Unlocking Financial Freedom: Buying Your First Buy To Let Property
Essential Tips for Buying Your First Buy-To-Let Property
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
All information was accurate at the time of publication.
14th January 2025
The appeal of property investment has likely crossed your mind. Perhaps you envision building a secure financial future while providing quality homes for others. However, the path to becoming a responsible landlord can feel daunting. You're determined to be a fair and ethical property owner, prioritising tenant satisfaction above all else.
With your personal finances in order and a suitable deposit secured, you're ready to take the plunge. Yet, the journey may hold unexpected challenges. Where do you even begin? What obstacles might arise along the way? And what crucial aspects of this venture might you be overlooking?
This blog will delve into the experiences of several first-time landlords, offering valuable insights and guidance. We'll explore the common hurdles encountered and address the often-overlooked considerations that can significantly impact your success. Additionally, I'll refer to some of my previous blog posts that may provide further assistance on your property investment journey.
Where should I buy my first Buy to Let property?
Social media often portrays property investment as effortless, with influencers showcasing rapid renovations and substantial returns. While these scenarios can occur, a more prudent approach for your first property might involve a more secure investment in a familiar location.
Consider the logistical implications. Frequent visits for maintenance, such as replacing light bulbs, become impractical if the property is located a significant distance away. Drawing a circle around your home, representing a reasonable commuting distance (perhaps an hour), can help you identify potential areas within your budget.
Prioritise areas you are familiar with, allowing you to leverage your local knowledge to assess property values and potential risks. Is the seemingly low price of a property justified by factors such as a rough neighbourhood, nuisance neighbours, or proximity to a major thoroughfare?
While tenant turnover is less of a personal concern for you, frequent vacancies can significantly impact your rental income and incur substantial costs related to re-letting.
By carefully considering these factors, you can increase your chances of a successful and rewarding first property investment.
What sort of property should I purchase as my first Buy to Let property?
The choice of property is entirely yours. Are you considering a one or two bedroom flat? If so, is it within a converted terrace house or a purpose-built block? Alternatively, are you drawn to a three bedroom semi-detached or a four bedroom detached house?
Given this is your first investment, I'd recommend seeking a low-maintenance option. If you opt for a house with a garden, will you expect tenants to maintain it, or will you need to engage a gardener to prevent it from becoming overgrown?
For flats, consider the size of the block. Some lenders have specific criteria regarding the number of floors and the flat's location within the building. I recently encountered a lender who declined a flat due to their existing exposure within that particular building. They already had too many mortgage on a number of flats already in that block. A decision unrelated to the client or the property itself.
Ex-local authority flats can also raise concerns for lenders. They may enquire about the number of remaining council-owned units within the block. Flats with "deck access" external corridors rather than internal hallways, may be automatically declined by some lenders. The buildings are particularly common in London.
Lenders scrutinise ground rent and service charges, declining applications where increases are deemed excessive. TMW, for example, declines properties where ground rent exceeds 0.5% of the property value or has a review period of five years or less. Similarly, ground rent that doubles within 20 years (e.g., every 5, 10, or 15 years) or escalates in line with compounded RPI will typically be declined.
Lease length is crucial. While most leases commence at 125 or 999 years, lenders may decline properties with less than 70 years remaining.
Neighbouring properties also factor into lender decisions. I've successfully secured mortgages for flats above nightclubs, yet encountered declines for houses near hairdressers. Lender criteria vary significantly. If any commercial properties are located below, adjacent to, or in close proximity to the property (across the road, behind, etc.), please inform me so I can discuss this with potential lenders before I make a recommendation. I always conduct a thorough Google Maps review to identify any potential concerns.
What is rental yield and how do I calculate it?
When evaluating potential investment properties, rental yield is a crucial metric. It allows for a swift comparison of profitability across properties with varying price points.
For example, consider a £200,000 property with a monthly rental income of £1,200. The annual rental income is £14,400 (£1,200 per month x 12 months). Dividing the annual rental income by the property value (£14,400 / £200,000) and multiplying by 100 gives us a yield of 7.2%.
