Is buy-to-let a good investment?

Buy-to-let is in the spotlight. It's easy to see why. For its proponents, there's almost a perfect storm: rising property markets, pittance interest rates on savings, mortgage rates at lifetime lows, and an investment opportunity that is (in theory) easy to understand. And it's rooted in the traditional British affection for bricks and mortar.

However, tax changes will affect many buy-to-let investors, including the new surcharge on Stamp Duty. It may be more difficult to ensure a positive return on buy-to-let.

So is buy-to-let still worth it as an investment? If so, is it worth prioritising over other forms of investment, such as funds and shares or your pension?

We lay out the risks and opportunities, so you can make your own decision. And if you need to borrow to get started, we help you compare every buy-to-let mortgage on the market.

First, a definition:

What is a buy-to-let investment?

Buy-to-let is purchasing a property with the intention of letting it out to tenants.

You can look at buy-to-let in the same way as any kind of investing: you're putting your capital at risk in pursuit of a regular income, capital growth or a combination of the two:

However, it's quite different to holding investments like stocks, bonds or precious metals:

  • For a start, your assets have low liquidity – another way of saying it isn't easy to get your money back, because it takes time and costs money to sell a property
  • There are lots of legal responsibilities, some of which we cover below.
  • Usually, there is borrowing (gearing) involved, in the form of a mortgage
  • By 2021, buy-to-let investors with a mortgage may be taxed on revenue, not profit

All in all, buy-to-let needs looking at differently. Rather than simply investing money, it might be better viewed as going into business.

Unless you already own a property outright, or can buy a property with cash, you'll need a dedicated buy-to-let mortgage to help you cover the purchase cost.

Intention to let the property
If you buy a home to live in, but later your circumstances change, you are what the media calls an “accidental landlord” – in other words you didn't set out to invest in property but are letting to keep ownership of a home. Nevertheless, if you're still paying off the home, you might need to switch to a buy-to-let mortgage. This depends on your current residential mortgage – you'll need to check the contract and get in touch with your lender.

Aims of buy-to-let investing

  • Income can be provided by rental income once the mortgage and other costs have been covered. This is usually the primary goal of buy-to-let investors.
  • Capital growth: if you choose well and the market goes in your favour, the property could rise in value. Note that when you sell, it will likely be subject to Capital Gains Tax, and the rates you pay on gains from residential property are higher than on other types of asset.

Risks of buy-to-let investing

Bricks and mortar may seem ‘safer’ than other investments like stocks and shares; nevertheless, if you can't afford to lose access to your capital for the medium to long term or you aren't comfortable with the risk of getting back less than you put in, buy-to-let investing may not be for you. Being a landlord also comes with certain responsibilities, which you should be prepared to take on before you invest.

Take these risks into account before you invest:

  • It ties up your capital. To access your capital you'll either have to sell or remortgage your rental property, which can take time. You'll need an emergency fund in place to cover unexpected expenses while your capital is locked away.
  • Property prices can go down as well as up. You may not be able to sell your property quickly, and you may not get what you paid for it which could leave you in negative equity.
  • Rental income can fluctuate. The amount that tenants are willing to pay can vary according to supply and demand. If you have to reduce the rent, it could affect your ability to keep up with your mortgage payments.
  • It can take time to find tenants, and they won't always pay their rent on time. If your property stands empty for a period of time (known as a void period), or your tenants miss a payment, it could quickly eat into your profits and could leave you at a loss.
  • You're responsible for maintaining the property, which can leave you with unexpected demands on your cash flow and affect your overall returns.
  • You have legal responsibilities to your tenants; if you inadvertently break the law you could end up with fines or a criminal record.

If you don't feel able to take these risks, consider a lower-risk alternative to buy-to-let investing.

Costs of buy-to-let

As a landlord you are effectively running a small business. Apart from the cost of the property, there are a number of other costs to consider.

Did you know?

Landlords overestimate returns by up to 50%, according to a recent report, by failing to take into account the additional costs of maintaining a property.

One-off costs

  • Stamp duty: If you're buying property in England, Wales or Northern Ireland that costs £125,000 or more, you will need to pay Stamp Duty Land Tax (calculate how much this could cost).

    From April 2016, Stamp Duty rates will be 3% higher for buy-to-let purchases than for standard purchases.

    In Scotland, the equivalent is called Land and Buildings Transaction Tax (LBTT) and applies to properties worth £145,000 or more (visit the Scottish Government website for more information).
  • Mortgage fees: If you want to secure the most competitive buy-to-let-mortgage interest rates, there are usually arrangement fees to pay, which can easily exceed £1,000. (However, our mortgage comparison tables let you set a limit on fees).
  • Conveyancing fees, surveyors' fees and a valuation: These apply when you're buying any property and can add up to several thousand pounds. See our piece on costs of buying a house for more detail on conveyancing.

Ongoing costs

  • Property maintenance: Some costs can be planned for, such as a Gas Safety Certificate (£80) and cleaning at the end of a tenancy. The big uncertainty is repair costs. You need cash in reserve to cover emergency expenses that aren't covered by your insurance.
  • Insurance: This typically costs between 2–3% of the rental income, but will depend on whether you want to insure contents (if it's furnished) and what area the property is in.
  • Letting agents: A letting agent's fee will usually be taken as a percentage of your rental income. You can expect to pay between 10% and 15% for a full management service, but you can choose to do some of the work yourself and pay less – it depends on your time and budget. Find out more about how to choose a lettings agent.
  • Mortgage interest: If you have a buy-to-let mortgage, the monthly interest payments will be one of your most significant outgoings. You can currently offset this against your profits before tax, but not for much longer – see below.

