Complete Guide To Buy To Let Property

If you have a dream of building a rental property empire, then you’re not alone. There are at least 1 million active property investors in the UK with income from 2 or more houses.

These people are smashing it – why not join them?

In this short guide we’ll cover:

  • how much money you can make from renting out property,
  • the strategy for getting rich;
  • how much it all costs;
  • how to find the perfect rental property;
  • the tax essentials;
  • and more advanced strategies for those building a larger empire.

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Part 1 – Your Returns

Ben (MU co-founder) makes around £325 a month after-tax rental profit on average from each of his properties, based on an average £700 rent.

These properties are nothing special. They are pretty average investment properties; mostly terraced houses in the North. Where he buys, the average upfront investment for a house like that is around £40,000 today.

That’s a cash return of about 10% annually (£325 x 12 months ÷ £40,000). Such high returns are possible because you keep all the rental profit, despite only having to fork out for a small fraction of the property upfront by using an interest-only mortgage.

This is most commonly a 75% Loan To Value split, with you investing just a 25% deposit.

After factoring in the mortgage interest, the effect is roughly a doubling of your cash returns compared to owning the property outright.

On top, you also earn capital gains from property. And this is again magnified by your mortgage.

If you have just a 25% deposit in the house, then a 3% inflationary rise in house prices would give you a leveraged gain of 12% (being 3% ÷ 25%): a 4-fold profit boost. Both profits combined, you’re looking at 20%+ annually.

Part 2 – Your Goal

A goal is a dream with a deadline, and yours should have one. For you, is that 5 houses? 10? 20?

To reach that goal as fast as possible you should keep reinvesting all your cash profits into the next property until it’s achieved.

This means you’ll need to fund your lifestyle through other income sources like you job until your goal is reached.

Part 3 – Can You Afford It?

Upfront Costs

You can buy a decent rental property from around £120,000. Think we’re joking?

In the video version of this guide on YouTube we showcased a perfectly respectable rental opportunity for £120,000 near one of Ben’s goldmine locations in Leeds, that might fetch £650-£700 rent. A 25% deposit on that is £30,000, and stamp duty plus legal fees and minor other expenses would bring you to about £35,000 total investment.

Some people question whether it’s possible to buy such a cheap house, but they’re usually hung up on where they’d want to live, or what they know about their area, rather than sound investment opportunities.

Where you live, property might not be this cheap – so you’ll either have to buy elsewhere and have an agent manage it for you, or simply make sure that the rent you’re getting is proportionally higher. It’s roughly comparable for instance to buying a £240,000 apartment where the rent is £1,300.

Additionally, you may also need to do some initial refurbishment on your new investment to get it tenant-ready.

MyBuilder.com is a fantastic resource for estimating the cost of a project – or to check contractors quotes against, to tell if you’re being fleeced or not – with handy pricing guides for pretty much any contractor work you could think of.

Top tip: for any job that needs scaffolding, add at least £600 to the price!

Ongoing Costs

Your rent should cover these, but what about the times when your house is untenanted?

The tenant is normally responsible for paying the utilities bills and council tax, while you are in charge of paying the mortgage interest, maintenance, landlord’s insurance and safety certificates. On a low-budget investment property, these may respectively cost £120 a month (mortgage interest), £50 a month (maintenance), £12 a month (insurance) and £5 a month (safety certs).

Maintenance

First, don’t do this yourself. You’re an investor, not a toilet fixer!

You should set aside £50-£100 a month from each house into a savings pot to pay for any future maintenance, called a provision.

Ben just had to spend £1,000 to fix a leak in one of his.

Was he bothered? You bet he was. Money is an emotional subject. But rationally, he’d already spent that money months before when he first added it to his provision.

Letting Agent

Use an agent. Don’t try saving every pound by doing it all yourself. Otherwise, your life becomes about other peoples’ problems.

Maybe you start out doing it yourself just to experience the amount of work required; then outsource once the lesson has been learnt.

An agent costs around 10% of your rental income; and means you can treat your investment property like a box on a piece of paper, with money coming in and money going out.

Part 4 – Finding Property

This is easy to do on Rightmove. First up, set up a filter for the house type and price you want to buy. We typically look at 3-bed terraced houses around the £110-£140k range.

Look at a few cities and towns until you find houses in your desired price range.

