Since the introduction of buy-to-let mortgages in the 1990s, thousands of people have purchased residential properties to rent out.
Some have gone on to acquire multiple units and become professional landlords. Others have found themselves becoming “accidental landlords”—such as when a temporary work relocation requires the family home to be rented out for a period, or when an inheritance results in a property being held as an investment.
Although returns have declined for many buy-to-let landlords in recent years, this guide aims to help potential landlords understand why it can still be a worthwhile option.
1. Buying an Investment Property—Not the Same as Buying a Home
The criteria for buying a property to let are significantly different from those for purchasing a home to live in. For instance, as a long-term owner-occupier, you might have very personal tastes in bold decorations or prioritize a property with a large garden.
However, many tenants prefer a home with neutral decor and a small, low-maintenance garden. Investment in rental property should be driven by practical, unemotional business decisions rather than personal preferences.
2. Where to Buy Property—Finding the Best Locations
If you are considering buying an investment property, focus on areas popular with tenants. Consult local letting agents to identify in-demand neighborhoods and understand the reasons behind their popularity.
Tenants are often drawn to areas with ample employment opportunities or excellent transportation links to nearby towns and cities.
University students represent a steady tenant base, and the right type of accommodation near their campus tends to rent well. Students often share properties, and these “houses in multiple occupation” (HMOs) are sometimes subject to specific legal requirements, including licensing, registration, and inspections by the local authority.
Check with your local council before proceeding. Also, stay informed about local developments, such as major company relocations or the opening of a highway or rail link, which could increase demand for rental properties in the area.
3. Choosing the Right Property to Meet Demand
Speak with local letting agents about the types of properties most in demand. These could be family homes, apartments, or student accommodations.
If there’s a shortage of a specific type of property in the area, consider purchasing one to fill that gap—it should rent out quickly.
Occasionally, properties are sold with tenants already in place, which can be a significant advantage. Also, watch for new housing developments in the area. These could create a surplus of rental properties, potentially reducing demand and rents.
As with buying a home, aim to purchase the best property you can afford in a location with strong demand and future growth potential.
4. Rental Yields—Calculating Your Return
First, consider the 3% stamp duty surcharge for second properties. Use the government’s stamp duty calculator to estimate the costs.
You are buying a property to generate income from rent. The rate of return is called the “yield” and is calculated by dividing the annual rent by the purchase price of the property. Yield is a crucial measure of the success of your investment.
However, you will have ongoing expenses, such as property repairs, which will reduce the rental income and result in a “net yield.”
5. Property Values—Factor in Market Changes
In addition to rental income, consider potential changes in the property’s value over time. Check recent sale prices in the area as part of your research.
If you purchase a property, rent it out for a period, and then sell it, its value is likely to have changed. This difference will either add to or subtract from the overall yield on your investment.
6. Be Cautious—Plan for Vacancies
Most rental investments are successful, but it is essential to err on the side of caution when estimating yields and deciding how much you can afford to spend.
It may take longer than expected to find a tenant, the rental income might be lower than anticipated, or there may be “void” periods between tenancies. These factors can reduce your return on investment and strain your cash flow.
7. Legal Compliance—Follow the Rules
When renting out a property, you must provide the tenant with a copy of the Energy Performance Certificate (EPC). You will also need a gas safety certificate and, for HMOs, an electrical safety certificate.
Fixed electrical installations in HMOs must be inspected every five years by a qualified electrician. Any furniture provided must comply with fire safety regulations.
While it is not a legal requirement, installing smoke and carbon monoxide detectors is strongly recommended.
8. Choosing the Right Letting Agent
The relationship between a landlord and a letting agent is different from that between a home seller and an estate agent. The former is often a long-term partnership, so choose wisely.
A professional letting agent can be an invaluable resource, especially for new landlords. They handle everything from finding tenants, checking references, and creating inventories to managing deposits, maintaining compliance with legal requirements, and addressing maintenance issues.
9. Service Levels—Determine Your Needs
Letting agents typically offer three levels of service:
- Tenant-Find Only: The landlord manages the day-to-day letting.
- Tenant-Find + Rent Collection: The agent finds the tenant and collects rent, but all other responsibilities lie with the landlord.
- Full Management: The agent handles all aspects of the letting, from start to finish, only involving the landlord for major decisions.
If you are inexperienced or prefer to avoid the hassle of managing a property, a full management service is recommended.
10. The Assured Shorthold Tenancy (AST)—Get It Right
The AST is the most common type of tenancy agreement for residential properties. It outlines the responsibilities of both landlord and tenant, the rent amount, and the tenancy duration.
There are strict legal requirements governing ASTs. A professional letting agent will ensure the tenancy agreement complies with the law, particularly when the tenancy ends, and possession of the property needs to revert to the landlord.
11. Tenant Deposits—Register Them
The tenant’s deposit must be registered with a government-approved Tenancy Deposit Scheme (TDS). At the end of the tenancy, the deposit is used to cover any damages beyond “fair wear and tear.”
The TDS has a Code of Recommended Practice outlining the requirements that letting agents and landlords must meet.
12. Inventory Management—Prevent Disputes
A detailed inventory should be prepared before the tenancy begins. It provides a record of the property’s condition and contents and can help resolve disputes about damages at the end of the tenancy. Ensure the tenant agrees to and signs the inventory.
13. Insurance—Check Your Coverage
Standard home insurance policies typically do not cover rental properties. Check whether you need specialized landlord insurance.
14. Buy-to-Let Mortgages—Seek Professional Advice
Buy-to-let mortgages are available, with lenders considering potential rental income when determining how much to lend.
Consult a financial advisor to find the best mortgage for your circumstances. If you already own the property under a residential mortgage, inform your lender if you plan to let it out, as this may affect your payments.
15. Tax—Declare Your Income
You must inform HMRC when you start letting out a property and report rental income on your self-assessment tax return. Some expenses, such as mortgage interest and letting agent fees, can be deducted from your taxable rental income.