Buy-to-let property investments

Buy-to-let is pretty much what it sounds like – you buy a property in order to rent it out to tenants. You should consider the property a medium to long-term investment.

A buy-to-let property investment may be right for you if you:

  • Prefer investments that feel more tangible than stocks and shares
  • Are willing to tie up your money for a long period of time
  • Understand property prices can go down as well as up
  • Are willing to take the risk that you might not earn a profit on your investment
  • Understand and accept the additional risks that go along with borrowing money to buy a property
  • Understand and accept the costs and time involved in owning and running a property and the impact that this will have on your potential return.

What is a buy-to-let property investment?

Buy-to-let investment is very different from owning your own home.

When you become a landlord, you’re effectively running a small business – one with important legal responsibilities.

How does buy-to-let property investment work?

To buy a residential property, you can use your own cash or take out a buy-to-let mortgage with a cash deposit.

Keep in mind that a mortgage comes with risks – if you need to sell the property for a loss, the sale price might not cover all that you owe on the mortgage.

You would need to make up the difference.

Also remember, that if your tenants leave and there is no rent coming in, you still need to make your mortgage repayments.

Once you buy a property, you can potentially earn a profit in two ways:

  • Rental yield – what your tenant(s) pay in rent, minus any maintenance and running costs, like repairs and agent fees.
  • Capital growth – the profit you earn if you sell your property for more than you paid for it.

Buying to let is a big commitment:

Risk and return

  • The amount of rent you can charge varies according to a number of factors, including wider market trends outside your control. Rents are not guaranteed.
  • If you can’t find tenants – or if you can’t charge the rent you expected – you might not be able to cover your mortgage repayments.
  • If house prices fall, the value of your property is likely to fall as well. You might not be able to sell it for as much as you hoped.
  • If you have to sell and the sale price doesn’t cover the whole mortgage, you’ll have to make up the difference.
  • Major repairs or difficult tenants might increase your costs – and trouble – unexpectedly.
  • If the housing market does well, you might be able to sell your property for a profit.

Access to your money

To access your money, you’ll need to sell the property or take out another mortgage.

Both take time. A new mortgage would need to be approved by the bank.

Charges

You’ll need to cover the costs of buying, which can include:

  • survey fees
  • solicitor’s fees
  • Stamp Duty Land Tax.

There are also running and maintenance costs associated with any kind of rental home.

A sales or letting agent will also charge a fee. If you want to use an agent, compare costs to make sure you get the best deal.

When you sell the property you might have legal and marketing fees to pay.

Are buy-to-let property investments safe and secure?

  • Landlord insurance – isn’t legally required, but taking out a policy can help protect you and your investment.
  • Buildings insurance – which you’ll need if you have a buy-to-let mortgage – can also help protect your investment

Because buildings and land are valuable, you might find yourself targeted by fraudsters.

Tax and buy-to-let properties

Stamp Duty Land Tax, Land and Buildings Transaction Tax and Land Transaction Tax

You’ll have to pay an extra 3% on top of each Stamp Duty band when you buy an additional home or a residential buy-to-let property. While Stamp Duty doesn’t apply in Scotland and Wales, there are other charges that will affect you

In Scotland, you’ll pay Land and Buildings Transaction Tax (LBTT) when you buy a property. For additional properties you’ll pay an extra 4% in LBTT on top of current rates for each band on properties costing more than £40,000. LBTT is collected by Revenue Scotland.

In Wales, Land transaction tax (LTT) replaced stamp duty land tax from April 2018 and is collected by the Welsh Revenue Authority. If you buy an additional residential property, such as second homes and buy-to-let properties, you’ll have to pay an extra 3% in Land Transaction Tax (LTT) on top of current rates for each band on properties costing more than £40,000.

This tax applies to both freehold and leasehold properties – whether you’re buying outright or with a mortgage.

Tax relief

You’ll likely need to pay income tax on rental income as well.

Up until the 2016/17 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.

The changes started to be phased in from April 2017.

These changes mean your taxable income will rise, affecting your tax bill, especially if you’re a higher or additional rate tax payer.

For the tax year 2018-2019, buy to let landlords can offset 50% of their mortgage interest payments against their rental income. 50% of the mortgage interest payment qualifies for a 20% tax credit.

From April 2019 this will change again, with 25% of mortgage interest payments qualifying for offsetting against rental income, and 75% qualifying for a 20% tax credit.

Capital Gains Tax

If you make a profit when you sell your buy-to-let property, you’ll be liable to pay Capital Gains Tax.

If things go wrong

The kinds of consumer protection that cover most investments don’t apply to buy-to-let properties.

So it’s all the more important to find out everything you can before you commit to a property and a mortgage.

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