Buy to let

Types of property investment

Buy to let is one of the most common property investment strategies. Quite simply, the aim is to buy a property and let it to tenants in exchange for rent. The goal is to receive rental payments in the short-term but also to achieve capital growth in the long-term as the property price increases.

Residential property investors also try to make money from:

  • flips – Normally a complete renovation with the aim to sell for profit.
  • refurbs – Often cosmetic work only to increase value for sale.

Sometimes strategies are combined and a flip or refurb becomes a BTL for a while until the right time to sell. Normally flips and refurbs are turned around quickly for profit and are short-term strategies. BTL investors are usually in the game long-term.

BTL is probably the most asked about on the sub so that’s what we’ll focus on here.

You can find more information on each strategy here:

It’s all about house prices & leverage

House prices are cyclical but over many cycles they trend upwards. There are ups and downs in each cycle and people win and lose in these. This is key to making money in property – long-term investment weathers the storms of the cycles and patient investors can do very well. It only works though if house prices continue to rise higher after each cycle, which historically has been the case. Take a look at the 18 year property cycle.

Mortgages allow investors to buy what they cannot afford today. If the bank lends you 25k you can probably buy a property worth 100k now. You’ve taken on debt but you plan to buy an asset that you believe will rise in value over one more cycles. This is a form of leverage and is a key concept in property investment. As you increase leverage you increase both potential gains and your exposure to the housing market and its cycles (risk).

BTL is not passive income

Even with a good agent you will still be managing re-mortgages, insurance, bills for void periods, dealings with the freeholders (if applicable), reviewing repair quotes, submitting tax returns, checking legal responsibilities for the property plus communication with the agent if it is managed. Don’t kid yourself – this is not passive income. Property is an active investment and you will have work to do.

It’s not just about income

A lot of BTL investors make money on capital growth and refinance deals. When the mortgage term comes to an end there may be an opportunity to get a new mortgage deal (often at a better interest rate). If the property has increased in value, the investor can remortgage to release some of that value by borrowing more (normally up to 75% LTV). BTL lending is usually based on rental income so as long as the rent still covers the mortgage payment the lender is happy. Now flush, the investor can use the spare cash on a deposit for another property or spend as they choose.

Tax & legislation are becoming less favourable for BTL

Successive governments are slowly tightening up policy & legislation that surrounds BTL. Broadly speaking, things have become more favourable for tenants with stricter rules and increased taxes for landlords. You need to keep up with this as it affects your legal obligations and your profits. There are regional differences across the UK – Scotland has been stricter introducing landlord registration and additional responsibilities compared to England.

Landlords paying higher rate tax have been particularly affected and in recent years there has been an increase in property ownership via limited companies. This comes with additional accounting and reporting obligations. Mortgages for limited companies are generally more expensive than residential.

Did we mention responsibilities?

You are 100% responsible for your tenants safety in the property. Even if you use an agent the buck stops with you. If a safety check isn’t done and that leads to someone getting hurt it will be you answering questions even if the agent failed to do it. Don’t treat this lightly, you need to make sure your tenants are kept safe.

Accounting, reporting and general admin will also be your responsibility. Don’t underestimate these. It will consume your time.

Property is illiquid

Whilst property gives you a material asset that you can sell for cash, it is not a liquid asset itself. If the market is on a dip and you find yourself in a position where you need to sell then you can be nursing heavy loses or worse still end up owing the lender more than you paid for the property (negative equity). You might think ‘oh no problem, I’ll just keep renting it out’ which might be a solution but rental demand also ebbs and flows – you could also end up slashing rents to attract tenants and topping up mortgage payments.

Interest rates fluctuate

At the moment we’re operating in a very low interest environment which makes borrowing cheap. This hasn’t always been the case. The late 70s and early 90s were periods of soaring interest rates (up to 17%!) which put serious pressure on folks with variable rate mortgages.

Scenarios like these mean you really really need to know your finance numbers before getting involved in BTL. You need to lay out the best and worst case scenarios for your mortgages and be confident you can cover any shortfall if interest rates rise and your tenants leave. It’s unlikely we’ll see such eye-watering interest rates anytime soon but you must do the stress test on paper. It’s important you know what you’re getting into.

