Buy-to-Let Property Tutorial

Buy-to-let gives investors both income and capital gains while probably being the least hassle, most passive strategy.

I firmly believe that property investing is the best asset class, and buy-to-let is still the gold standard strategy for investors, being the easiest way to invest in residential property. If you want to keep things simple and straightforward, then it is ideal.

So why bother with any other strategy? The fact is that it is harder now to build a portfolio given higher prices, changes to mortgage parameters and bigger deposits and stamp duty sums required.

Nevertheless, UK property is a great investment that has historically doubled in value every 7 - 12 years. While not expected to grow at quite the same rate, is still set to continue growing over the long term.

Let’s look at an example of what could be achieved in just five years, based on reasonably average figures if property prices rise by 5% per year:

Property purchase price = £250,000

Value after 1 year£262,500 (£250,000 + 5%)
Value after 2 years£275,625 (£262,500 + 5%)
Value after 3 years£289,406 (£275,625 + 5%)
Value after 4 years£303,876 (£289,406 + 5%)
Value after 5 years£319,070 (£303,876 + 5%)

Total increase in value = £69,000
Less stamp duty of £10,000 (assumes 3% stamp duty surcharge, in addition to the normal 1% payable at purchase) [1]
And solicitors costs at purchase circa £1,500
Net gain after five years = £57,500

That’s £11,500 per year of capital gains from just one property held for five years.

[1] See the stamp duty calculator at www.gov.uk

Now let’s look at potential rental income:

Rent = £1,200 per month
Annual rent = £14,400 per year
Ongoing costs at 25% per year = £3,600 [2]
Net rental income after costs = £10,800

[2] Typical landlord’s maintenance and management costs

The gross yield on the rent is determined by (rent × 12) ÷ purchase price × 100: (£1,200 × 12) ÷ £250,000 × 100 = 5.76%

This average property, with a purchase price of £250,00 and rental yield of 5.76% after just five years of growth at 5% per annum, can deliver a NET capital gain of £57,500 together with NET rental income along the way at 5.76% yield of £10,800 per year giving a total of £54,000. So altogether, total NET gains of over £100,000 in five years, or £111,500 to be exact.

So, how many of these do you want?

There are so many things to be considered when buying a property to let, it can be helpful to break it down in terms of the lifecycle of buy-to-let:

The Leverage of Buy‑to‑Let Mortgages

The use of borrowed money by means of a buy-to-let mortgage, enables you to buy more property. This is leverage and the great thing about it is that it increases the return on investment (ROI) from the money you put in. It also magnifies your capital gains.

Assuming you have £250,000 to invest, you could use that money to buy one property with cash, or for 25% deposits and get 75% buy-to-let mortgages to buy four properties (not including expenses, for the sake of simplicity).

You now own not £250,000 but £1,000,000 worth of property.

And that £1M of property is all the more to compound in value over time. That’s the power of leverage.

Choosing Property for Buy‑to‑Let

There are many factors to consider, such as location, type, whether you intend to self-manage, the yield, tenant demand, and so on. This is discussed in more detail in my first book The Complete Guide to Property Investing Success.

Deciding Where to Buy‑to‑Let

One of the biggest decisions to be made is whether to buy-to-let locally or not. Some investors choose to buy in non-local areas where the gross yield is higher; others choose to buy where capital growth prospects are better. After having built a successful portfolio locally, I started buying non-locally with varied outcomes. While some have performed well, others have caused headaches mainly due to the maintenance costing a lot more than I could have sorted locally.

Preparing Your Property to Let

Before you rent out property, there are a number of regulations you need to adhere to. It is important to ensure that you are aware of these regulations as they are prone to frequent updates. If you are in any doubt, seek advice from a letting agent or other professional body such as your landlords association. The things you need to have include:

  • An EPC certificate
  • A landlords’ gas safety certificate
  • There must be no shortcomings in terms of health & safety standards and general standards of decent homes
  • It also pays to prepare a good inventory of the property condition at the start of the tenancy

Finding the Best Tenants for Your Property

Think about the type of tenants you want to target, for example students, families or professionals, then focus your marketing on them. Think about what type of tenants your property would suit; this will be affected by the location and property type. Students normally want to be as close to their university campus as possible. Families generally value good local schools and quieter locations further from town centres. Professionals may prefer to be where the action is, close to the city centre, transport and other amenities.

Deciding Whether to Self-Manage Your Properties

The decision to self-manage could affect where you buy. It will also depend on your skills and other commitments, including how many properties you have or intend to buy. If you are willing and able to do your own maintenance, then the practicalities of buying locally will be more relevant than if you intend to outsource the management. Whether you intend to self-manage or not, you can learn more about property management under the estate and letting agents tutorial.

Property Maintenance

Maintenance issues will arise at properties from time to time and if you grow a sizeable portfolio, this work can become quite significant. The types of problems that typically arise include:

  • Plumbing issues
  • Boiler breakdowns (you will require a Gas Safe engineer)
  • Breakages and mishaps
  • “Fair wear and tear”
  • Redecoration (normally between tenancies)

Ending the Tenancy and Eviction

Whilst tenancies often end naturally and amicably due to tenants moving out, they can end in tears, mainly due to non-payment of rent. Proper procedures must be followed to bring about an eviction if necessary. As a landlord you can do-it-yourself, but if you’re not confident, your letting agent should help if you have one. Otherwise use a specialist eviction support company.

Refurbishing Your Properties

All properties will need refurbishment from time to time, often between tenancies and particularly when getting ready to sell. This often entails repainting, new carpets or flooring, and maybe a kitchen or bathroom update after several years. As a landlord, it is always wise to keep sufficient cash aside for such expenses.

Selling Property

While you may start out with the intention to never sell your buy-to-let properties, there might come a time when you decide to sell and hopefully cash-in on your capital gains. Remember to factor into your cashflow that the property may benefit from refurbishment to look its best for sale, and there could be a few months when you still have a mortgage as well as council tax to pay before the sale completes.

Whatever strategy you choose, buy-to-let forms the foundation of all types of lets and is vital to understand. To find out more, read The Complete Guide to Property Strategies.