How to become a landlord: what you need to know before taking on tenants

Bricks and mortar have been a pillar of British retirement plans ever since the birth of the buy-to-let mortgage more than 26 years ago. 

It’s a tried and true strategy which – if done properly – gives investors two sets of returns; rental income and capital growth of their underlying asset. More than half of landlords have invested in property as part of their retirement plans, according to the English Private Landlord Survey.  

But property investment is not without its pitfalls, and recent tax and regulatory changes have triggered an exodus of landlords from the sector. Interest rate rises have also dramatically increased the cost of borrowing, triggering a profit crunch which has pushed thousands of investors into the red.

Becoming a landlord is not for the faint hearted; research is vital to ensure your investment remains a good one. In this guide we will cover:

• Getting a buy-to-let mortgage
• How much deposit do I need?
• What rates can I expect to pay on a buy-to-let mortgage?.
• Do I have to get a buy-to-let mortgage?
• How much does a buy-to-let property cost?
• How much cash will I need to get going?
• How much should I put aside for maintenance?
• Is pension or buy-to-let best to fund your retirement?
• How often can I increase rent?
• Can I easily evict a tenant?

Getting a buy-to-let mortgage

Most landlords choose to pay their mortgage on an interest-only basis to keep monthly costs down, so if you sell the property you will still need to repay the initial loan amount. 

The way in which lenders assess affordability for a buy-to-let mortgage differs from a typical homeowner loan. A borrower with a homeowner mortgage will be assessed for affordability on their income, but a buy-to-let borrower will be assessed using an interest-coverage ratio (ICR). 

This metric requires basic rate taxpayers to have a rental income on the property at least equal to 125pc of the monthly mortgage interest – this rises to 145pc for higher rate taxpayers. 

A lender will use rental valuations on similar properties in the same area when assessing affordability on a new buy-to-let purchase.  

Nicholas Mendes, of broker John Charcol, said most lenders will also require buy-to-let borrowers to be earning a minimum of between £15,000 and £20,000 outside any rental income. 

He said: “Banks do not want to lend to a borrower who will become dependent on rental income straight away. They want to make sure you could still afford payments if you were relying solely on your own income, if there were ever any gaps in the rent.”

How much deposit do I need? 

Most lenders require a deposit of 25pc of the property’s purchase price, although some will accept 20pc. 

As with a normal mortgage, borrowers who put more equity into a property are less risky customers for lenders and will qualify for better interest rates.

What rates can I expect to pay on a buy-to-let mortgage? 

The cost of borrowing has soared in recent months of 2022, with average rates for a two-year fixed buy-to-let mortgage currently at 6.67pc, which has more than doubled from 2.9pc in December 2021, according to data analyst Moneyfacts. 

On a £160,000 interest-only loan – enough to buy an average buy-to-let property in England and Wales priced at £216,000 with a 25pc deposit – a rate of 6.67pc would equate to monthly payments of £890. 

A landlord with the same size loan who locked in the average rate at the end of 2021 would have paid just £303 a month.

The huge rise in borrowing costs is threatening to push many landlords into a loss, or forcing them to increase the rent they charge. Anyone looking to borrow a buy-to-let mortgage should consider whether their investment will still be profitable should their interest rate rise. 

Do I have to get a buy-to-let mortgage?

Whether you’ve purposely set out to be a landlord, or you’ve become an accidental landlord, risk the wrath of their mortgage lender if they fail to get their explicit permission before letting out a property.

While it might seem like a small inaccuracy, renting without your lender’s knowledge is a breach of contract and constitutes mortgage fraud. However, you might be able to carry on with your residential mortgage in certain circumstances. 

How much does a buy-to-let property cost? 

The average cost of a buy-to-let property in England and Wales is £213,020, according to analysis by estate agency Hamptons, and an investor would need £53,255 for a 25pc deposit. 

And don’t forget stamp duty – the additional 3pc surcharge for investors would result in a £6,390 tax bill. 

But initial investment varies greatly depending on location – we’ve found the best buy-to-let locations if you have £50,000 to invest. 

The cheapest place for landlords to invest is the North East of England, where the average buy-to-let costs £105,770. 

Next door in the North West of England, an average rental property costs £141,920 and in the East Midlands a landlord can expect to pay £168,350 for a typical buy-to-let.  

Landlords further south will need deeper pockets. The average buy-to-let in the South West of England costs £224,690 and rises to £262,850 in the South East of England. 

Buy-to-let investment in London is a different ball game altogether. The average rental property in the capital costs £501,530, profit margins are small and yields are the lowest in the country – it is not a market recommended for a first-time landlord.

How much cash will I need to get going?

