If you’re interested in investing but prefer the idea of putting your money into bricks and mortar rather than stocks and shares, a buy to let property might be one option worth considering.

Investing in property – especially one you plan to let out rather than live in – comes with its own unique risks and challenges, particularly in this current uncertain economic climate, which it’s vital to be aware of before you take the plunge.

In this article, we examine what’s involved in buying and owning a rental property and outline the pros and cons, so that you can decide whether it could be a worthwhile investment for you.

What is a buy to let property investment?

When you invest in a buy to let property, you simply buy a residential property, like a house or a flat, in order to rent it out to tenants. This means that you become a landlord, which comes with various responsibilities that we explore later.

As with many other types of investment, the hope is that your property will provide you with a regular monthly income, which could be used to supplement your retirement income, or any other sources of income you might have.

There is also the prospect of capital growth – in other words, that your property will appreciate in value over the long term, so that you make a profit when you eventually come to sell it.

This might all sound fairly straightforward, but there are a whole host of variables to take into account when buying and letting property. If you’re not careful or just get unlucky, you could end up making a loss, just as you could with any other kind of investment.

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What are the advantages of buy to let properties?

The main benefit of owning a buy to let property is that, provided you have limited “void periods” (those times when your property isn’t let out), you should have a regular income stream. Rental yields, particularly in northern areas, can be as high as 7% or 8%. Your property may increase in value over time too, although neither income nor capital growth is guaranteed. 

Many buy to let investors like owning property as it is a tangible asset, which gives them more control over it than a stock or share. Rather than buying interest in a stock and hoping it performs well, you have an active role to play in every part of the letting process. You choose the property and, as the landlord, control how it is managed and oversee every aspect of the finances. This might be appealing if you trust your instincts and can be organised with both your time and money.

If you are already an experienced investor then buying property can also be a good way to diversify your existing portfolio.

Can I take out a mortgage on a buy to let property?

The main cost of a buy to let property investment is of course buying the property itself. You could either use savings to buy the property outright if you can afford to, or you can fund your purchase using a buy to let mortgage.

Buy to let mortgages are fundamentally different to residential mortgages, and lenders will take a range of different factors into account when assessing your application, such as how much rental income the property is likely to generate.

You’ll need to put down a bigger deposit too – whereas you can usually take out a residential mortgage with a deposit as small as 5% of the property value, most lenders require a minimum 25% deposit if you want to take out a buy to let mortgage.

Buy to let mortgage rates and fees will usually be higher as well, as letting out a property is considered a riskier proposition for lenders than if you were simply living in it yourself. A series of increases in the Bank of England base rate in recent months mean that buy to let mortgage rates have increased sharply since last year, stretching affordability for potential buy to let investors. You can compare costs using this buy to let mortgage comparison tool.

You’ll also most likely only be paying off the interest you owe the lender each month, rather than the capital, until the mortgage term finishes. At that point, you’ll either need to remortgage the property, or repay the capital (either by selling the property or using your own savings). For an in-depth look at how buy to let mortgages work, read our guide to Understanding buy to let mortgages. You can find out more about all the different mortgage options that may be available to you, and how they compare, in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.

How much can I borrow on a buy to let mortgage?

Instead of looking solely at your income and outgoings to see how much you can borrow as lenders would if you were buying a home to live in, buy to let mortgage providers want to know how much rental income the property is likely to generate.

Lenders typically look for rental income to be equivalent to at least 125% of your mortgage payments, or sometimes more than this.

If you’d like to see how much you might be able to borrow for a buy to let property, simply enter your expected rental income in our buy to let mortgage calculator to get an estimate.

What is leveraging?

Getting a mortgage in order to make an investment, such as a buy to let property, is known as “leveraging” (or sometimes “gearing”). Even if you are confident that you can afford a property with your current savings, it would be worth considering using leverage as an option.

For example, let’s say that you had enough saved up to buy a property worth £100,000. If the property increased in value by 10% every year, then five years later you could sell it for £150,000, giving you a total profit of £50,000 (these examples exclude fees, charges, tax, and rental income for the sake of simplicity).

However, if there was another property in the same area worth £300,000, then you might decide to take out a buy to let mortgage in order to afford this property instead. Assuming you invest £100,000 of your own money and take out a £200,000 mortgage, and this property rises in value at the same rate as the cheaper one, then after five years you could sell it for £450,000. This gives you a total profit of £350,000 from your initial investment, or £150,000 after paying off your mortgage. In this way, leveraging allows you to access investment opportunities that would normally be outside of your savings.

Alternatively, you could stick with the £100,000 property and take out a buy to let mortgage for £50,000. The benefits of leverage here would be twofold: firstly, it would allow you to invest your remaining £50,000 in other properties or ventures at the same time. Secondly, the overall return on your initial investment would be higher when expressed as a percentage: if you put in £50,000 and make £100,000, then this amounts to a 100% return, which is technically a more successful investment than putting in £100,000 and making £50,000 (a 50% return), even though after paying back the mortgage your profit will basically be the same amount. A higher percentage return is seen as more successful in the context of an investment portfolio.

