How to Invest in Buy-to-Let Property

Having a bit of extra cash on your hands is never a bad thing, but learning how to invest in buy-to-let property can result in consuming a whirlwind of information.

Here, we pull together some useful information for buy-to-let investment beginners.

What is a buy-to-let investment?

 In basic terms, a buy-to-let investment is where an individual purchases a property solely for the purpose of renting it out to tenants. A buy-to-let property isn’t purchased for an investor to live in, but for them to make a return on rental costs.

It’s important to recognise that a buy-to-let investment is very different to owning your own home.

From the moment your new tenants move in, you are basically running a business. While there are huge benefits to owning your own business and earning your own income, there are also many responsibilities that come alongside it too.

The UK Government website provides a useful checklist for landlords.

As a landlord, you must:

  • Keep your rented properties safe and free from health hazards
  • Make sure all gas and electrical equipment is safely installed and maintained
  • Provide an Energy Performance Certificate (EPC) for the property
  • Protect your tenant’s deposit in a government-approved scheme
  • Check your tenant has the right to rent your property (if it’s in England)

 Who is a buy-to-let investment right for?

 Buy-to-let investments are perfect for individuals who prefer to invest in something more concrete than stocks and shares. Often, stocks and shares can feel a lot less tangible than something you can see for yourself.

Individuals investing in a buy-to-let also need to understand the commitment that’s required to an investment like this. To get the highest yield, it’s important to know that you’ll be required to tie your money into your investment for a longer period of time than other investment options available.

What are the benefits of a buy-to-let investment?

First and foremost, there’s the rental income you can accrue with a buy-to-let investment. By investing in areas with a high rental yield, you can get the most out of your money while making a monthly profit at the same time. Areas such as York, Preston and South Wales are currently proving to be excellent investment hotspots.

Rental yields in these areas can be as high as 8% and property prices are expected to rise by nearly 22% by 2025 too. These predictions could result in an extremely prosperous investment.

What are the rewards of a buy-to-let investment?

There are two ways to earn a profit when investing in property.

The first is in rental yield.

Rental yield is your annual rental income and is a percentage of the total value of the property you have purchased. In our property investments in West Bromwich House for example, you can benefit from rental yield as high as 8%. With a £99,000 purchase price, this property can give you an income of £7,920 per annum.

The second way to earn a profit is in capital growth.

To put it simply, capital growth is the profit you earn if you sell your property for more than you paid for it. Patience is a virtue when it comes to capital growth.

While it’s very rare there is an immediate capital growth return, according to experts, property prices in places like Yorkshire are set to rise by 21.6% by 2025. A £246,000 investment into apartments like the ones in Icona in York could therefore see you making a profit of £53,136 in as little as three years.

It’s important to remember that both of these profits have tax implications, that will vary based on your tax bracket.

What are the tax implications of a buy-to-let property?

As with anything, when you make a profit on your buy-to-let investment, you are likely to have tax implications. It’s important to keep on top of these, to avoid it being a hinderance on the profit you are making.

There are a variety of taxes you may come across, should your annual income (including any other earnings you have aside from your property investments) go over the 21/22 tax threshold of £12,570.

These taxes include:

Tax on rental yield

The rent you receive from your tenant on a monthly basis will be taxed within your relevant tax band. It’s also important to keep track of your earnings to check whether your rental yield has pushed your overall earnings into the higher tax band.

Before paying your tax bill, ensure you have deducted your expenses, including agent fees, your insurances, council tax, home improvements etc.

Capital Gains Tax

We recently wrote an article that covered all you need to know about Capital Gains Tax (CGT) but, in short CGT is the tax you pay on the profit your property makes when you come to sell it.

For the 21/22 tax year, the first £12,570 is tax free, with this increasing if the property is owned by two or more individuals. If you have gone into a joint buy-to-let investment with a friend, colleague, spouse etc., each person can use their annual allowance against their portion of the gain.

Again, ensure you have made the relevant deductions before paying the taxman. For CGT, this can include all the costs incurred when selling or purchasing a property including Stamp Duty, estate agents’ fees and conveyancing fees.

