Buy to let advice

29 September 2016


For those thinking of investing in buy to let but not sure where to start; here is some buy to let advice. 

Leveraging your borrowing

The first question many potential investors ask when seeking buy to let advice is how much should I borrow?

The great thing about buy-to-let borrowing is that it provides leverage, the bad thing is that it also adds risk.

The key is to balance the amount of deposit against the size of mortgage.  The higher the deposit the better the selection of competitive mortgage deals that are available.  

The start point is the amount of money you have available for deposit.

Let’s say you have a windfall of £300,000.

You could use all the cash and buy a £300,000 property and rent it out mortgage free.  Depending on location and type of property you would expect to get an annual rent of c£15,000 which would give a yield of around 5% on your investment before tax and costs.

Leverage is introduced if you split your investment over more than one property by securing a buy to let mortgage on each property.

Say you buy two £300,000 properties – a deposit of £150,000 and a buy to let mortgage of £150,000 on each.

The rental income will still be £15,000 on each property giving you a gross annual income of £30,000.

Your costs will obviously have increased because you are now paying interest on your two buy to let mortgages.

A good mortgage broker will help you secure the most competitive mortgage available on a 50% deposit basis and currently this could be around 1 to 2% but for this example we will assume a 3% rate of interest.

This will cost you around £4,500 per annum on each mortgage – £9,000 in total giving you a net buy to let income of £21,000 per annum (a 7% return on your down payment) before tax and costs.

Buy three £300,000 properties with a 1/3rd deposit (£100,000) on each and a 2/3rds mortgage (£200,000) on each and the leverage increases still further.

The gross annual rent is now £45,000 but the costs will also have increased.

The smaller deposit will decrease the number of better mortgage offers available so you might expect to be paying nearer to 4% interest on a larger mortgage.  This would be around £8,000 per annum per mortgage – £24,000 in total – your net annual income will still be £21,000 (still a 7% return on your down payment) but with a third property available for sale when you are ready to cash in.

None of the above takes into account capital growth.

But borrowing is risky. Mortgage rates are at an all-time low and will almost certainly rise within the coming years, even if they don’t move either very far or very fast.

Rents are already high relative to incomes, which might restrict landlords ability to push up rents just because their mortgage costs start to climb.

Have your customer in mind

To get the best returns landlords need to be discriminating.

Sticking with newly built properties to minimize maintenance and running costs; investing in one or two bedroom houses and flats which suit the profile of young, professional and reliable tenants are tried and tested ways of building a good quality rental portfolio.

But you then need an area where there is strong tenant demand, such as close to good transport hubs (stations, good motorway access) or centres of employment (hospitals, business parks) for example.

Don’t assume lucrative property price rises

Over the long term property prices have always gone up but the financial crisis of 2008 will always be a reminder that in the short term prices can drop significantly. So don’t depend, at least in the short term, on rising prices, instead make rental income a big part of your total return.

Whilst good capital growth is the ideal – and while history suggests you will get it in the long run – in the short term you need to focus on your cash flow by making sure that your mortgage repayments and other costs are always at least covered by your rental income.  Don’t ignore the risk that your property may sit empty for a time between one tenant leaving and the next arriving.  Each month that the property sits empty is a month that your costs will not be matched by your income so plan ahead, and potentially employ a good letting agent to minimize such dormant periods.

Due Diligence always pays off

Another key piece of buy to let advice concerns tenant vetting. 

Whether you do the work yourself or employ a lettings agency to cut out the slog ensure that you fully vet each tenant to ensure their suitability and credit worthiness.  Getting rid of a bad, non-paying tenant can be both time consuming and expensive so it pays to undertake extensive due diligence at the outset.

Always make use of the tenant deposit schemes now available.

Doing a very careful inventory before a tenancy begins is also vital so that tenants can’t dispute valid reasons for deducting money from their deposits at the end of the tenancy.

Be properly insured

Not having the right insurance can be financially disastrous so take advantage of the many specialist landlord insurances now available

For further help and buy to let advice get in touch at