Buy-to-lets are at the heart of almost ALL property investments! Whether you have been investing in property for YEARS or you have just started, it is essential that you understand the basics of buy-to-lets. In this blog post we’ll outline the key things you need to know in order to get started using this strategy and to help you maximise your BTL property investments.
What is a buy-to-let?
A buy-to-let (BTL) is a property that you buy in order to let it out to tenants. Sometimes the phrase BTL is used interchangeably with a “single-let” but a BTL isn’t necessarily a single-let…
The way in which you let the property out can vary but the most common rental strategy used is a single-let. This is where you rent the property to an individual, couple or family using one assured short-hold tenancy agreement (AST).
Alternatively, depending on the property & its location you may be able to rent it out using a different rental strategy such as an HMO, serviced accommodation or a student let.
If you’re interested to learn more about these different rental strategies have a look at our other blog posts.
Why is buy-to-let a property investment?
There are 2 ways you can make money using buy-to-lets.
Firstly, you can make money from the rental income. Provided each month your costs are less than the monthly rental payments you receive from your tenants you will be making money. Costs that you will need to consider each month include:
- Mortgage payments (if applicable)
- Council tax (if not paid for by your tenants)
- Utilities (if not paid for by your tenants)
- Insurances
- Maintenance fees
If these costs add up to be more than the rental income you’ll be able to make, you might want to consider using a different rental strategy or speaking with a local independent property advisor (IPA) who could help you to maximise your monthly income and/or minimise your costs.
Secondly, you can make money from the value of the property itself. If the value of a property increases this is called capital growth.
Typically this is the main reason why people invest in property as it often provides a much greater return on your investment than the monthly income you make from renting a property.
You will only be able to benefit from capital growth if you remortgage the property or sell it.
The amount you can make from capital growth depends on 3 things:
Each year the U.K. property market increases in value due to house price inflation. Such that when you come to sell a property or remortgage it several years later, you will have made money from this increase in the property’s value.
The degree of house price inflation is typically determined by the amount of demand for properties in a particular area. Some areas will have greater rates of inflation than others and this is something that’s important to research before buying any investment property.
You need to make sure that you are buying a BTL property in an area where people want to live!
The amount of capital growth you can make as a result of house price inflation will also depend on how long you keep a property for. Typically, the longer you keep a property for the more capital growth you will make.
The price you pay for a property can be considered in terms of how close the price is to the “market value”. For example, if 3 bedroom semi-detached properties are valued at £200,000 in your area and are selling on average for this price, then that is the market value for that type of property in your area.
Depending on whether you buy a property for below or above market value will alter how much capital growth you make.
If you bought a property at “below market value” (BMV) the property’s capital growth will be greater. Technically you should be able to sell the property straight away for more and will have benefited from this increased capital growth….but it doesn’t always work this way due to additional purchasing costs and it isn’t necessarily guaranteed that the property will instantly be worth more than the “sale price” you brought it for.
As we mentioned previously, over time the property will then increase in value with house price inflation making your capital growth even greater.
On the other hand, if you paid above market value for the property when you bought it, you would have an initial capital loss and it would take longer for you to realise a capital gain from the increase in the property’s value due to house price inflation.
Let’s take the example from before:
Let’s say the 3-bedroom semi detached will have increased in value due to inflation by 10% in 2 years. Going from a market value of £200,000 to £220,000. If you’d bought this property at market value you would have made £20,000 in 2 years. If you’d bought this property below market value for £180,000 you would have made £40,000 in 2 years. If you’d bought this property above market value for £210,000 you would have made £10,000 in 2 years.
Overall, to maximise the amount of capital growth you make, you want to purchase a property for at least market value or preferably below market value (BMV).
Again, you will only be able to benefit from capital growth if you remortgage the property or sell it.
You may be asking why would anyone want to ever sell a property at below market value?
There are lots of reasons why people are sometimes forced to sell properties below market value. Typically, it’s because they want to sell a property quickly. If you want someone to help you to find a property for sale at below market value, you can use an independent property advisor (IPA) who offers deal sourcing.
Depending on the condition of the property you buy, you may be able to increase the property’s value even more by refurbishing or renovating the property. This is often referred to as “adding value” to a property.