Then switch to filter for rental property of the same size in that area. Use the map feature on a computer so you can zoom in on specific areas and streets.

If 3-bed houses are getting high rents in the same area as you’re looking to buy, then houses for sale in that area are worth a phone call to the estate agent to book a viewing for.

Part 5 – Your Dream Team

To buy a rental property you will need a mortgage broker, mortgage provider, a solicitor, and contractors to tidy up the house if required.

It’s important you find a good mortgage broker – they don’t need to be local, just highly recommended. They’ll find you the best mortgage, and handle the mortgage provider for you.

The estate agent selling the property can provide you with a solicitor if you don’t have your own – though usually at a premium fee! Contractors can be found at trustatrader.com, or ratedpeople.com.

Part 6 – Tax

The tax rules are unnecessarily complicated for property investors, but be aware that there are 2 sets of rules; one for if you own the properties, and another for if you own a company which owns the properties on your behalf.

We can’t tell you which is best, as the answer will be personal to your circumstances. But generally, if you plan on having a large portfolio of 5 or more properties or you’re a high rate taxpayer, you’ll likely be better off using a company.

Owning through a company has the following rules:

  • A 19% tax on rental profits;
  • To access profits you must pay yourself a dividend, with are taxed at 7.5% for basic rate taxpayers, or 32.5% at the higher rate;
  • Mortgage interest is a valid tax-deductible expense.

Also, not tax related, but mortgage products for companies typically have around 1% higher interest rates than ordinary buy-to-let mortgages.

Owning directly yourself has these rules:

  • You pay tax on profits at the normal 20% basic rate or 40% higher rate of income tax;
  • Mortgage interest is not a valid tax-deductible expense (but you can get a 20% credit against profits).

We think this is a disgusting theft by the taxman – not allowing property investors to offset the largest monthly expense in their profit calculations for tax.

Like much of the tax system, there is no logic or consistency being applied by the taxman here!

Part 7 – Advanced Strategies

House in Multiple Occupation (HMO)

Ben converted his first property to a HMO. It meant he could rent out the property by the bedroom to multiple separate tenants, who share a communal kitchen/lounge area and bathrooms.

Where an ordinary single-let house might fetch £700 rent, a multi-let HMO could bring in £300 a room, across 5 rooms – or £1,500 total. But the landlord pays the utilities, council tax and TV licence.

You’d typically convert lounges and dining rooms into downstairs bedrooms, which could turn a 3-bed into a 5-bed.

From Ben’s experience of managing a HMO by himself – in the days before he realised that time is more important than money – there is no worse way to live than to have to take calls and deal with several peoples’ problems and disagreements 24/7.

Make sure you’re outsourcing the management to an agency.

HMO law has tightened up massively in recent years.

Most cities have an ‘Article 4 Direction’, meaning you must ask permission from the council before you convert a property – with the answer almost certainly being “no”.

Check your city council’s website for where you can and cannot convert – here’s Manchester’s version for example.

The hotspots are typically at the edge of cities, where rent demand is still high but where councils don’t insist on such heavy-handed planning permission.

There are a million other hoops to jump through, including many safety regulations – here’s a comprehensive checklist.

Commercial Property

Investors who’ve built up a decent sized property portfolio might have the financial clout behind them to be granted a commercial mortgage on something like an office building or retail space.

This is a very different market to residential, as your tenants are businesses. The void periods (the name for the time a property is empty) are likely to be longer than for residential houses.

But the range of potential profits are far wider – you might bag a bargain opportunity that makes you your millions.

Development Projects & Flipping

This is another potentially lucrative opportunity you can grasp once you’ve built up several properties’ worth of capital. Instead of buying a nice house on a mortgage, you can buy a horrible shell of a house, and hire contractors to turn it into a very nice house.

You can’t use a mortgage to do this, as a house must be habitable to qualify for one.

So the usual way forward is to both buy the house and pay for the renovation using cash, for which you’d need at least £100,000 at the bottom end of the market.

It’s either that or use expensive short-term debt known as a bridging loan, which we wouldn’t recommend for beginners.

You’d then either sell it on at a profit, called “flipping”, or, get a mortgage on the finished house to extract 75% of the value back into your bank account – and get it tenanted and producing a monthly income!

Are you planning on buying buy to let property? Or do you already have budding empire? Let us know in the comments below!

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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