schemes

All landlords must legally have a deposit protection scheme in place to protect the deposit money given over by their renters.

You or your letting agent will be fined if you don’t provide one. There are two types of government-backed deposit schemes, insurance and custodial.

  • Insurance: Under the insurance scheme, the landlord or agent retains the deposit and pays interest to the insurer. They are available through the Deposit Protection Service, MyDeposits and Tenancy Deposit Scheme.
  • Custodial: The custodial option, where the deposit is paid directly into the scheme, is free-of-charge to use. Each scheme comes with an independent resolution service to iron out problems between landlords and tenants should they arise.

Right to rent

As a landlord, you’re legally responsible for making sure the people who rent your home have the right to rent in the UK.

Find out more about the government guidelines on right to rent and what you need to do.

Other landlord responsibilities

  • Making the property safe for tenants to live in
  • Dealing with repairs to the property’s structure and exterior
  • Maintaining heating and water systems
  • Making sure furniture meets fire safety regulations
  • Ensuring that the gas and electrics are safe
  • Providing the right paperwork and information

Find out more about renters’ rights and your responsibilities in this guide.

Should I use an estate agent for my buy-to-let?

It’s always a good idea to advertise your rental property with a local estate agent. For this service, you’re likely to be charged one month’s rent.

Once you’ve let your home, you may or may not want to use an estate agency to manage it.

Managing agents' services include anything from arranging for a broken boiler to be fixed to chasing up late rent.

Fees to manage the property can start at around 10% of your monthly rental income.

So you need to decide if the help is worth the monthly agents’ fee. Or if the hassle of managing a property yourself is worth the financial savings.

Our top buy-to-let tips

1. Make the most of it

Look for creative ways to boost your income. That might mean adding an extra bedroom by converting a loft space, or turning an office or spare reception room into an extra bedroom.

2. Buy modern

Modernised properties tend to let quicker than older homes, plus they need less maintenance.

3. Do your checks

Check tenant references thoroughly and conduct credit checks.

4. Keep clean 

Always clean and redecorate your buy-to-let after a long tenancy.

5. Don't be greedy

It's better to hold onto a good tenant paying less, than a bad one paying more.

6. Buy small

Don’t overlook smaller homes which might not work so well for residential buyers. Unlikely spaces in great locations can make attractive buy-to-lets. 

7. Consider paying cash

It could be less expensive to remortgage your own home rather than take a buy-to-let mortgage. But always seek financial advice before doing this.

8. Be cautious

When choosing a lettings agent, make sure he or she is a member of the Association of Residential Letting Agents and the National Approved Lettings Scheme.

9. Cover yourself 

Invest in good buy-to-let insurance to make sure you’re fully covered for all eventualities.

Women moving in to new home, dog greeting them

What is buy-to-let insurance?

Also known as 'landlord insurance', buy-to-let insurance provides cover for buildings and contents as well as landlord liability.

There are three types:

1. Buildings insurance

You’ll need to take out buildings insurance before you can secure a mortgage on a property. This covers you if your property is damaged, destroyed and needs to be repaired or rebuilt.

Make sure you input the correct rebuild value on your buildings insurance form. This is different to the amount you paid for the property. 

If you’re uncertain, get a chartered building surveyor to do a valuation for you.

2. Contents insurance

Your contents insurance will cover the furniture and fixtures in the property. 

Even if your place is unfurnished, getting some level of contents cover is a good idea to protect carpets, curtains and white goods. 

The people renting from you will be responsible for insuring their own belongings.

3. Landlord liability

This type of insurance will cover you in the event of the injury or death of the people who live in or visit your property. 

Usually getting this cover is a choice. But in some cases you may be required to have a minimum level in place.

For example, if you are renting to students, have an HMO, or in some local authorities. 

Is buy-to-let right for me?

Only you can decide whether becoming a landlord is the right thing for you.

But as a way to generate extra income, or as a destination for your nest egg, if you take the right precautions and choose wisely, you could end up with a tidy profit.

Like all investments, buying-to-let carries risk. But if you’ve read widely and understand the potential outcomes, you can mitigate them.

If in doubt, talk to a letting agent in your area about what’s going on in the market near you.

Keep up with our latest research and insight into the market more broadly by following our Rental Market Report.