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- Buy-to-let is an investment strategy where individuals purchase properties to rent them out, aiming for rental income and potential property value appreciation.
- Investing in buy-to-lets is a straightforward strategy suitable for beginners due to its simplicity, but it’s more suited for long-term investments and not for those seeking short-term gains.
Buy-to-let investment involves purchasing a property specifically with the intention of renting it out to tenants, generating a regular stream of rental income. It’s a strategy that has proven to be fruitful for many investors, offering both financial stability and potential long-term growth.
In this comprehensive guide, we will delve into the fundamentals of buy-to-let investments, exploring what it entails, the key considerations to keep in mind, and how you can make the most of this investment strategy. Whether you’re a beginner investor or seeking to expand your property portfolio, this guide will provide you with valuable insights to navigate the world of buy-to-let investments successfully.
Property Investor vs Landlord
The terms “property investor” and “landlord” are often used interchangeably, but it’s essential to grasp the significant differences between them. Understanding these distinctions is crucial as they will shape various aspects of your property investment journey, including the strategies you choose to employ.
A property investor typically prefers a hands-off approach, seeking to outsource as much as possible, such as tenant sourcing and property management. Their primary focus is on the cash flow generated by the property and the potential for capital appreciation. This type of investor may reside hundreds of miles away from their buy-to-let property, relying on remote management.
On the other hand, a landlord tends to take a more hands-on role, often residing locally and personally managing their properties. They are the ones who visit their properties in person to address any issues and may collect rent directly from their tenants each month.
Now that we have clarified the distinctions between being a landlord and an investor, we can delve into the world of the buy-to-let strategy.
What Is Buy To Let?
Buy-to-let refers to the practice of purchasing a property specifically with the intention of renting it out to tenants. It is a popular investment strategy in which investors aim to generate rental income and potentially benefit from property value appreciation over time. With buy-to-let, individuals become landlords who receive regular rental payments from their tenants, allowing them to cover mortgage costs and potentially make a profit. It offers an opportunity to build a property portfolio and create a passive income stream through rental returns.
How Does Buy To Let Work?
Let’s break this one down into steps, starting from the purchase of the property. As our example, let’s look at the below property – a beautiful 3-bed terraced house in Liverpool, L9 9BN.
1) Because we’re smart property investors, we’ve researched this property using Lendlord’s free tools and we know that it’s worth around £110,000. See below for how we used the Property Value Estimator to arrive at that number (from my experience, the estimator is very accurate).
2) We offer the current owner £110,000 and we have our offer accepted.
3) Because we are purchasing this property with a buy-to-let interest-only mortgage, we need to put down a 25% deposit (which in this case would be £27,500) as well as some extra cash for stamp duty, legal costs and surveys. Your total purchase cost would be in the region of £35,000.
4) After a few months, we should have the keys in our hands if everything goes well (for an in-depth explanation of how the process of buying a house works, view our buying an investment property guide).
5) Now that we are the proud owner of this 3-bed terraced property, we need to find a tenant who wishes to call this home. If you wish to do it yourself, by all means, feel free to, but it’s much easier to have a letting agent do it. They also ensure that the tenant has been provided with all the legal documents so you don’t have to worry about that aspect of things. A letting agent’s fee is often a month of rent which may seem like a lot but it’s 100% worth it unless you wish to conduct all the viewings yourself and screen every single potential tenant yourself. This takes forever, trust me and get a lettings agent instead.
6) We now have a tenant in our property who’s making it their home. More research on Lendlord tells us that this exact property should rent out for around £750 so let’s charge the new tenants £750 a month.
7) From this point on, the tenant will pay us that £750 as monthly rent. If you’re using a management company, the rent will be paid to them and after they deduct their fees (good ones will charge 10% plus VAT), they will send you your profits.
8) But of course, this won’t all end up being profit because you have a mortgage to pay as well as landlord insurance and other costs if you choose the property investor route. Actual profit would look more like this:
| Self Managed | Managed | |
|---|---|---|
| Rent | 750 | 750 |
| Interest Only Payment @ 5% Rates | -344 | -344 |
| Insurance Costs | -25 | -25 |
| Management Fee | 0 | -96 |
| Monthly Profit | 381 | 285 |
| Annual Profit | 4572 | 3420 |
| Return On Capital Employed (ROCE) | 13.06% | 9.77% |
The calculation for ROCE is: Annual Profit / Money In The Deal (which in this case is £35,000).
As you can see, whichever route you take, managed or self-managed, you end up with a fantastic return on investment.
9) And that’s it, feel free to put your feet up and watch some telly whilst you watch the rent come in every month, or, make yourself a nice cup of tea and sit down to learn some more about property investment; I know which option I would choose 😉
10) Eventually, you will receive a call from the tenant or management company because something has gone wrong; whether that’s the boiler or the taps. Simply just book an emergency tradesperson to go over and fix the issue. After that’s done and dusted, you shouldn’t hear from them for a good few months.
