Why invest in a buy-to-let property?
Investing in a buy-to-let property is considered a highly stable way of utilising your savings. It can generate immediate income, passive income, long-term equity, and even a retirement fund.
Is it always a good idea? It depends on your situation, but compared to other types of investments, it can be lucrative and full of long-term opportunities – even with recent government changes.
In this article, we’ll explain the ins and outs of investing in a buy-to-let property, including the benefits, challenges, and how to maximise profits when choosing this type of investment.
What is a buy-to-let?
A buy-to-let is a property you purchase to rent out, not to live in. Most landlords get a buy-to-let mortgage to invest in a property, which is different from a residential mortgage. Lending rules are different, and you usually have to pay different interest rates for buy-to-lets.
Moreover, a buy-to-let is an investment – something you put your savings into to gain a steady income and long-term capital gains in return. It isn’t exactly a passive income stream, but it can be very low-maintenance depending on how you manage it (e.g., by using a letting agent or proptech software).
Why is a buy-to-let a good option?
Investing in a buy-to-let property – whether it’s an apartment, maisonette, or house – can be a highly profitable way to invest your savings. Landlords and those who own large property portfolios gain:
- Reliable income stream: Monthly rent from tenants creates a steady income stream, where incoming payments cover all outgoings/expenses, at a minimum.
- Capital growth: If the property value increases, you can remortgage to release the equity or sell to achieve capital gain.
- Long-term opportunities: As mortgage payments decrease over time, monthly income can increase. You can also take advantage of opportunities to grow your portfolio using equity gains.
- Pension fund: As a “reliable” income stream, the monthly income and capital gains are seen as a smart pension investment for many.
Even though recent changes to buy-to-let ownership have led to increased taxes and responsibilities on landlords, it’s still a profitable opportunity in the right location with the right strategy.
How to choose a profitable buy-to-let
Profitability with a buy-to-let heavily relies on choosing the right property in the right area. Your earnings are entirely dependent on whether you own a profitable buy-to-let – as opposed to a sinking ship.
Here’s a quick guide to choosing a profitable buy-to-let:
- Choose location carefully: Assess the local market carefully to determine the demand, going rates, and potential for future growth. Leverage data and speak to local letting agents.
- Decide your tenant market: It’s crucial to have a plan before purchasing a buy-to-let. Decide who you want to target and what your strategy will be to generate income and reduce voids.
- Select a low-cost property: Consider the maintenance needs and the long-term associated costs. For example, properties with chimneys require mandatory annual sweeping, and lenders often mandate stricter maintenance on properties with flat roofs.
- Research market changes: Keep abreast of any incoming changes affecting landlords and the bottom line. For example, the required EPC rating for buy-to-lets is expected to rise, meaning properties below this rating require heavy investment in the coming years.
Learn more about how to choose the right location for a buy-to-let.
How to maximise profits from a buy-to-let
You can maximise profits from a buy-to-let in different ways, from changing your registration status and utilising tax deductions, to lowering your expenses and reducing the risks of voids.
Here’s a quick guide on ways to maximise profits in a buy-to-let:
- Buy in high-yield locations: All buy-to-lets should be profitable, but some locations/properties will have higher yields than others. If high cash flow is the goal, choose the property and location wisely.
- Optimise mortgage structures: Buy-to-lets qualify for interest-only or repayment mortgages – use the best option for your business.
- Utilise tax deductions: Landlords qualify for tax deductions when submitting tax returns, which can increase profits. Learn more about what qualifies for landlord tax deductions.
- Consider using a limited company: Depending on your specific circumstances and income, buying a property or switching an investment to a limited company can have tax benefits.
- Lower expenses, where feasible: The higher your expenses, the lower your profits. Consider ways to reduce unnecessary expenditure. E.g., using property management software vs. employing a letting agent.
- Reduce/prevent voids: Gaps in tenancies mean lost income – especially when you have to continue mortgage payments. Prevent voids where possible by maintaining good relationships with tenants, investing in necessary renovations/upgrades, and advertising smartly.
Other types of investments: Where does a buy-to-let property rank?