Being able to invest in more expensive properties or multiple properties at the same time also generally means that your rental yield from these properties will be higher, which is another way that leveraging can result in greater earnings than you would normally achieve with your own savings.

The downside to leveraging is that the same principles apply in reverse: just as the potential reward is higher, so is the potential risk. If the property goes down in value, you may not have enough to pay off your mortgage just from selling it, and might have to dip into rental income or your own savings in order to cover the rest. Your percentage return will suffer as well; if you bought a £300,000 property outright and its value falls by 20% to £240,000, then you will only have lost 20% of your investment. If you only put down a 50% deposit of £150,000, however, then the same £60,000 loss is equivalent to 40% of your investment.

Our free mortgage comparison service allows you to compare buy to let deals from the whole of the market and find out how much they could save you.

What other costs are involved with buy to let properties?

If you’re considering purchasing a buy to let property, you’ll have to take into account all of the usual costs that come with buying property, beyond the price of the property itself. These include getting the property surveyed, fees for a conveyancing solicitor, mortgage arrangement fees, and the costs of buying furniture if you plan to let it out furnished.

If you live in England then you’ll have to pay the Stamp Duty Land Tax surcharge as well. This applies to second homes and buy to let properties and will cost an extra 3% on top of standard Stamp Duty rates.

If you live in Scotland then you’ll have to pay an Additional Dwelling Supplement on top of Land and Buildings Transaction Tax, which means you’ll pay an extra 6%% on top of the current rates for any additional property costing over £40,000.

If you live in Wales then you’ll pay Land Transaction Tax. This will cost an extra 3% on top of the current rates for any additional property costing over £40,000.

You can find out more about how Stamp Duty works in our article Stamp Duty explained.

There are other unique costs you’ll have to keep in mind as well. If you plan to let or sell through an agency then they will charge you for their services.

Once you have successfully found tenants then you’ll still need to be prepared to pay for basic running and maintenance costs for the property as well.

How much tax do I have to pay on income from a buy to let property?

Any income you make from letting the property will be subject to income tax, if that income pushes you over your personal allowance. The personal allowance is the amount of income you can earn each tax year without having to pay tax, and for the 2023/24 tax year is £12,570.

However, you will be able to deduct most expenses from the payable amount, as long as you can prove they’ve been incurred solely for the purpose of renting and maintaining the property. These include insurance policies, the costs of general maintenance and repairs (but not improvements), services such as gardeners or cleaners, and various legal costs. You can find out more about income tax for landlords and how exactly these allowances work here on GOV.uk.

Landlords used to be able to deduct their mortgage interest before paying tax, which meant higher rate taxpayers could benefit from 40% tax relief on their mortgage payments. However, this has been gradually reduced over time, so that all landlords, regardless of whether they pay tax at the basic, higher or top rate, are given a flat-rate tax credit based on 20% of their mortgage interest.

Finally, when it comes time to sell the property, there may be Capital Gains Tax to pay if you make a profit that exceeds your annual Capital Gains Tax allowance. In the current 2023/24 tax year, this allowance is £6,000. This will reduce to £3,000 in the 2024/2025 tax year. If you’re a basic rate taxpayer and your income is £50,270 or less, you’ll pay Capital Gains Tax at a rate of 18% when selling a rental property, rising to 28% if you’re a higher rate taxpayer with an income of £50,271 or more.

You can deduct certain costs from any gain, such as estate agent’s and solicitor’s fees, Stamp Duty when you bought the property and the cost of any improvements you’ve made, such as fitting a new bathroom.

Buy to let as a limited company

One growing trend for avoiding some of these strict taxation rules is to consider setting up your buy-to-let properties in a limited company structure. A record 47,400 new buy-to-let companies were formed last year alone, according to estate agent and property services company Hamptons. Owning property or properties and earning income from them as a company subjects you to different tax rules than if you own them as an individual. This is because a company is treated as a separate legal entity to its owner or owners.

The key difference is that companies do not pay Income Tax or Capital Gains tax. Rather, they pay Corporation Tax, which is currently set at 19% of all profits, regardless of the level of profits. This applies to both rental yields and money made from selling the property.

Bear in mind that only individuals, not companies, can claim the £6,000 Capital Gains Tax allowance (falling to £3,000 in the 2024/25 tax year). If you are dealing with one cheap property on a relatively short-term basis then it may be more cost-effective to own and sell the property as an individual, as the Capital Gains Tax paid after applying the allowance will likely be lower than the Corporation Tax paid at full price.

However, If you are dealing with multiple properties or one more expensive property, then letting as a limited company can greatly reduce the amount of tax paid on your earnings. The downside here is that the income will then belong to the company rather than the individual, and getting the money out of the company – either through dividends or in the form of salary – comes with its own tax consequences, which could end up offsetting the savings you’ve made. There can also be significant costs involved if you’re transferring a current buy to let property into a limited company as this can lead to Stamp Duty and Capital Gains Tax charges at the time of transfer. It’s essential to seek professional tax advice if you’re considering doing this.

Overall, buy to let property is subject to much greater taxation than other types of investments, which could be another reason to consider stocks and shares or traded property funds instead. Your returns from a buy to let property will have to be much higher than other kinds of investments at an equivalent level in order to cover tax.