Now, consider another property in the same area valued at £190,000, generating a monthly rental income of £1,150. The annual rental income for this property is £13,800 (£1,150 per month x 12 months). Calculating the yield (£13,800 / £190,000) x 100 results in a slightly higher figure of 7.26%.
By analysing rental yields, you can gain valuable insights to inform your decision-making process when selecting the most promising investment opportunities.
Do I need an accountant if I own a Buy to Let property?
Having carefully considered property selection and location, the next crucial step is to assemble the right professional team. You've already identified an award-winning mortgage adviser, an excellent starting point. Now, let's turn our attention to other key players.
An accountant is invaluable, particularly if you are employed. If you are self-employed, consult with your existing accountant to determine their experience with property investments, as not all practices specialise in this area. If you require an accountant recommendation, I'd be happy to provide some suitable contacts.
Together with your accountant, you can explore the most tax-efficient strategies for managing your property investment. Setting up a limited company specifically for your lettings activities may be a viable option, a topic I delve into further in a previous blog post: Which is Best for Your Buy to Let: Personal Name or Limited Company?
Do I need a Letting Agent if I own a Buy to Let property?
The decision of whether to self-manage your property or utilise a letting agent entirely depends on your individual circumstances. If you possess the time and energy to handle tenant relations, maintenance issues, and repairs, then self-management may be a viable option. However, for many busy individuals, partnering with a letting agent can offer significant advantages.
One of my clients, who served as a key inspiration for this blog post, recently purchased their first buy-to-let property – a well-maintained flat valued at approximately £200,000. While the property itself was sound, it required some cosmetic improvements, such as repainting scuffed walls, replacing worn-out shelves, and regrouting the shower.
The letting agent they partnered with has a network of reliable tradespeople who promptly addressed these minor renovations, ensuring the property was presented in its best light. Additionally, the letting agent handled the entire letting process, including property listing, conducting viewings, and thoroughly vetting potential tenants to ensure financial responsibility and adherence to previous rental agreements.
Letting agents can also provide ongoing property maintenance support. They often have a recommended cleaner who can perform regular inspections and report any potential issues. In the event of unexpected problems, the letting agent acts as your first point of contact, taking responsibility for resolving the situation.
Here in Bristol, I have had excellent experiences collaborating with Front Door Lettings. Their professionalism and expertise make them a highly recommended choice for property investors.
How much deposit do I need for a Buy to Let property?
Securing a buy-to-let mortgage generally requires a larger deposit compared to a residential mortgage. While an ideal deposit would be 25%, mortgages are available with a 20% deposit. However, securing finance with a smaller deposit may be more challenging if the property does not demonstrate a strong rental yield.
Using our example of a £200,000 property with a monthly rental income of £1,200, TMW can readily offer a 75% loan-to-value mortgage (LTV) with a 25% deposit, particularly if the purchase is made through a limited company. While an 80% LTV mortgage with a 20% deposit is also feasible, you may encounter higher interest rates compared to a 75% LTV loan. In such cases, lenders may only have a 5-year fixed-rate mortgage as an option.
You might want to have a look at another blog I’ve written called Mastering Buy to Let Mortgages.
Should I choose a 2 or 5 year fixed rate for my Buy to Let mortgage?
The range of available buy-to-let mortgage products is more limited compared to residential mortgages. Lenders typically offer 2-year and 5-year fixed-rate options, with some also providing variable rate products.
Fixed rates offer certainty for the chosen term (2 or 5 years), while variable rates fluctuate in line with the Bank of England Base Rate (currently 4.75% at the time of writing) or the lender's own Standard Variable Rate. Given the current interest rate environment, which has seen rates rise significantly since I began advising in 2009, variable rate mortgages are less popular among borrowers.
The choice between a 2-year and 5-year fixed rate ultimately depends on your individual investment objectives. For most investors, property represents a long-term investment, making a longer fixed-rate term appealing for budgeting purposes and mitigating the impact of potential interest rate fluctuations.
