5 Things to Consider When Buying a Rental Property in the UK

Are you thinking about becoming a landlord? While the idea of a steady rental income sounds appealing, there’s more to consider than just finding a tenant. Or, perhaps you’re an accidental landlord looking for some guidance. Whatever finds you here, we’ve put together this guide to help you consider whether buying (or keeping) a rental property is right for you.

What is a buy-to-let property?

A buy-to-let property is one that you purchase specifically to rent it out to tenants. It’s a way to generate income through rental payments and potentially benefit from long-term capital appreciation as the property value increases.

Overall, a rental property is usually a safe and secure long-term investment for those looking to diversify their portfolio or those simply looking for more financial freedom. As of the time of writing the demand from tenants outweighs the current supply of rental properties in the UK, which has caused rental prices to rise whilst house prices conversely have fallen. However, this does not mean that buying a rental property will always be a slam dunk. It’s important to consider a variety of factors to determine whether it’s right to invest in a particular property.

Buying a rental property vs. your own home

Firstly, there are some key differences when buying a rental property compared to a home which you and your family will live in:

Mortgage Type

Buy-to-let mortgages have stricter criteria and higher interest rates compared to standard residential mortgages (scroll down to section 4 for more information).

Deposit

The minimum deposit required for a buy-to-let mortgage is typically much higher than a standard residential mortgage (usually 25% or more).

Tax implications

The tax treatment of rental income and property expenses differs from that of a primary residence.

Just like any other income, the income generated from a rental property will be taxed at the rate of your relevant tax band. Bear in mind that your rental income could push you into a higher income tax bracket. You can reduce your tax bill by deducting the following costs associated with your rental property:

• Letting agent and/or property management fees
• Builings and contents insurance
• Council tax
• Utility bills (if paid on behalf of your tenant(s)
• Essential maintenance (such as a new boiler)
• Repair costs to fix wear and tear or damage caused during a tenancy

Relief on mortgage interest for all landlords is capped at 20%, regardless of your tax band.

If you’re unsure how any of this applies to you, it’s essential to consult with a financial advisor to understand your tax obligations when purchasing a rental property.

Regulations

There may be additional regulations or licensing requirements for landlords, depending on the property type and local council policies.

I now understand the ins and outs of purchasing a buy-to-let property, but how do I find the best one?

Now that we’ve covered the basics, here are five crucial factors to ensure your buy-to-let property delivers strong returns:

1. Location

A good location is essential for any rental property. Here’s what to consider for long-term success:

Target demographics – what type of tenant are you looking for?

Understanding who you want to rent to is key, as it will determine what type of property is most appropriate for that demographic. Is your ideal tenant a young professional, a family, or perhaps students? Research the area’s rental market to ensure strong demand for your chosen property type. If you’re unsure, a letting agent can help you with this.

Proximity to schools/universities

If your target tenants are families or students, being close to good schools or universities can significantly increase your pool of potential renters who are looking for long-term tenancies. This can help reduce vacancy periods.

Up-and-coming areas

Consider areas undergoing redevelopment or regeneration. These areas can offer good rental yields and the potential for long-term capital appreciation.

Crime Rates

Research the crime rates in your chosen area. A safer environment will help attract high quality tenants and ensure peace of mind for your investment.

Familiarity
You might also want to consider how close the property is to your own home. If you choose a property in the same location as you, you’ll be familiar with the area and be on hand if anything goes wrong.

2. Picking the perfect property for your ideal tenant:

Beyond location, the property itself matters.

Houses vs. flats

Consider the pros and cons of each in your area. Houses typically offer more space and potentially higher rents, but come with a larger maintenance burden. Flats generally require less upkeep and appeal to tenants looking for low-maintenance living, but they may have lower rental yields. Ultimately, the choice you make will depend on the demand for and availability of a particular property type in the area you have chosen.

NB: As a general rule, depending on the kind of property, it’s a good idea to put at least £250-£1,000 aside per year to cover maintenance costs.

New build vs. secondary market

New builds often boast high energy efficiency, modern features, and safety compliance certificates, all of which help reduce running costs for you and your tenant. Being a blank canvas, new-build apartments allow tenants to put their own stamp on the property, and a happy tenant means a happy landlord. However, you may be subject to costly service charges and a new build could lack character compared to an older property.

Typically, older properties on the secondary market can offer a more traditional feel and potentially a lower price per sqft, but they may require upgrades to meet tenant safety regulations. As with purchasing your own home, it’s important to have the property fully inspected by a professional to gain an estimate of the extent of renovations required.

