Basics of Buying a Buy-to-Let Property for Landlord as a Beginner

The real estate market remains one of the most lucrative investing alternatives in the UK. As per Statistia’s report, the British residential real estate property market value has surged to $7.2 trillion between 2015 to 2020. However, this investment realm can feel quite confounding for a newbie. The process of property buying is expensive and time-intensive.

Especially, as someone wanting to acquire a buy-to-let property, you need to reckon many do’s and don'ts that can help you maximise your returns. The task of looking out for properties, purchasing a good one, and then renting it out to become a landlord can seem like an uphill battle. You must consider preparing for this mission with thorough research and guidance.

Team RentonCloud wants to share its words of wisdom to help beginners in the buy-to-let property area to put their best foot forward. Let’s begin with some basics about buy-to-let property investment.

Understanding the meaning of buy-to-let properties

Buy-to-let properties represent real estate properties that an entity acquires with the primary purpose of being leased out to suitable tenants under a rent agreement.

General types of buy-to-let properties

Regular vanilla buy-to-let properties

These denote flats, studios, or 3-4 bedroom homes that most landlords undertake for buy-to-let purposes. Since they are the most common forms of buy-to-let properties, they get recognized as vanilla buy-to-lets.

Multi-unit freehold blocks

This type of property refers to a single freehold block or building that has different, independent, and distinct residential sections with demarcated access points. The landlord rents out each of the sections separately under a model AST (Assured shorthold tenancy) agreement. Professional real estate entities prefer such multi-unit freehold blocks to generate significant cash flow in the long run.

HMOs (Houses in multiple occupations)

HMOs represent residential units where different tenants are given exclusive access to certain areas of the property with shared living areas such as kitchen, bathroom, or the living room. The landlord has the option to lease out the HMO property with one AST agreement for all the tenants or each tenant has a distinct agreement.

Semi-commercial buy-to-let properties

Such buy-to-let areas properties are a mix of residential and commercial rental units. Flats with shops and office spaces, restaurants and guesthouses with a segregated owner’s residence space are some examples of semi-commercial buy-to-let properties.

Choosing the ideal property

Location

The better the location, the more rent you can expect for your property. Tenants will be willing to rent a place that promises better amenities and proximity to essential services like public transportation, schools, and hotels, and supermarket stores. A decent neighbourhood and low crime instances are also a plus. As a landlord, you should choose a property with a location stands up to such parameters that can lead to an increased demand from renters and thus a higher amount of rent.

Condition of the property

Along with the location, you must also account for the overall condition of the potential house property. Scrutinise the essential aspects such as the age of the property, the owner’s background, the possibility of any problems, warranties, safety certifications, and the need for renovations. You must ensure that the past owner/landlord complies with all legal requirements before selling the property to you.

Personal budget

The amount available after combining your personal savings and approved loans is the fundamental factor while choosing the property. You need to strike the balance between getting a premier property and affordability. Your budget is the threshold that you need to sustain while selecting the prospective houses.

Sourcing for financing options

There are various avenues for landlords to fulfill their buy-to-let mortgage requirements. However, while applying for loans, you must consider factors like:

Personal credit rating

Bad credit scores can affect your ability to get buy-to-let mortgages to finance your rental property. A credit score less than 700 in the model scores up to 999 is considered in the category of poor. You need to factor in the available loan options in line with your prevailing credit score.

Proportion of debt in comparison to your earnings

The debt-to-income (DTI) ratio is another critical factor that lenders assess before giving out the buy-to-let loan. Most banking and financial institutions permit a DTI in the range of 20 percent to 50 percent in the UK in line with your credit score. Ideally, it is best to keep your DTI up to 20 percent to avoid unnecessary risks. Again, most banks prefer to give out mortgages to people who can gain rent that is 25 to 30 percent more than the loan obligations payable.

Downpayment obligation

The upfront payment on buy-to-let mortgages in the UK is usually 25 percent of the potential property value. This percentage can vary from lender to lender.

Available savings

Technically, it is desirable to have accumulated savings that is sufficient to meet 3-6 months of the loan obligations payable along with your other essentials. It is always best to mindful of the possibility of no-rent for some part of the year.

Returns on investment in buy-to-let properties

The basic way to calculate the return you generate on your buy-to-let investment is to use the following formula:

(Annual rental income- Operating expenses for the year)/ Mortgage value

Consult RentonCloud to grasp more integral matters regarding buy-to-let properties!

Investing and managing buy-to-let property as a beginner can be a challenging endeavour. Fret not, experts at RentOnCloud can offer techno-savvy assistance to ease the entire process. We have a community of landlords as well as tenants and even offer property tax advise for landlords. Consult us now to ease your life as a landlord!