For example:
Imagine our 3 bedroom semi-detached has a well used & dated kitchen & bathroom. In this condition its market value is £200,000. However, a 3 bedroom semi-detached in the same area with a new kitchen & bathroom has a value of £250,000.
If you bought the 3 bedroom with the tired kitchen & bathroom, you could use £20,000 to renovate the kitchen and bathroom. Such that it was now of a similar standard to the modernised 3 bedroom properties and would be valued at £250,000. By spending an extra £20,000 you would have added an extra £50,000 to the value of the property, making you £30,000.
When trying to add value to a property it’s important that the amount of money you spend renovating the property is LESS than the amount of money you will increase the property’s value by. Using this method of “adding value” you can quickly increase the property’s capital growth. Again, you won’t benefit from this capital growth unless you decide to sell the property or remortgage it.
How to maximise the amount of money you make from a BTL property investment?
As we’ve already discussed the main way investors make money from BTL is through the property’s capital growth & you can maximise this by:
- Buying a property in an area with good house price inflation
- Buying a property at below market value
- Buying a property which you can add value to profitably.
However, there are a few other things you can consider in order to maximise the amount of money you make from a buy-to-let property.
At the start of this blog post we mentioned that sometimes people use the phrase buy-to-let to refer to a single let but this isn’t necessarily correct, as BTL refers to the fact that you are buying a property, to let it out….
You don’t have to let it out as a single-let, you can use lots of other rental strategies. Traditionally, landlords who own BTL properties do rent them out on a single-let basis but this isn’t necessarily going to make the most rental income.
Other rental strategies such as serviced accommodation, student lets or houses of multiple occupancy (HMO) can provide greater rental income.
However, with these different rental strategies there are different pros & cons. For example, to operate a student-let you need to make sure that students are going to want to live in it. If your property is 10 miles away from the nearest university you’re probably not going to get very good occupancy.
Alternatively, if you want to operate your property as an HMO you need to make sure you get a change of use class, apply for an HMO licence if required and then there’s the extra hassle of managing more than one tenant…..
If you want to know more about the pros & cons of different rental strategies we have blog posts which explain them in more detail. Alternatively, you can talk to an independent property advisor (IPA) in your area about the different rental strategies to help you!
This word is used alot in the world of property investment. The way leverage is used for buy-to-lets is typically in the way you purchase the property you want to rent out.
The most common form of leverage is using a bank to get a mortgage. For a BTL property you can borrow a maximum of 75% of the value of the property (75%LTV). The reason you would do this is to make your money go further.
Let’s take a really simplified example…
Imagine you found 4 properties to buy, each worth £100,000. If you had £100,000 you could buy 1 of these properties with cash. You wouldn’t need to borrow money from anyone. The profit you make would be the rental income minus the property’s running costs.
However, if you used a bank to get a 75% LTV mortgage you would only need £25,000 to buy a property. If you wanted you could use the total £100,000 you have to buy all 4 properties in this way, not just the one.
As you can see, we have massively simplified that example and have ignored lots of other costs associated with buying a property. But using leverage is one way you can try to maximise the amount you make from BTL property investments….
However, using leverage only helps you to make more money IF the rental income you make from each property is enough to cover the costs of having the mortgages.
Preferably, you want the rental income to be at least 50% greater than the mortgage costs. Lenders themselves will be looking for the rental income to cover the mortgage costs by a certain amount before they are prepared to lend.
If you’re interested in buying a BTL property and want to work out whether you’ll make enough money from the rental income to pay for a mortgage, we’d advise speaking to a mortgage broker who has experience with BTL mortgage products.
They will be able to give you a much more accurate estimate of what the mortgage costs will be (i.e. what the interest rate will be for the type of mortgage product you want) AND how much the lender will want to see you are making in rent each month in order to cover this mortgage.
Once you get these figures you can then work out if the rental income from a property will be enough to make it suitable for a BTL mortgage.
It’s important to understand that the amount you can make from a rental property will be very specific to that property & it’s location.
That’s our quick overview on the basics of buy-to-let. We hope you found it useful! If there is anything we didn’t cover or something you’d specifically like help with when it comes to your own buy-to-let property investments, we can find you an independent property advisor (IPA) who is local to you and meets your needs. They will work with you to provide the help, advice or service you need to achieve your property goals.
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