Both new builds and older properties have their advantages and disadvantages. Above all, consider what type of tenant a particular property is likely to attract. If you’re looking to target young professionals or those coming to work in the UK from overseas, a low-maintenance new-build apartment is probably more appropriate. If families are more prominent in the area, a two or three-bed house could be a better bet. Of course, there is always a matter of budget to consider, which leads us on to…

3. Price, rental yield, and resale value

Balancing these three factors is crucial to determining the success of your rental property:

Purchase price vs. the market average

Aim to buy below market value to maximise your capital gain potential. Start by looking for properties that are priced competitively or slightly below market value. This could be due to a motivated seller, a less desirable street within an otherwise good area, or a property that requires some minor cosmetic work or renovation. Up-and-coming areas undergoing regeneration, or areas with planned infrastructure improvements may also offer competitive pricing with the potential of future increases as demand rises.

Rental yield

Calculate your potential rental income as a percentage of the purchase price. To do this, find your annual rental income amount, then divide this by the property’s value. Then, multiply the figure by 100 to get the percentage.

Aim for a yield that covers your mortgage payments, property management fees (if applicable), and leaves you with a profit. As a general rule, you should be earning a minimum of 25% more in rent than your mortgage payments.

In London, landlords can typically experience average rental yields of 4.5-6% for single-occupancy homes. For houses of multiple occupation (HMOs), yields can increase to circa 8% or even higher depending on the area.

Resale value

While some landlords prioritise cash flow and maximising rental income from their investment, it is important to consider the property’s long-term value as this will in turn bring healthy yields. Investing in a property that increases in value, or at the very least retains its value, over time will enable more fliexbility when it comes to an exit strategy for say retirement or the liquidation of assets due to unforeseen circumstances.

When applying for a mortgage or loan on a rental property, lenders consider the resale value as part of the underwriting process. A higher resale value allows you to qualify for better terms, such as a lower interest rate.

Bear in mind that capital gains tax (CGT) is applied to any profit you make when selling your rental property. The good news is that from 6th April 2024, the higher rate of CGT on residential property will be lowered from 28% to 24%.

4. Budgeting: cash vs. mortgage

Cash purchase

As always, buying a property with cash offers the advantage of avoiding mortgage interest payments, but it also means tying up a significant amount of capital upfront.

Buy-to-let mortgage

A buy-to-let mortgage is specifically designed for purchasing investment properties. Qualifying for a buy-to-let mortgage requires meeting several criteria; you’ll typically need to be a homeowner with a strong credit score and an annual income exceeding £25,000. Some lenders may also have age restrictions.

The affordability assessment for a buy-to-let mortgage differs from a standard residential mortgage. Instead of focusing on your personal income, the lender will primarily assess the property’s potential rental income to determine how much you can borrow, as this is what will be used to cover the mortgage payments. To ensure you have a buffer for unexpected vacancies or repairs, lenders will typically require that the monthly rental income is a minimum of 25% higher than your monthly mortgage payments.

Finally, as with any mortgage the size of your deposit will also impact your application. While the minimum deposit for a buy-to-let mortgage is usually 25%, putting down a larger deposit, such as 40%, can give you access to more favorable interest rates, lowering your monthly payments.

For portfolio landlords, it’s also important to note that multiple dwelling relief (MDR), which lowered the stamp duty paid on purchases of two or more homes in a single transaction, will be abolished after 1st June 2024. Existing contracts signed before March 6th 2024 can still claim MDR as long as they remain unchanged.

5. Property Management

Should you hire a property manager?

When you become a landlord you inherit a lot of responsibilities, including but not limited to deposit protection, chasing rent arrears, dealing with tenant complaints, handling ongoing property maintenance and meeting safety regulations.

A property manager can take on all these responsibilities for you, providing a completely hands-off experience so you can reap all the benefits from being a landlord without all the stress and hassle. But what if the estate agency you used to purchase the property doesn’t offer property management services? Well, this is where a white label property management company comes in.

At Marland Property Management, lettings agents can outsource their property management needs to us. Our trusted team of professionally accredited and qualified property managers provide tailored support for lettings agents so they can focus on their day-to-day duties. We take care of all aspects of property management, remotely managing landlords’ properties and their tenants seamlessly.

The additional cost might sound like a lot if you’re a first-time landlord, however entrusting a property management company can free up your valuable time and minimise the effort required on your part. Tenants are also reassured when there is a dedicated agent on hand to address any concerns or issues that may arise.

To find out more about how a property management company could help you with your rental property, get in touch with us today. We’ll speak with you about your specific requirements and liaise with your letting agent on your behalf to come to the perfect solution.