Stamp Duty

In 2020/21 there has been a Stamp Duty holiday for the first time in history, due to the Coronavirus pandemic. This has put buy-to-let investors in an excellent position and is in place until June 2021 [correct as of April 2021].

Stamp Duty varies dependent on the cost of the property you are selling and your current circumstance. For free independent advice please contact us.

The following rates apply in England and Northern Ireland between 1st July 2021 and 30th September 2021, but are subject to change.

Property Cost Stamp Duty Rate
£0-£40,000 0%
£40,001-£125,000 3%
£125,001-£250,000 5%
£250,001-£925,000 8%
£925,001-£1.5m 13%
£1.5m+ 15%

Is good capital growth or high rental yield a better investment?

This is entirely dependent on your personal circumstances. If you’re looking for a regular income and have low mortgage costs or are a cash buyer, then high rental yields may be what you’re looking for.

This will give you a larger monthly income at the very beginning of your investment, so is often the preferred option for more cash-rich investors.

Investing in a property with good capital growth is only going to benefit you in the long run. If you have large initial costs, such as a hefty buy-to-let mortgage, then you may be more reliant on your investment bringing great capital growth. This is usually the more preferred option for property investment beginners who aren’t as financially stable as more seasoned investors.

If you’re looking for a good benchmark when it comes to both types of return, as a general rule a good rental yield is usually benchmarked at over 5% per year. On the other hand, a good capital growth is based on properties in good areas doubling in value every 10 years, meaning a 10% annual increase is a sign of an excellent investment.

How do you access the rewards of your investment?

In terms of rental yield, this is easily accessible, as it is the monies paid by your tenant to you on a monthly basis.

While this is immediately accessible, it is important to remember that this monthly income is likely to be taxable income, especially if you have a salary separate to your investment. We’d recommend putting the tax you owe to one side for the end of the following financial year. Speak to the team for free independent financial advice.

The capital growth your investment earns is a little less accessible. In order to reap real financial reward, you need to be prepared to tie your money into your investment. Therefore, it’s important to only invest funds you won’t need in the immediate future.

These funds are best accessed after a number of years, to allow your capital growth to mature.

MPP’s tips on how to invest in buy-to-let property

We know investing in a buy-to-let property isn’t something you do every day, so ensuring you’ve made the correct investment is so important.

Over the years, we’ve learned a lot about how to invest in buy-to-let property.

Here’s our top five tips:

  1. Be diligent

There’s a lot to be said for doing your due diligence on a property and its surrounding areas. Research is key – find out about investment in the local area, rental demand and the average rental yield.

Base your decision on there being a solid return on your investment.

  1. Do thorough checks on your tenant

Your buy-to-let investment is worth nothing without a good tenant. It’s also worth a lot less with a bad tenant.

Ensure you’ve got references and have conducted credit checks. These can protect your investment from falling into arrears, damages, financial instability etc.

  1. Look after your tenants

While on the subject of tenants, it is just as much your responsibility to communicate thoroughly with your tenant and not let them down.

A buy-to-let investment is just going to cost you money if it is sitting empty. If you’re keeping your tenant happy, then you’re receiving regular rent and are therefore happy too.

Don’t underestimate the relationship between yourself and your tenant.

  1. Look after your investment

Whether it’s small repairs requested by a tenant, or making changes after a long tenancy, it’s important to keep your buy-to-let property maintained and to a high standard.

Allowing the standards to drop in your property can result in losing tenants (and struggling to get new tenants when you lose those). Always thoroughly clean and re-decorate where necessary after a tenancy.

  1. Use a good buy-to-let consultant

Now we’re not just saying this to plug our services. As investors ourselves, we have had first-hand experience on the benefits of using a good buy-to-let consultant.

If you’re unsure how you could benefit from our services, we can teach you how to invest in buy-to-let property and help you to get the very most out of your portfolio.

We have worked hard to develop great relationships with established developers of all-new developments to ensure maximum security for our investors. As well as this, we’ve done the regional research for you, with tonnes of information about the locality, your potential return on investment, rental demand and more.

If you’d like a chat with our team, don’t hesitate to give us a call on 0161 359 4305 to schedule a no-obligation appointment and learn more about your next investment opportunity.

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