1 Understand what investing in a buy to let property involves
You’re investing both time and money into a buy to let property so make sure that you don't go in thinking that there are no potential pitfalls, so you are properly prepared. Do also take into account that being a landlord means you have certain legal obligations (such as annual gas safety checks) because failing to comply could mean you commit a criminal offence.
Research what buying a buy to let property really involves and prepare to comply with your obligations as a landlord.
2 Can you afford it?
Do your homework before you start looking for a property so that you are clear what you can afford. It’s also a good idea to consider taking some financial advice to ensure that you understand and use any available tax/savings advantages.
Remember that you’ll also be responsible for maintaining your property and making sure it is safe for a tenant to live in. For example, if the sink needs replacing, that’s probably at your expense and not your tenant’s.
You also need to consider that you may not always receive regular rental income. For example, your tenant might not pay on time meaning you must follow a procedure and incur expense to recover what’s due (it’s against the law to pester /harass a tenant) or there may be a period of time when the property is empty (between tenants).
If you have a mortgage, take into account that general changes in interest rates and/or the end of any fixed term deal could mean an increase in what you have to pay.
Do your calculations carefully – this is not a time for guesswork. Ideally, have a “slush fund” (equivalent to at least 6 months rental income) available for unforeseen repairs and lack of rental income.
3 Investment “yield”
Buy to let property is generally a longer term investment but any investment should “yield” a profit. For example, if you buy a property for £150,000 and your annual rental income is £7,500; your yield is 5%.
Like any investment, property prices and rental incomes can go up and down.
4 Do you have time?
You will need to factor in some time to deal with your property. Aside from the initial purchase and finding tenants, how will you cope when your tenant calls at 10pm on a Saturday to report a flooded toilet?
You may want to consider enlisting support from a property management business but make sure that you
Providing tenants with a good “service” will mean that they want to stay put which, in turn, means a more regular rental income because you don’t have to keep finding new tenants.
Use our moving cost calculator to work out how much it will cost for you to move house
5 Where to buy
Part of your research must include looking for the best areas to rent out properties which might not be in the area where you currently live. Instead, buy in an area which is attractive to tenants and where there are sufficient people who will want to rent.
Remember that this is not somewhere you are planning to live! It’s not about what you’d like but what your prospective tenants will want.
6 Know your tenant
Just as a business must know their target market (who they’ll sell to), you must identify your own prospective tenants so that you can ensure that your property is attractive to them, which in turn will make prospective tenants want to rent from you. For example, the needs of a professional couple will be different to those of 5 university students in everything from how much rent they will pay to what fixtures they will expect you to provide.
Identify your “target” tenant and cater for them.
7 The right price
Once you’ve found the property you’re looking for, don’t be afraid to haggle over the price. Markets fluctuate and you may not know the personal circumstances of the sellers so this is not a time to be coy about asking for a price reduction.
Be confident and professional when haggling but there is no need to be arrogant or rude.
8 Get the right mortgage
A mortgage for a buy to let property is different from one you would be granted when buying a property you are going to live in (a residential mortgage). Although mortgage rates on buy to let properties can sometimes be higher than residential mortgages, don’t be tempted to mislead or deceive the mortgage company about how you’re using the property because that would constitute fraud.
Shop around to make sure you get the best mortgage deal.
9 Research Insurances
You will need to have specialist building and probably contents (depending on what’s in your property) insurance for a buy to let property. However, don’t be tempted to buy an often cheaper insurance for a residential property because if something happens (such as the tenant causes a fire) your insurance company will not cover your losses. Instead you will need specialist cover designed particularly for buy to let properties – often referred to as “Landlord insurance”.
You may also be able to purchase an insurance policy which covers your rental income if your tenant doesn’t pay – something to consider if you will be left paying a mortgage on the property.
Make sure that you not only get the right insurance cover that protects your investment but that you shop around for the best quote, comparing like with like.
10 Make it legal
Last, but by no means least, never try to cut corners by not using a valid written tenancy agreement. Particularly in England and Wales, if you don’t provide your tenant with certain notices and obtain a signed tenancy agreement before they move into the property, they may acquire rights that neither of you intended. For example, you may find that it is virtually impossible to ensure your tenant vacates the property, even if they are not paying you the rent due.
Seek professional help with your tenancy agreement and accompanying paperwork.
11 Stamp Duty
In April 2016 the law changed regarding Stamp Duty on second homes. On a first home, you pay Stamp Duty on properties over £125,000. On your second home, even if you are buying to let, you will pay on anything over £40,000. So a second home purchased for £125,000 would cost you 3% in Stamp Duty.
When looking at a property, work out the Stamp Duty and automatically add it to the cost of the property. If you are aiming to make money from the rental of the buy to let property, you need to know the full cost before you commit.
Updated September 2017.