The Key to Successful Investments
How Much Money Do You Need To Buy A Property To Rent Out?
It depends on where you want to buy a property and what kind of property it is. If you’re okay with purchasing a property in an up-and-coming area such as Bootle, Merseyside, you may be able to find a 2 or 3-bedroom terraced house for around £60,000. Your all-in purchase costs would come out to around £18,000 although you may have to throw in an extra few hundred pounds to spruce the place up a bit.
However, if you would like to purchase in a nicer area like the L9 property mentioned earlier in this article, you would need around £35,000 to cover all of these associated purchase costs.
Looking at the higher end of the property spectrum, purchasing a similar 2-bed property in Greater London would require a budget of around £125,000.
What Are The Advantages Of Buy-To-Let?
It’s simple and beginner-friendly
Investing in buy-to-lets is the simplest property investing strategy out there. There isn’t much room to go wrong and as long as the numbers work, you should be totally fine. All of this makes it the perfect property investing strategy for beginners.
It’s the least time-consuming
After the property is rented out, there really isn’t much for you to do. It’s almost guaranteed that something will need repairing at some point but it won’t happen too often so for the most part, there really won’t be too much for you to do, apart from maybe looking for your next buy-to-let investment.
The tenant turnover is low
Most often, single residency buy-to-lets are rented out by families and couples moving in together. This means that they are going to move into your property and make it their home, building their lives out around it – getting jobs that are nearby and sending their kids to local schools. As long as you treat them right, it’s very likely that they will remain in your property for years to come.
Buy-to-let property offers two types of returns
Rental return = The income you make from renting out your property. How much you can make depends on various factors including the area, the condition of the property and the price of the property.
Capital appreciation = You can also make a return on the appreciation of your asset as property prices rise. Using the L9 property as an example, according to Lendlord, its value rose by an average of 3.5% over the past 5 years. Because we are using mortgages to purchase our properties, assuming that you have a 25% deposit, the capital appreciation quadruples. So that 3.5% annual gain translates to a 14% increase in the value of your investment.
What Are The Disadvantages Of Buy-To-Let?
Other strategies can make you more money
Single residency buy-to-let properties are more suited for long-term investors who wish to keep their properties for decades if not lifetimes, they’re not made for investors who wish to make significant short-term gains. If you want increased cash flow or would prefer to make large lump sums of money, consider checking out our guides on buy refurbish refinance and property flipping.
It becomes a liability if it’s ever void
If the property were to ever become void (meaning there are no tenants), you would be responsible for paying the associated costs such as council tax, utility bills and so on. This could mean that you end up making a loss for a few weeks as you try to find a new tenant. It’s important to point out that if you pick an in-demand area, this really shouldn’t be an issue as the demand for houses to rent will be large.
How To Buy To Let?
To purchase a property to let, you must either use cash or a buy-to-let mortgage. Even if you have the cash available, it’s a far better option to use a mortgage because it increases your rental income and portfolio value – more exposure to the market means more opportunity to gain. As an example, let’s say you have £120,000 available – enough to purchase the 3-bed property in L9 9BN (remember, the property costs £110,000 but you also have to pay for stamp duty and legal costs). Let’s compare buying it in cash with using mortgages to buy three similar properties:
| Buy With Cash | Buy 3 With Mortgages | |
|---|---|---|
| Total Cash In Deal | £115,000 | £105,000 |
| Monthly Profit | £629 | £855 |
| Annual Profit | £7,548 | £10,260 |
| Portfolio Value | £110,000 | £330,000 |
| Gain If Property Values Rise By 3% | £3,300 | £9,900 |
As you can see, buying with a mortgage is a far better idea, even if you do have the money available to buy it with cash. This is because you can leverage that cash and instead purchase three properties instead of just one – this increases your rental income and triples the value of your portfolio. Now let’s explore what a buy-to-let mortgage is and how to get one.
What Is A Buy-To-Let Mortgage?
A buy-to-let mortgage is very simply a mortgage meant for properties which are going to be let out. The key differences to a residential mortgage are as follows:
- The minimum deposit for a BTL mortgage is 25%
- Typically, a BTL mortgage will be interest only – this maximises the cash flow of the property
- Eligibility for a BTL mortgage is less so about your wage (although it’s preferred that you make at least £25k and own a property of your own) and more so about rental coverage.
Rental coverage is very simply how many times your rent will cover your mortgage payments if the rate was increased. For example, if your rent is £750 and your mortgage payments are £344, this gives you a rental coverage of 218%. Brokers will require at least 125% while others will set the minimum at 150%.