You can find out more about owning a buy-to-let property through a limited company in our guide Should I own my Buy to Let property through a limited company?

Do I need insurance for a buy to let property?

There’s no legal requirement to have buildings insurance on your buy to let property, but lenders won’t offer you a mortgage unless you have this cover. Buildings insurance covers the cost of repairs to your property in the event of structural damage or replacing items such as pipes, drains and cables.

Many insurers offer specialist landlord insurance policies, which typically include both building insurance and contents insurance. If you’ve furnished the property yourself, having contents cover can provide valuable peace of mind that if any of your furniture is damaged, you can make a claim to replace it. A good policy will also cover costs specifically related to letting, such as malicious damage by tenants, legal and liability protection, and rent guarantee insurance (which means that you will be covered if a tenant fails to pay their rent).

Find out more about landlord insurance in our guide What is landlord insurance and do you need it?

What are the risks of investing in buy to let properties?

Even though buy to let properties can be a good investment, there are some potentially significant risks to consider if you’re thinking about becoming a landlord.

As the costs of buying property are so high, buy to let properties should be considered a long-term investment, which means your money will be tied up for a long time. It would be unwise to invest in a buy to let property if you don’t expect your finances to remain stable for the foreseeable future, as you might find it difficult to sell your property quickly.

Unlike stocks and shares, a buy to let property requires constant attention to maintain, and you’ll need to be prepared to sink a lot of time, effort and money into your property. Remember that it’s much easier to invest smaller amounts in stocks and shares than it is to invest them in property. Also unlike a stock or share, a buy to let property is “illiquid”, which means that it cannot easily be converted into cash. Buying and selling property is a complex, costly process within itself, much more so than selling “liquid” assets like stocks.

There are also certain factors that fall outside of your control that may result in an overall loss. If housing prices in the area fall then your property is likely to suffer as well; the amount of rent you can charge will decrease, and you may struggle to pay back your mortgage as a result. Even if you were to sell it there would be no guarantee that you would get back what you’ve spent on it. Market trends are tricky and unpredictable, so make sure you know what you’re getting into when buying a property, particularly one in an area you aren’t familiar with.

You could also get unlucky and not find any tenants to rent your property, or tenants who fail to pay their rent, which could make it hard or impossible to pay back your mortgage. Finally, your property could get damaged or fall victim to other unexpected issues and it would fall on you to pay for repairs, unless you have landlord insurance which will cover these costs.

If you are keen to expose yourself to the property market but find these risks off-putting, then one option you may decide to consider is investing in property funds. This means that your investment would be fairly hands-off, and wouldn’t require the same financial and time commitment to maintain. Property funds still come with risks however, so you must be comfortable with the fact you could get back less than you put in.

What are the legal and safety responsibilities of a landlord?

Landlords have certain legal duties and health and safety requirements that they have to carry out in order to protect their tenants.

Rent checks

It’s every landlord’s responsibility to make sure that potential tenants can legally rent in the UK, generally by requesting documentation such as passports. The government provides detailed guidance on how to do this on GOV.uk.

Energy Performance Certificates (EPCs)

Potential tenants should be able to view an Energy Performance Certificate (EPC) when finding out about the property, a form of certification that demonstrates how energy-efficient the property is. Your property must have at least an E rating in order for you to rent it, unless an exemption applies – for example, if the property being let is listed, it does not require an EPC.

Protect tenant deposits

Any deposits collected from tenants after an agreement has been signed must be deposited into a Tenancy Deposit Scheme (TDS) within 30 days of receiving it.

Repairs and Maintenance

As a landlord, you are responsible for maintaining and repairing the property’s:

  • Structure and exterior, including windows and roof
  • Gas installations
  • Plumbing, gutters, drainage and ventilation
  • Electricity installations and wiring
  • Garden paths, fences and gates
  • Major appliances that you provide
  • Common areas (kitchen, stairways, living room)
  • Bathroom appliances
  • Boiler

You are also responsible for dealing with any damp or mould that is not the tenant’s fault.

Health and Safety Duties

Gas equipment must be safely installed by a Gas Safe registered engineer, and you must provide potential tenants with a gas safety certificate. You must also arrange an annual safety check from a registered engineer.

You must have the electricity inspected, in order to ensure that the system – including sockets, light fittings, and any appliances that are plugged in – is safe. You must also provide evidence of this to potential tenants.

Additionally, to adhere to fire safety regulations, you must provide a smoke alarm on each storey and a carbon monoxide alarm in any room with a fuel burning appliance. There must be accessible fire exits at all times, and larger properties may require fire extinguishers or fire alarms.

You can find out about your obligations as a landlord in our guide What are my responsibilities as a landlord?

Is it worth investing in a buy to let property?

While investing in a buy to let property can be profitable if you’re lucky, you’ll need to weigh up all the pros and cons carefully first.

If you’re not sure whether your finances are in the right place to start thinking about investing in a buy to let property, consider speaking to a financial advisor. Read our guide on How to find the right financial advisor for you if you are unsure how to go about this.

If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.

The consultation is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

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