Buy-to-let explained

Buy-to-let explained

This article uncovers everything you need to know about buy-to-let.

September 24, 2022
2 min read
Buy to let explained

For many investors around the globe, buy-to-let in London is considered to be one of the most rewarding and profit-yielding investments. Why is this, you may be asking? Generally speaking, investing in property is viewed as a safer investment compared to stocks or shares. Further, the profit margins are also relatively high. Moreover, property prices tend not to fluctuate substantially, and, more often than not, investors get capital appreciation. We could argue that options average around 4,5-5% net profit. Doesn’t sound bad, does it?

But, what exactly is buy-to-let? A buy-to-let property is an investment that induces income for landlords after it’s rented out. To qualify for a buy-to-let mortgage, you mostly need to own a property in the UK. To get a buy-to-let mortgage, you need at least a deposit that equals 25% of the property price and the mortgage is interest-only. This means that your monthly payments are only the interest of the mortgage and not a portion of the total mortgage amount (or else, the capital). As a result, the monthly payments are less compared to a typical consumer mortgage, however, you must be prepared to pay it off in full by selling the property or remortgaging at the end of the mortgage term.

Simply put, you can buy a property, induce income from the rent throughout the mortgage length (for example 25 years) and pay off the mortgage by selling the property at the end of the mortgage term. 

The majority of lenders typically require a minimum income of £20,000, while a few lenders do not require a minimum income. Moreover, many lenders require the predicted rental income to be 125% or 145% of the landlord’s mortgage payments. For example, if the landlord’s income from the rental is £1,500 per month, the maximum mortgage repayment amount would be around £1,000.

But, how you do make a profit with buy-to-let? Initially, you should calculate all your expenses: for example, you buy a property for £420.000 (interest only 2.7% mortgage for 25 years), the deposit is £120,000, stamp duty is £23,600, solicitor’s fees are £2,000, furnishings for £3000, other miscellaneous expenses £1,400; the expenses inch up to £150,000. The mortgage repayment would be £685 monthly and the service charges (including ground rent) around £270 per month, amounting to £955. Your expected rent is around £1900. Therefore, your profit from buy to let before tax would be £950 per month. 

Another key consideration is whether you are going to manage the property yourself or you will outsource the activity to a real estate agent. Often, agencies charge around 12% off the property price for management and 6% off the monthly rental to rent out the property to tenants. Xenofon’s knowledge of the London property market draws on 10 years of experience and unparalleled industry insights.

If you’re looking to learn more about buy-to-let, rentals and property management, get in touch with Xenofon today.