Buy-to-let Guide For Landlords In 2023

Summary

This buy-to-let guide will explain everything there is to know about this investment type, including what it is, the benefits, and how to get started. If you’re considering joining the many buy-to-let investors in property, you must get a good grasp of what you’re signing up for.

The UK rental property market continues to present opportunities for both new and experienced landlords. Due to the generation of consistent income to capital growth, it remains an attractive investment opportunity.

However, if you want to invest in property, it comes with its fair share of challenges, especially with the government making newer policies and redesigning the taxation system.

What is Buy-to-Let?

Buy-to-let (BTL) is a popular type of property investment where an investor buys a residential property for the purpose of renting it out. It is also possible to find BTL properties that are inherited or converted from a live-in property.

For most buy-to-lets, the owner may require a buy-to-let mortgage, a kind of mortgage for this specific purpose. In the case of a conversion from residential to the rental, the mortgage lender must be aware of this switch.

What are The Benefits of Buy-to-let Property Investment?

There are a fair few upsides that come with investing in a BTL property, and the important ones are mentioned below:

Steady income source: Buy-to-let investments are one of the most straightforward and in-demand. Since housing is a basic necessity and it is not uncommon for people to not afford to buy a house, it is easier to find tenants whose rents will serve as income and pay for the BTL mortgage.
Multiple income sources: A buy-to-let property investment allows you to earn in multiple ways. The consistent rental income you get from tenants is one of the major ways, while capital growth is another.
Long-term opportunity: Property investment is relatively safe in the long run. Although prices can fluctuate depending on different factors, you should still find a monetary increase when you calculate over a period.

How to Get on The Buy-to-let Property Ladder

If you’ve already decided to invest in a buy-to-let but do not know how to begin, don’t worry. Here, this buy-to-let guide will explain what you need to consider and prepare as you venture into a buy-to-let property investment.

Buy-to-let Mortgage

Buy-to-let mortgages are a common method for acquiring BTL properties, especially for those who do not have the cash to buy a property instantly.

However, certain rules guide who can get a buy-to-let mortgage and how to get it. For instance, most lending institutions would require you to be a homeowner already, and you must be able to show that you earn at least £25,000 per year.

If you are a first time buyer choosing a buy-to-let, note that mortgage deals will be few and far between, and more expensive as you are deemed a higher risk.

Some lenders would also set an age limit, usually less than 70 years old, if they’re to offer you a BTL mortgage. Your income may also be a factor, as well as your deposit amount and credit score.

Buy-to-let mortgages usually attract larger deposits than residential property mortgages, with the most common being 25%, even though you may also find a rate between 15% and 20%.

Buy-to-let Property Location

The location of the buy-to-let property investment is also essential, and you should consider expected income, potential tenants, and management style.

Some locations will generally generate more income than others but bear in mind that property prices will also be affected.

If you intend to manage the property yourself, the location should be close to where you live. This may, however, not be a concern if you’ll be handing over the property to a management company.

Potential Types of Tenants

It’s also a good idea to consider renting out to a specific group of tenants, and this will ultimately affect your location and property type. That’s because each tenant type has particular needs you may need to cater to if you target them.

For example, targeting students requires that you get a buy-to-let property closer to learning institutions, while renting to families will require a property type with ample space. Meanwhile, young professionals may prefer aesthetics to space.

Buy-to-let Property Type

Depending on your budget, time, and other targets, you should choose a property type that helps you achieve your objectives. Regarding rental yield, Houses in Multiple Occupation (HMOs) are the most lucrative for landlords.

HMOs are properties where tenants are allowed to share the same spaces, such as kitchens, bathrooms, and living rooms, even though they do not know each other beforehand. These properties generate more income than other property types but require more administration and are specially regulated.

You can check the official government website to learn more about licences and other things you need to take care of.

Buying the Property as a Limited Company

Due to the accompanying tax benefits, more investors are choosing to buy properties as limited companies. Close to 50,000 limited companies were set up by landlords in 2021.

If you set up a limited company to buy your BTL property, you’d have to pay only corporation tax of 19%, as opposed to paying 20%, 40%, or 45%, depending on your tax bracket.

If you do not set up as a limited company, you will have to declare your income from rent in a Self Assessment tax return.

You’ll also get to deduct finance costs like mortgage interest from your income (interest is variable dependant on the Bank of England’s interest rates). This option ceased to be available for individual landlords when the new mortgage tax relief regulations were released in 2015.

That said, buying as a limited company has its downsides, ranging from legal and stamp duty fees to the inability to use personal Capital Gains Tax (CGT) when you sell a property.

What are The Tax and Fees for Buy-to-let Properties?

Buy-to-let landlords have to pay certain taxes and fees. They include rental income tax, although you can deduct agent fees, utility bills, council tax, building insurance fees, certain maintenance costs, etc.

You’ll pay an 18% or 28% CGT on the profits of your property if you choose to sell it. BTL landlords are also eligible to pay a 3% stamp duty when they buy a second home.

So, is Buy-to-let in the UK Still Worth it?

The short answer is yes. Buy-to-let properties are forever in demand. In fact, a survey by the National Residential Landlords Association (NRLA) revealed that will be the case for a long time.

Recent government legislation has made it quite difficult for landlords to get as much income as they used to. For instance, landlords can no longer deduct certain finances from their income and must pay 3% more on stamp duty.

However, buy-to-let property investment is still worth it because it still presents a consistent source of income for homeowners. You can also reduce your tax by setting up a limited company, among other methods.