However, if you are acquiring a property requiring significant renovation (e.g., a refurbishment of a terraced house involving a new kitchen, bathroom, and full redecoration), the property's value may appreciate significantly within the initial 2-year period. This presents an opportunity to remortgage after 2 years and potentially release equity to fund your next investment.
While 2-year fixed rates currently tend to be slightly more expensive than 5-year fixed rates, both typically have comparable arrangement fees. It's important to consider that opting for a 2-year fixed rate may involve incurring arrangement fees every two years, which can impact the overall cost of borrowing.
During our appointment, we can explore some initial figures and allow you ample time to carefully consider your options before making a final decision. I am always available to answer any questions you may have.
What fees should I expect with a Buy to Let mortgage?
Mortgage fees are a topic that frequently arises, and it's one that's best addressed in conjunction with your accountant. Depending on your chosen structure (sole trader or limited company), you may be able to offset certain fees, potentially making products with higher fees and lower interest rates more favourable.
The most significant fee is typically the arrangement fee. These can vary considerably, ranging from free (often accompanied by a slightly higher interest rate) to a percentage of the total loan amount. Determining the most cost-effective option requires careful analysis. We'll work together to crunch the numbers and identify the solution that best suits your financial goals.
There are two main approaches to handling arrangement fees:
- Adding the Fee to the Mortgage: This spreads the cost over the mortgage term, but you'll accrue interest on the fee itself.
- Paying the Fee Upfront: While this avoids interest charges, the fee may be non-refundable if the sale falls through. We can discuss both options and determine the most suitable approach for your circumstances.
Booking fees, once more prevalent, are now less common. These might involve a one-off, non-refundable upfront charge, typically around £199.
Surveys: Protecting Your Investment
Some lenders may offer a basic, complimentary valuation survey. However, it's important to remember that this serves their primary purpose – confirming a fair market price and adherence to their lending criteria. You may not always receive a copy of this survey, although some lenders do provide them. To ensure there are no unexpected issues after purchasing the property, I strongly recommend commissioning a private surveyor's report. If you'd like a recommendation for a reputable surveyor, please don't hesitate to ask.
Legal Fees: Tailoring Expertise to Your Needs
As with most services, legal fees can vary depending on the chosen conveyancer. Budget-friendly firms with a high volume of cases may offer a more automated process, which might be suitable for a straightforward first-time buyer purchase. However, for a more complex transaction or if you value readily available local expertise, a different firm might be preferable. I'm happy to obtain quotes from both types of conveyancers to ensure you have options that align with your needs.
My Transparent Fee Structure
For my services, I maintain a straightforward £495 fee at application stage. While some advisers may charge more or less, this structure works effectively for me and my clients.
Stamp Duty Considerations
Stamp Duty Land Tax (SDLT) is a crucial factor to consider. I find StampDutyCalculator.org.ukto be a user-friendly resource for estimating these costs. Be aware that significant changes to SDLT are expected to come into effect on April 1st, potentially leading to a surge in property purchases before that date. We can discuss the implications of these changes and ensure you're well-informed throughout the buying process.
Do you have a read of my blog: Understanding Stamp Duty Changes Before the March 2025 Deadline
That £200,000 property we keep mentioning, the stamp duty is £10,000 up to the 31st March 2025, but will increase to £11,500 on the 1st April, for people who already own their home and are looking to purchase their first BTL.
Can I turn my home into a Buy to Let and purchase a new property to live in?
Let-to-buy mortgages have gained significant popularity, frequently touted on social media as a strategy for building a property portfolio. This approach involves renting out your current home while simultaneously purchasing a new property.
The process typically involves remortgaging your existing property, converting it to a buy-to-let mortgage, and utilising the released equity as a deposit for your new home.
Lending criteria for let-to-buy mortgages closely resemble those for traditional buy-to-let mortgages. Loan-to-value (LTV) ratios generally have a ceiling of 75%, and interest rates may be comparable to standard buy-to-let products with certain lenders.
I’ve written another blog about this here: Funding Your Future: Using The Equity In Your Home, To Purchase Buy To Lets.
If you’re thinking about purchasing your first investment property, get in touch with me and we’ll go through your options and make sure you’re in the best position possible before you apply for a mortgage.