How To Get a Buy-To-Let Mortgage
- You first need to find a mortgage lender whom you wish to apply for a mortgage in principle with. It’s recommended that you use a mortgage broker such as Lendlord to help you find the best rates on the market. The BTL mortgages on Lendlord offer some of the most competitive rates out there and they don’t charge you for the brokerage service either.
- In order to secure a BTL mortgage in principle, you need to meet the eligibility criteria. This differs for each lender but in general, they will want to see the following:
- You earn at least £25,000
- You own a property of your own
- You’ve never defaulted on a mortgage or had property seized
- The rental coverage for the sort of property you’re looking for is greater than 125%
How Do You Start Off Investing In Property?
It’s always recommended that you stay patient and continue learning before you start investing in property. However, if you feel that you’re bursting with knowledge and are ready to go, the first step would be to put together a strategy – one which outlines exactly what your goals are, what sort of property you are looking for, which property investing strategies you plan to use and how you will go about executing that plan.
A simple example would look like this:
Property Investing Strategy = Buy-to-let
Investor Type = Landlord (I wish to self-manage my properties)
Area Criteria:
- A population of more than 300k
- The population has increased by 5% in the last 5 years
- Plans for local developments
- The properties in this area have grown by at least 2% on average in the past 10 years
- It has great transport links – both into the city centre and to major cities in the UK
Property Criteria:
- The property value is between 70k and 100k
- Rental income results in a ROCE of at least 7%
- It’s a turnkey property – this means that it’s ready to rent out, no refurbishment is necessary
- Cash flow continues to be positive at interest rates of 7%
Once you have your strategy put together, you can begin to start looking for properties that fit the bill. Rightmove is a good place to start along the following:
- Gumtree
- Zoopla
- Lendlord
- Facebook marketplace
- Contacting sellers directly
- Newspaper adverts
- Local letting agents
How To Buy One Rental Property Per Year?
Buying one rental property per year and using any income from your properties to buy even more is a great way to build a sizeable property portfolio. We’ve broken down how this would look in our what is an investment property and how does it work guide.
Assuming that you buy one rental property per year worth £115,000, in 5 years, you would have 5 rentals worth over half a million pounds making you an annual profit of £9,600. In 10 years, you would have 16 rental properties worth just over 2 million pounds producing an annual profit of £30,720. And in 20 years, you would have 63 rental properties worth almost 9 million pounds and making you an annual profit of £120,960. This doesn’t even take into account that rental rates rise by around 3-7% each year so, in reality, you would make a whole lot more.
If you’re amazed by how much those numbers jump, welcome to compound interest. As Einstein once said, “Compound Interest is the eighth wonder of this world.”
So how do you go about buying one rental property per year?
You obviously need to save enough money every year to purchase that single property. If you’re trying to buy properties on the cheaper side of things (those that cost around £60,000), you would need to save £18,000 each year. Whereas, if you wanted to buy ones that cost £110,000, you would need to save £35,000.
That equates to £1,500 – £2,916 per month.
Can you live off buy to let?
Achieving financial independence through buy-to-let properties is a feasible goal that many property investors aspire to. Let’s say that you want to sustain a lifestyle equivalent to the national average wage of £38,000 (approximately £30,000 post-tax). The amount of rental properties required will of course depend on how much rental income they bring in. If we use the above property as an example (it generates £300 in monthly profit), you would require 9 such properties. However, if you were to buy in areas that demand higher rents or if the mortgage rates were to drop significantly, you may only require 4 or 5 buy-to-lets.
Can you get rich from buy to let?
While buy-to-let property investment may not make you rich overnight, it has the potential to gradually accumulate wealth over time. For instance, if you were to invest in a single buy-to-let property valued at approximately £110,000 per year and reinvest all the profits into acquiring additional properties, after 20 years, you could have a portfolio of 63 properties valued at £8,600,000.
This sizable portfolio would generate an annual profit of £120,000, and it’s important to note that these calculations do not even account for potential annual rental increases, which could further enhance your returns. The power of compounding and long-term property appreciation can significantly contribute to building substantial wealth through buy-to-let investments.
Final Thoughts
Buy-to-let is a fantastic property investment strategy, it’s simple yet so powerful and manages to wipe the floor with other investment assets such as the FTSE 100 which only returns around 6% a year on average. We hope that this buy-to-let guide has given you a better idea of what this strategy is, how it works and how you can begin to utilise it. Be sure to check out the other buy-to-let guides on Amateur Landlord to supercharge your knowledge. I’ve also included some commonly asked questions below and linked all the resources mentioned throughout this guide.
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Victor Sterling
Hi, my name’s Victor - I’ve been investing in property for three years now, with my preferred strategies being buy-to-let, BRR and house flips. My goal with Amateur Landlord is simple - to provide beginners with easy-to-follow resources that simply weren’t around when I started, and to offer these for free and without ads.