BUY TO LET
Property investment has proved attractive to many people over a sustained period. The theory is simple:
buy a property, rent it out and you benefit both from rental income that will go up over time and capital
values that should rise as well. But buy to let is not a guaranteed way to make money, and you could
even lose money.
Before considering buy to let, it is a good idea to note what could go wrong. The ways that this could
happen are:
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Paying too much for a property initially.
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Having to spend too much money on repairs and improvements.
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Having too many void periods (when the property is not let).
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Tenants not paying rent on time or at all.
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Rental income not covering the cost of any borrowing.
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Uninsured losses and damage to the property.
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Selling at a loss or not being able to sell.
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Unexpected tax changes (of which there were four announced in the second half of 2015).
With modest luck and good planning, though, buy to let can be a great investment, especially if you take
a long-term view and buy and sell at the right time. If you do, it can be possible to:
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Buy a property at less than its ultimate value.
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Make changes that add more value than they cost.
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Secure regular rental income that rises over time.
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Enjoy capital growth that can be realised by eventually selling or by borrowing more, perhaps to
buy more properties.
In many property markets – and the UK is no exception – many people choose to (or have to) rent. This
can include:
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People saving to buy their own home.
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People who plan to stay in a property for months rather than years.
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Students.
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People whose jobs mean they move around frequently.
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People who do not want the added responsibility and potential costs involved in ownership.
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People who cannot afford to buy. This can include people who want to live in a better property
than they could afford to buy.
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People who believe that property prices will fall.
Buying the right property
The ideal buy to let property is not the same as the ideal property to buy as your personal home. Instead,
the property should appeal to your potential tenant(s). For example, a student let will have many
bedrooms – and ideally bathrooms, too – and will be situated close to a university or college. A high rent
flat for young professionals must be decorated to appeal to their tastes (which may not be the same as
yours).
In some cases, it can pay to buy a property that has been converted to a buy to let property; in other
cases, you may plan to carry out work yourself or employ builders, architects and project managers to do
that.
Raising finance
If you have sufficient equity in your home (equity is the difference between what the property is worth
now – regardless of what you paid for it – and how big any mortgage on it is), you may be able to borrow
against the value of that equity, either by increasing your current mortgage or by remortgaging.
Two other ways to raise finance are:
Borrowing on the security of the buy to let property This is suitable where you have sufficient capital to
pay towards the purchase. Lenders will not lend as much as on your home, and will want to see rental
income of at least 125% of the monthly mortgage payment.
Second mortgages and other borrowing These may be more expensive, but may be invaluable if you are
unable to raise capital in other ways.
At present interest on such borrowing made by individuals to purchase buy to let properties can be fully
offset against rental income. However, this will gradually change from April 2017. By 2020/21, relief will
be limited to basic rate only and given as a tax credit, not a deduction against rent.
Using an agent
You can find tenants yourself or employ an agent to do so on your behalf. Agents may also manage the
property for you – this is invaluable if you do not live close to the buy to let property.
Specialist agents should understand the market locally, and be able to advise you and help you to avoid
making wrong decisions through lack of experience.
It is also important to have the right form of tenancy agreement to ensure that both you and your
tenants have sufficient legal safeguards. Your solicitor can advise you on contracts and the law.
Avoiding problems with tenants
Choosing the right tenants, having the right tenancy agreements and managing your property well
minimises the risks. But there are other things you can do to minimise any problems, too:
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Ensure that any complaints are handled quickly and efficiently.
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Resolve any maintenance problems as soon as possible. It can be very hard to resolve a situation
where a tenant withholds rent because a leaking radiator has not been mended, for example.
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Unless you are using an agent, make yourself available to tenants as soon as is reasonable.
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Check on the property periodically and take action immediately if problems are spotted. This does
not mean that relationships with tenants should be strained – for example, if a tenant’s rent
cheque bounces, explain the position to them and ask them to remedy the situation straight away.
Once they have done that, thank them for taking the right action.
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Do not accept tenants who do not provide a full deposit and/or references, or who do not have a
bank account.
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Make sure that you comply with the law and regulations regarding rented property.
Buy to let abroad
The gains are potentially greater abroad, but so are the risks. Additional risks include currency
fluctuations, currency controls, different legal systems and greater risks over property ownership.
Physically, you are also further away, so resolving any problems may also be harder. It may also be more
difficult to eventually sell the property, and the profit, tax and currency restrictions could prevent or
delay you bringing capital back to the UK. The key is to do your homework well, consider the economic
and political risks carefully and use only the best advisers.
Building a buy to let portfolio and investment
diversification
Many landlords look to build their property portfolio over time. If the value of an existing property rises,
you may be able to borrow more against its value, so helping to finance another purchase. Care needs to
be taken to ensure that you do not over-borrow, and it helps too for the portfolio to be diversified so that
you can withstand falls in any particular market. The recently announced tax changes favour building a
portfolio within a company, rather than personally, but this is a complex are where advice is essential.
There is a danger in having all your wealth in property. Property prices can fall as well as rise, as has been
all too obvious since the financial crisis started. Invest and manage wisely, however, and buy to let can be
an attractive long term investment.
Indirect buy to let investments
In recent years there have been a number of investment structures promoted to provide an exposure to
property without necessarily buying a complete property outright. These have included property clubs,
specialist property syndicates, crowdfunding, offshore funds and real estate investment trusts focussed
on student lets. Some of these vehicles are largely unregulated. In particular, a few years ago some high
profile clubs have closed, leaving their investors with major losses. Expert independent advice is
necessary before any indirect investment is made.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The precise amount will depend on your circumstances and/or
amount of borrowing. We will notify you of any costs before any advice is provided. The FCA does not
regulate buy-to-let mortgages.
This guide is for general information only and is not intended to be advice to any specific person. You are
recommended to seek competent professional advice before taking or refraining from taking action on the
basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax
advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the
Financial Services Compensation Scheme. This publication represents our understanding of the law and
HM Revenue & Customs practice as at 19 December 2015, which are subject to change.