Thinking of buying rental property as an investment? Whether you want to know about buy-to-let mortgages, property taxes, or landlord responsibilities, our simple guide has all the info you need to get started.

Let’s dive in.

Why buy rental property?

Buy-to-let is where you buy a property that you’re planning to rent out to other people to live in, rather than living in it yourself.

There are two ways that buy-to-let can work for you as an investment:

  • Short term: You can earn income through rent payments.
  • Long term: When you come to sell up, you can make a profit on the sale if the property value has increased over time.

Before deciding to buy to let, it’s a good idea to talk to an independent financial adviser, who can help you work out if this is the right type of investment for you.

What if I want to buy the property I’m renting?

Of course, that’s another reason for buying a rental property – if you love the house or flat you’re renting and want to make it your own. Buying the property you’re renting is absolutely possible, if your landlord is willing to sell.

You might want to start with an informal enquiry to your landlord about whether they’ve considered selling. Then, we’d recommend getting a valuation for the property and a mortgage in principle (MIP) to show how much you can afford to borrow.

Armed with this info, you can write to your landlord and make a formal offer to buy the property. And hope they say yes!

How do you choose the right buy-to-let property?

If you’re going to make a success of buy-to-let, the first thing to do is to find a property that people will want to live in. 

But that’s not as simple as buying the nicest-looking house or apartment within your budget. Here are our top tips for choosing the right buy-to-let investment property:

  • Do your research. Look into property prices and rents in the area you’re considering buying a property. Ideally, you want somewhere where property prices are going up (for your long term investment), and rents and rental demand are high (for your short term income).
  • Consider an up-and-coming location. The best town or city to invest in might not be “perfect” right now. Instead, look for places with regeneration projects in the pipeline. Property prices are likely to be lower, and there’s potential for them to rise once the town becomes a more desirable location.
  • Think about the life stage of the tenants you want to attract. For example, if you’re aiming for a property that a young family will want to live in, you’re probably looking for a house with a garden near good schools. If you have students in mind, a property near the campus and nightlife spots would fit the bill.
  • Ask yourself: Would I want to live there? Bearing in mind things like crime rates, health care, transport links, job opportunities, and local amenities, would you want to live in this area? If you wouldn’t, tenants are just as unlikely to want to live there either.
  • Consider who’s going to manage the property. Planning to be a hands-on landlord? A property close to your home might be more convenient. But if you’re going to leave everything to a letting agent, a property further afield would be less of a problem.
  • Think about whether you want to go for an HMO property. An HMO (house in multiple occupation) property is one that’s rented out by three or more individuals who aren’t in the same family (often students or young professionals), and who share bathroom or kitchen facilities. It can bring in higher rental income, but you’ve got a few extra responsibilities as a landlord, including getting an HMO licence.

It’s also a good idea to get a home survey carried out on the property before you commit to it (in other words, before you exchange contracts for the sale). A survey can help uncover any significant problems with the fabric or structure of the building that could be expensive to fix.

Buy-to-let mortgages: How do they work?

If you’ve got a tidy pile of cash put away – enough to buy a property outright – you can skip this section. Otherwise, once you’ve found a property and had an offer on it accepted, you’ll need to apply for a buy-to-let mortgage.

How is a buy-to-let mortgage different from a residential mortgage? Here’s what you need to know:

  • Interest-only. Most buy-to-let mortgages are interest-only – that is, you only pay off the interest on your mortgage loan each month. Then, at the end of the mortgage term, you pay off the loan itself. Most landlords do this by selling the property, and the hope is that the value will have increased, so you make a profit.
  • Bigger deposit. Because lenders see buy-to-let mortgages as higher risk, you’ll need to provide a bigger deposit than you would for a residential mortgage. The minimum is usually 20% of the property’s value, but it can be up to 40%.
  • Lenders consider rental income. The amount you can borrow for a buy-to-let mortgage is mainly based on how much rental income the lender expects you to get from the property. They’ll want monthly rental payments to cover at least 125–145% of your monthly mortgage repayments (this is also called the “interest cover ratio”). That provides a bit of wriggle room if a tenant fails to pay one month or the property stands empty for a while.

Try using Habito’s handy buy-to-let mortgage calculator to give you an estimate of how much you could borrow.

You can compare buy-to-let mortgage deals online or use a mortgage broker (like Habito) to help you find the best deal.

Along with applying for your mortgage, you’ll need to:

  • Hire a conveyancer or conveyancing solicitor to take care of the legal side of the property sale.
  • Pay for buildings insurance (you can’t get a mortgage without it) to cover you if the property is damaged or destroyed.