You can invest your money in different types of investments. The main options available are buy-to-let properties, a home you live in, a savings account/ISA, or stocks and shares.
Here’s a quick guide on how each investment compares:
Buy-to-let properties
Buy-to-lets provide a monthly income stream and the potential for long-term capital gains, as properties generally increase in value over time.
The benefit of owning a buy-to-let property is that you can release the equity to fund other investments without having to downsize your home or put it at any risk.
The average return on investment for buy-to-lets is between 5-8%, making it a lucrative investment opportunity that’s widely considered stable.
Read our full guide to buy-to-let properties for landlords.
Property (home)
Purchasing a home (instead of renting) is considered an investment, where you put your savings into the home and (typically) pay off a mortgage loan over time. You have to sell to release equity, which you can use to pay for another property of a higher value or something else (like an extension or buy-to-let).
Your return on investment depends on a huge host of factors, like how much you invest in the property, how long you stay, and how much you sell the property for when you move.
Savings/ISAs
You can invest your money in savings accounts or ISAs that offer monthly/annual interest in return for holding your money with their bank.
Interest rates vary depending on the Bank of England interest rate, which, in recent years, has led to savings accounts offering between less than 1% and around 4%.
Stocks and shares
Investing your money in the open market is completely variable in terms of ROI. When utilising a stocks and shares ISA, you can see returns over a long period, with fluctuations in terms of profits/losses over the years.
For other investments, like trading in the stock market, it’s considered a highly volatile market. You can see short-term gains, long-term gains, or high losses, depending on where you invest your money. It’s an investment that requires skills, knowledge, research, and strategy to get right.
FAQs
What is the average income of a landlord in the UK?
Based on official data, the average property income of a UK landlord was £19,400 in 2023-2024. The majority of landlords (55%) have a job alongside being a landlord (either full-time, part-time, or self-employed), while around 35% of landlords are retired, using buy-to-let property as a pension fund.
What type of rental property is the most profitable?
HMOs (houses of multiple occupancy) are usually the most profitable type of buy-to-let property. Rental yields tend to be much higher for HMOs compared to single-lets – recent data suggests 7-10% compared to 4-6% – especially in the right areas (like in big cities or near universities).
HMOs are essentially big houses or apartments, with multiple bedrooms that are let separately, with each tenant renting their own bedroom, but sharing spaces like kitchens, bathrooms, and living areas.
Tenants in HMOs prefer to find new roommates themselves by asking friends, colleagues, or advertising the vacancy on social media, which can negate the need for landlords to pay letting agent fees.
If HMO landlords use a property management software to renew each tenancy agreement, this can reduce costs and increase profits even further, removing the need for a letting agent entirely.
What adds the most value to a rental?
Rent payments can increase with inflation, but there are ways to up your income by investing in value-adding amenities.
Value-adding upgrades often include investing in energy efficiency, modern interiors, newer appliances, and better security (like cameras, door codes, or concierges).
You can also charge more for a property if it offers off-street parking, garage space, loft storage, or close proximity to local attractions (like bus stops, train stations, supermarkets, gyms, high streets, etc.).
Consider speaking to a local letting agent to see what could bump your property up into the next rate bracket. Or learn more about how to raise rent in a buy-to-let.
Things to remember: Why invest in a buy-to-let?
- Buy-to-let properties are investments, not homes, and they should offer you monthly income alongside long-term capital gains. Generally, they are seen as a stable type of investment for your savings.
- Before purchasing a buy-to-let, do your research. Consider the location, yield rates, property growth predictions, tenant market, and future demand before making an offer.
- Leverage profit opportunities, where possible. Landlords often qualify for tax deductions, mortgage optimisations, corporation benefits, etc., that can increase profits in the right situation.
- Consider market changes: Buy-to-let investment offers long-term gains as well as immediate cash flow, but it’s important to plan ahead. Research market changes that could impact profits, like changes to EPC rules and the implications of the Renters Rights Act.
- Evaluate potential expenses and keep these low to maximise profits. E.g., use property management software vs a letting agent, and invest in renovations that can reduce ongoing maintenance costs.
