What is a Buy to Let Investment?

Posted by Market Financial Solutions on 6th October 2021 -

The UK’s buy-to-let (BTL) market is an important driver of investment into bricks and mortar. This sector of the property market has been continuously booming as the demand for tenants continues to rise, bringing more traction to investors looking for a medium to long term investment. The number of landlords in the UK now sits above 2.65 million people and with demand for rental properties continuing to rise, the sector is an attractive option.

Source:  The Negotiator

What is a buy-to-let?

A buy-to let-investment is when either an individual or a company purchases a residential investment with the intention to ‘let’ them out to tenants.

Buying a property for first timers who are hoping to get onto the property ladder is a challenge due to the price entry barrier and high deposits. Outcome of this is that we are very much a society of ‘generation rent’ whereby half of the millennials are very likely to rent into their forties.

The September House Price Index from Rightmove shows the average asking price across the UK is currently £338,462 this month according to their research.

BTL properties are often flats or house shares, generally found close to city centres. This is where property prices are often very high but renting becomes an affordable living option for those looking to stay within walking distance to work.

During 2020, Statista research department found that tenants aged between 25-34 were the largest rental group within the UK. The range totalled 1.4 million private renters, despite the increase in the number of homeowners for every age band.

Source: Statista

The advantages of buy-to-let property

There are many reasons why people rent. Equally, there are many reasons why people become landlords. For those looking to invest in property, it’s important to ask yourself if being a landlord is for you:

• Can you deliver the type of property, tenants are looking for?
• Are you looking to rent a property closer to where you are or from abroad?
• Will you require someone to manage the property and tenants on your behalf, such as an estate agent – if so, have you considered the costs for this?

Let’s look at some of the advantages of buy-to-let properties. There are two main advantages for those who own a buy-to-let property.

1)     Regular Income

Landlords typically receive rental payments monthly. This allows them to pay any existing debt on the residential property, such as contributing towards a mortgage.

The rental payments could also help fund any renovation or refurbishment the property needs – to repair damage such as wear-and-tear. On top of this, landlords also generally factor in a profit, to make the endeavour worthwhile.

HMOs and their advantages

Houses in multiple occupation (HMOs) are a form of buy-to-let property. With an HMO, landlords could receive a rental yield up to three times higher than renting a whole property on one agreement. However, they also have the potential to require additional long-term maintenance costs.

Whilst some long-term lenders require two years or more landlord experience for an applicant to be accepted for an HMO mortgage, short-term finance works differently. For example, MFS consider applications on a case-by-case basis. This is so we can look at the larger picture, taking in the applicant and the property on individual merits rather than one tick-box criteria. Meaning, we can provide new landlords with a residential bridging loan, should an HMO opportunity present itself to them.

Read our latest case studies to find out more.

HMO tenants

HMOs are mostly popular amongst young professionals and students:

• They can decrease the monthly rental cost between tenants
• Minimises risk for the household (should one person need to exit their tenancy early and there becomes a payment gap in the properties monthly fee)

For more information on HMOs, read our HMO regulation checklist – covering many aspects new HMO landlords need to be aware of when taking on an HMO property.

2)     Capital growth

Owning a BTL property means the landlord’s asset will potentially rise in value over the long-term in line with national house price increases. If the landlord decides to sell the property, the market value of the house could be a lot higher than when initially purchased. Therefore, generating an increase in capital growth.

Over the last ten years, the average UK property prices has grown from £169,866 to £255,535 (July 2011 vs 2021). That’s a 50% increase – an impressive capital growth. If a landlord had bought a buy to let property in 2011 and sold in 2021, they would have made a profit on the sale of the asset, on top of regular rental payments. This can provide landlords with the opportunity to pay off any existing debt on the asset.

Source: Office for National Statistics

However, any increase on property will be subject to Capital Gains Tax. This tax will vary from person to person. To understand more about different charges relating to Capital Gains Tax, please read the government guidelines here.

The future of buy-to-let

The pandemic has changed what tenants want from a rental home. We recently conducted our own survey which uncovers how landlords have fared during the pandemic over the last 18 months and provided an insight into how they intend to approach the upcoming year.

Download your copy today.

Landlords are adapting to these challenges posed by COVID-19. As lockdown restrictions are lifting, commentators are confident demand for rental properties will continue to increase. There are also new property investment hotspots that prospective landlords need to be aware of. One element that has definitely become apart during Covid-19 is the ability to work from home. This has led to more tenants considering less expensive properties within cities commuter belts. Commuter towns generally offer tenants:

• Cheaper rent
• More space
• A garden / access to communal green spaces

Growing demand for BTL properties located just outside cities in recent years is a great example of this. They are popular locations as tenants can commute to London and other major cities when required but benefit from cheaper rent and cost of living.

Looking for upcoming commuter towns located within London’s commuter belt? Check the MFS top 5 commuter towns here

Aspects to consider with a buy-to-let

Another aspect to consider with buy-to-let properties in the potential increase to refurbish or renovate your asset(s) on a regular basis. Properties in need of refurbishment are less likely to receive a high-earning rental income for landlords. By refurbishing your buy-to-let, you could increase the overall spec of your property. Therefore, allowing you to charge a premium for the increase in living standards. However, be sure that your spec and rental income reflects the tenants you are looking to attract.

Buy-to-let bridging

Specialist lending can offer flexible buy-to-let and residential bridging loans that can ensure funds can be with you in a matter of days. A fast completion is something that, initially, BTL mortgages can’t provide. A bridge-to-let loan can help finance a property investment opportunity with a swift and simple process.

If you’re interested in finding out how much you can borrow, try our free bridging loan calculator here.

Our team can provide more information about what bridging finance options are available with our buy to let product. Whether you’re in need of a standard buy to let loan or looking for finance to help with a buy to let refurbishment project, we’ve got you covered. If you or your clients are considering this, get in touch today.