Tenants are a mixed bag

We’re sure you’ve heard horror stories. Be very careful selecting tenants. Do thorough credit and background checks. Don’t skimp here and pay to get this done by a company that does this kind of thing regularly. If you use an agent, talk to them, get their opinion on your potential tenants. Call the tenants yourself, size them up.

It’s rare to get really bad tenants. Usually the worst case is that they don’t really look after your property very well and you need to pay for renovation or repairs and make a claim on deposit. However if you are very unlucky or lazy in your research you could end up with the nightmare tenants you’ve heard about. Evictions and court dealings are not fun and will hammer your profit and willpower.

Emotional cost

Are you cut out for BTL? Are you the right kind of person to deal with lots of random problems, some little, some bigger? From tradesmen to tenants, your patience will be tested at times. Most of it comes down to being organised and motivated. Sometimes you don’t need to do a lot, sometimes you’ll need to cut through a series of problems just like a job. It helps if you can treat this methodically, logically and try to not get too emotionally involved – sometimes this is hard! Are you this kind of person? Are you happy to take on this work in addition to your full-time job? Can you cope with it? Be realistic and don’t stretch yourself too far.

Costs (financial ones)

Broadly these can broken down into one-off and ongoing costs. Some things you can do yourself but others are unavoidable – generally the less you take on the more you pay.

People thinking about BTL (and some BTL investors) tend to underestimate costs and overestimate profits. This list may not be exhaustive but should give you a good idea of costs to factor into your numbers:

One-off

  • deposit – usually 25% minimum (so 75% LTV)
  • mortgage fees
  • legal fees & searches
  • surveys & advice
  • stamp duty or LBTT/ADS (Scotland)

Ongoing

  • gas/electrical safety certificates
  • repairs
  • tenancy creation & check in/out, credit & background checks
  • buildings & contents insurance
  • landlord insurance
  • boiler cover
  • accounting fees
  • smoke/CO alarms
  • extinguishers / fire blankets
  • void periods (property empty, no income + bills to pay)
  • ground rent / service charge / factor fees (Scotland)
  • estate agent fees

Can you still make money?

A lot of new investors approach UKPF to discuss BTL and often it appears that people think it’s ‘easy money’. You might know people who ‘made bank’ – maybe an uncle or a friend of your parents. It’s true that in the past it was easier: lenders were generous, rates were attractive, legislation was loose and taxes weren’t punitive. Times have moved on and things have changed.

It’s important to say yes, you can still make money on BTL and people do. There are experienced landlords out there with healthy property portfolios that make good returns. There’s no reason you can’t become like them but go in with your eyes open. You’ll have a lot to learn and you need to be interested to learn it.

UKPF doesn’t hate BTL however there is recognition in the community that there are far easier ways to make money (read on).

BTL vs Index Investing

BTL questions come up reasonably regularly on UKPF. Often the community steer the posters toward passive index investment. Comparisons are often drawn between the two, however it’s fair to say they are very different beasts. The following post on r/FIREUK is a good place to start if you want to look at some numbers:

You can also search r/UKPersonalFinance for ‘BTL‘ or ‘buy to let‘ for a swathe of posts with many opinions. It’s widely accepted that index funds are a far simpler introduction to investment for newcomers.

REITs

Real Estate Investment Trusts allow investors to gain indirect exposure to property. REITs are companies that own a portfolio of property, this can be residential, commercial or even land.

You can invest in a REIT by buying its shares which are listed on the stock exchange. By buying the shares, you’re buying a tiny piece of that property portfolio without all the hassle of managing it yourself. You can buy a slice of: tower blocks, housing estates, warehouses, distribution centres, hospitals, hotels, shopping centres, theme parks, car parks and all sorts!

This is nice because a) the REIT will pay you rent in the form of dividends b) the property might increase in value c) the management team look after it all for you. REITs benefit from not paying corporation tax which means more dividends in your pockets. An additional benefit is realised if you buy and hold the REIT’s shares in an ISA – if you do this you pay no tax on the dividends.

There are many different UK listed REITs and it can be confusing to choose. You need to spend a little time looking at each REIT and how it invests. REITComparison has a useful list of all UK REITs and a handy guide for more information on REITs. There’s even videos on YouTube if that’s more your thing.

There is a simpler way than choosing individual REITs. These days you can pretty much invest in everything through a tracker fund. A popular choice is IUKP which seeks to track the performance of an index composed of UK listed real estate companies and REITs.

If you prefer to diversify into global property there is also: