This is probably the most traditional route into property investment. You buy a secondary property, rent it out to tenants over a long period of time, using the rent to pay for the mortgage or recoup the cost of the property.
Unless you’re already sitting on a chunk of money to buy the property outright, you’ll need to take out a specific buy-to-let mortgage. These differ from your standard residential mortgage in a couple of ways. Firstly, the minimum 5% deposit for a residential property often rises to 25% for a buy-to-let. Monthly payments are also often higher so you’ll need to crunch your numbers to make sure your bottom line isn’t affected.
With the stamp duty holiday now over in the UK (at time of writing March 2022), an additional fee must be paid on top of your initial deposit which is currently 3% of the total value in most cases.
Once you’ve got your property you’ll officially gain the status of landlord. With this comes extra legal obligations such as ensuring a safe environment to your tenants. If you prefer a hands-off approach you can hire a property manager for an additional cost. If you consider yourself handy with DIY, now’s the best time to polish up on your skills to prevent any bumps further down the road. It's also worth noting that once you become a landlord you'll also need to submit a self-assessment tax return each year too.
Due to government measures, buy-to-lets have less profitable punch when compared to the past. Although the first £1,000 of your property’s rent is tax-free, higher and additional tax rate payers feel the pinch the most when it comes to profit. Previously, landlords could deduct mortgage interest payments from their rental income. Today’s landlords can only take advantage of a 20% tax credit on their interest. This means that if you currently pay 40% or 45% tax on your salary, you’ll be paying more for your property’s income.
It is possible to set up a limited company to include these mortgage interest payments within, however if you’re new to property investment, it may be a good idea to seek professional advice.