Investing in buy-to-let requires cash for more than just a deposit. Second homes in England are subject to a 3pc stamp duty surcharge on top of normal rates, which can add thousands of pounds to a property purchase.

For example, if you were purchasing a home for £213,000 as your main residence it would be exempt from any stamp duty as it falls under the standard nil-rate threshold of £250,000. But purchasing a property at this price as a buy-to-let would incur a 3pc tax charge of £6,390.

The exception to this rule would be if a landlord were also a first-time buyer. They would not incur the second home stamp duty surcharge, but nor would they qualify for any first-time buyer tax relief, and instead pay standard rates.

Be aware that buying an investment property as a first-time buyer might also cause issues with mortgage lenders, who prefer buy-to-let borrowers to already have their own property.

Mr Mendes said: “If you are a first-time buyer applying for a buy-to-let mortgage, some lenders will either decline it or require an additional party on the mortgage who isn’t a first-time buyer.”

How much should I put aside for maintenance?

Prudent investors will also need a cash reserve for maintenance costs and unexpected gaps in rental income, says Robert Jones of Property Investments UK.

He said: “We recommend investors have a separate pot for surprise costs. In the best case scenario this would be enough for six months of mortgage payments on top of maintenance and repair costs.

“A middle ground would be enough to cover unexpected repair and maintenance costs, without enough to cover mortgage payments in the event of a rental void.”

As a rough guide, landlords should set aside 1pc of the property’s value to cover annual repairs and maintenance. So in the case of an average £213,000 rental property, ringfence £2,130 for upkeep each year.

The initial cash injection in an investment property will be higher if it requires renovation or has a poor Energy Performance Certificate (EPC) rating. However, landlords can breath a sigh of relief – for now.

Earlier this month, the Government u-turned on its energy efficiency requirements for landlords.

Until now, landlords had been working on the assumption that new lets would need to have an EPC rating of at least “C” by 2025, and by 2028 for existing lets.

These deadlines have now been scrapped and it is not clear what, if anything, will replace them.

Is pension or buy-to-let best to fund your retirement?

The average gross yield on a new buy-to-let purchase was a healthy 6.2pc, according to Hamptons. That is in contrast with a target 4pc rate of income from a typical pension pot in drawdown.

It is possible to make good money in bricks and mortar, especially if you benefit from house price growth which significantly boosts returns. The average landlord in England and Wales sold their buy-to-let in 2021 for £91,270 more than they bought it for, having owned the property for just less than 10 years, according to Hamptons.

But investing in buy-to-let is not without multiple pitfalls that have serious consequences. Getting it wrong can lead to heavy losses and, if you fail to protect your tenants, fines and legal troubles.

The rulebook for landlords is vast and there are more than 160 pieces of legislation which investors must abide by, according to the National Residential Landlords Association. This is also likely to grow in the coming years with new energy efficiency standards on the horizon. 

Landlords also need to factor in the emotional strain of their investment. There is a risk that problematic tenants damage a property or stop paying rent, leading to rental voids and sleepless nights for the landlord. It is a far more hands-on investment than placing your money in the stock market.

How often can I increase rent?

There are strict rules on how often a landlord can increase rent, depending on the type of tenancy in place.

Fixed-term tenancies – which the Renters’ Reform Bill intends to ban, in favour of rolling tenancies – can include rent increases at the end of the term, or earlier if agreed with the tenant.

For a periodic tenancy, which rolls month-to-month or week-to-week, rent can be increased once a year, unless agreed otherwise.

A minimum one month’s notice must be given if a tenant pays rent weekly or monthly and six months’ notice given for a yearly tenancy.

Regardless of the type of tenancy in place, some golden rules apply to rent increases. Writing any rent clauses into the tenancy agreement will help avoid any disputes further down the line and any increases should be fair and in line with local averages. Good communication with tenants will help keep both parties happy.

Can I easily evict a tenant?

As with rent changes, there are important steps landlords must follow to ensure an eviction is legal. It is likely you will have an assured shorthold tenancy with your tenant – these are the most common rental agreements.

However, the rules around eviction in England are changing. The Renters’ Reform Bill aims to scrap Section 21 evictions in a bid to give tenants greater protection. Serving a Section 21 notice under the Housing Act 1988 allows landlords regain possession of the property once the fixed term ends, without having to give a reason, following two months’ written notice.

It will continue to be possible to evict a tenant using a Section 8 notice, which can be served before the end of their fixed term if they have breached the terms of the rental agreement – for example, if they have rental arrears or are disturbing neighbours with antisocial behaviour.

If a tenant refuses to leave, the landlord will need to escalate the repossession to the courts – but these are bogged down with chronic delays, so the process is often far from simple.

This article was first published on 9 August and is kept updated with the latest information.