With mortgage fees, solicitor’s fees, and insurance, the costs of buying a buy-to-let property can stack up. It’s important to factor this into your calculations, as it impacts any potential profit from the investment. You can find out more about the costs of buy-to-let here.

What taxes do you have to pay on a buy-to-let property?

Here are the three main types of tax that apply to buy-to-let properties:

  • Stamp Duty Land Tax. You may need to pay more stamp duty when you buy additional properties (a second home or a buy-to-let property). Find out more about stamp duty rates across the UK in this stamp duty guide.
  • Income tax. Any rental income you earn from the property will be taxed according to the tax band you’re in (and remember that it could push you into a higher tax band). But, you can claim tax relief on 20% of the mortgage interest you pay. Plus, you can subtract certain buy-to-let costs from your tax bill, including letting agent fees, buildings insurance, and essential maintenance on the property.
  • Capital Gains Tax (CGT). When you come to sell the property, you have to pay Capital Gains Tax on any profit that you make.

How do you find tenants?

Once you’ve got the keys to your buy-to-let property, you’ll want to give it a little TLC before any prospective tenants look around. Repair any broken fixtures, give the walls a fresh lick of paint, and make sure everything is clean and tidy. Then it’s time to find tenants.

Here are your options:

  • Get a letting agent on the case. Letting agents charge a one-time fixed fee (usually one month’s rent) to find tenants for your property and set up the tenancy. This includes booking viewings, checking the tenants’ references, and drawing up an inventory (that’s a list of the property’s contents and the condition they’re in). A letting agent can also advise you on the right level of rent to charge.
  • Find tenants yourself. You can advertise the property on an online listing site and then conduct viewings yourself. This is the cheaper option, but remember that you’ll have to handle all the work involved in setting up the tenancy yourself. 

What are your responsibilities as a landlord?

Being a landlord is a big responsibility. Here are the boxes you’ll need to tick before your new tenants move in:

  • Draw up a tenancy contract. This protects your tenants and gives them the legal right to live in the property during the time covered by the agreement. An assured shorthold tenancy (AST) is the most common type of contract. It should include info about the rent, length of tenancy, notice period for eviction, and deposit protection scheme.
  • Organise a deposit protection scheme. After you get your tenants’ deposit on the property, you have to place it in a government-backed deposit protection scheme within 30 days. This will ensure that your tenants get their deposit back if they meet the terms of your tenancy agreement, don’t damage the property, and pay their rent and bills on time and in full.
  • Check your tenants have the right to rent in the UK. You can find government guidance on how to check your tenants can rent in the UK here.
  • Provide essential information for your tenants. You’ll need to give your tenants: a copy of the How to rent guide, a gas safety certificate (if relevant), and an energy performance certificate for the building.

And during the tenancy, you’ll need to make sure the property stays safe and well-maintained, including arranging a yearly gas safety check if there are gas appliances.

If that all sounds a bit overwhelming, don’t worry. The good news is that you have the option of hiring a letting agent to take care of everything for you – from sorting out all the initial tenancy admin to essential maintenance during the tenancy. Fees start at around 12% of your monthly rental income.

You might also want to consider taking out insurance to protect yourself, your property, and your rental income. Types of insurance aimed at landlords include:

  • Loss of rent cover. This protects you and your income if your tenants have to move out after an insurable event, such as a flood or fire. It can also cover the cost of rehousing your tenants while the property is prepared (if that’s something the tenancy contract obliges you to do).
  • Contents insurance to protect any furniture, fixtures, carpets, curtains, or white goods in the property. (It’s up to your tenants to insure their own belongings.)
  • Landlord liability. This covers you if someone is injured or killed in your property. In some cases, you may be legally required to get this type of insurance – for example, if you’re letting out an HMO property.

Buying rental property: pros and cons

Let’s finish with a quick summary of the potential pros and cons of investing in a buy-to-let property.

The pros

  • The money you get from rent payments could be a good supplement to your income in the short to medium term. Rental yield (rental income as a percentage of the property’s value) of about 5% per year is considered healthy, but it could be more.
  • In the long term, you could make a profit when you eventually sell the property.
  • Buy-to-let is considered safer than investing in the stock market.
  • You can take out insurance to cover you if there are any problems with the property.

The cons

  • Various taxes will eat into any profit you make from rental income or the sale of the property.
  • Property prices could fall, and you might have to sell the property for less than you bought it for (and you’ll still have to pay off the whole mortgage loan if you have an interest-only mortgage).
  • Buy-to-let comes with lots of costs, from letting agent fees to routine maintenance.
  • The responsibility of being a landlord can be stressful.

We hope you found this guide a helpful starting point, and we wish you luck on your buy-to-let journey!

Ready to buy a rental property? Get started with your buy-to-let mortgage application.