Your responsibilities as a buy-to-let landlord

As well as the financial costs involved, make sure you have the time to take on the responsibility of being a landlord. These are some of the things you are obliged by law to take care of:

  • Keep the property safe: You must have gas safety checks carried out by a Gas Safe-registered tradesperson once a year. All electrical appliances and furnishings must also pass safety checks (particularly fire regulations). You will need to fit a fire alarm, and should consider fitting a carbon monoxide detector.
  • Carry out repairs: If something breaks and the tenant isn't at fault, you must get it fixed or replaced as soon as reasonably possible.
  • Secure tenants' deposits: When a tenant pays their deposit, you must place it in a secure holding scheme such as the Deposit Protection Service. This is to ensure that tenants can always get their deposit back, even if the landlord's circumstances change.
  • Carry out inventory checks and inspections: Most landlords pay someone to make regular inspections of the property, as well as carrying out an inventory check at the end of the tenancy.
  • Deal with problem tenants: If your tenants are harassing their neighbours or breaking the law, you will need to deal with it. Of course, it is also in your interest to get in touch with tenants who haven't paid their rent on time.

A letting agent can do some or all of these jobs, saving you time and hassle – but their fees will eat into your yield. For a full management service you can expect to pay up to 15% of your rent, but if you just want an agent to advertise your property and find tenants the fee will be more like 10%. If you do choose to use a letting agent, make sure you're clear on exactly what you're paying them to do, and find out in advance what extra costs they can charge you for.

How to choose the right buy-to-let property

Choosing a buy-to-let property is different to choosing a home, and it requires a bit of market research. These are the three main things to think about:

  • Your target tenant: Who are they, what are their needs? If you're buying a house to rent out to students, for example, think about access to transport and university. If you want to rent out a family home, look into local schools, and so on.
  • Supply and demand: What kind of property is in high demand in the area? Are people looking for houses or flats? Is parking important? Research can help you out here: what kind of properties are snapped up quickly in your area?
  • Is the property mortgageable? If you're borrowing to buy, lenders can be choosy about property. Some lenders are wary of ex-council flats and new developments, as they may be overpriced. Others won't lend to you if a property is too cheap – many will set a minimum valuation limit eg £50,000.

Buying a property in your own area isn't a must, particularly if you plan to use a letting agent to manage tenants and deal with maintenance. However, having some knowledge of the area that you're buying in is essential.

If you do live in the same area as your buy-to-let property there may be added risk if property prices fall: you're exposing yourself to the local property market twice over.

Buying a property that needs renovation

Many buy-to-let investors seek out properties that need some work doing before they can be rented out. This approach has potential drawbacks as well as benefits:


  • The asking price will be lower
  • Refurbishing a property can significantly boost its value, if you make the right choices
  • If you have the necessary skills you can save money by doing some of the work yourself


  • There will certainly be a void period between purchase and getting your first tenant in
  • Depending on the extent of the work, you'll need to factor in the cost of hiring professionals
  • Things can go wrong which could lead to you spending more than you intended to

As a rule of thumb you should aim for the property to be worth 20% more than the purchase price and refurbishment cost combined by the time you've finished.

Buy-to-let and tax

Before investing in buy-to-let, you will need to consider how tax will affect you. Some of the above costs can be used to reduce your tax bill, softening the blow on your returns.

Rental income counts as taxable earnings for the purposes of Income Tax. You must contact HMRC when you start renting out a property, or you could face a fine.

However, you can claim tax relief on the mortgage interest you pay. Currently this is claimed at your marginal rate (so if you're a higher rate taxpayer, you can reclaim tax at 40%), but from 2017 buy-to-let tax relief will be capped at 20% (the change will be phased in over four years). For more information on how the recent changes to buy-to-let tax will affect your returns, visit our detailed guide.

You can also claim tax relief on:

  • Mortgage broker and arrangement fees. These can be claimed back in the year you took out the mortgage (however this is also likely to be restricted to 20% tax relief in 2017)
  • Letting agency fees, and the cost of advertising for tenants if you choose to find them privately
  • Any money you spend on repairs and maintenance – but you can't claim for extensions or renovations that will add value to the property (for example if you buy a property that needs work and renovate it)
  • Council tax, insurance, and any other costs associated with running the property

There may be Capital Gains Tax (CGT) to pay when you sell the property. You will need to submit a self-assessment tax return, and it's a good idea to keep all receipts and other records in case HMRC raises a query. From April 2019, any outstanding CGT will have to be paid within 30 days of selling the property.

Do you need a buy-to-let mortgage?

Once you've decided that buy-to-let is the right investment option for you, the next step is securing the money to buy a property. For most investors, this means taking out a buy-to-let mortgage. Visit our guide for more information on how to get a buy-to-let mortgage, and the special considerations involved.

How to calculate your investment returns

So, with all the above in mind, how do you work out if a particular buy-to-let investment is worth it?

The answer is in a figure called yield. This is the percentage of your investment that comes back to you as annual income.
Buy-to-let investors use this figure as a key indicator of whether an investment is worthwhile or not.

The annual yield on a buy-to-let property is your net rental income (after mortgage payments, maintenance costs, insurance etc have been deducted) divided by your initial capital outlay for the property. So if you buy a property for £300,000 and your net rental income in year one is £12,000, your yield for year one is 4%.

You can estimate the yield on a specific buy-to-let investment, or experiment with different scenarios, using our detailed buy-to-let yield calculator.

As with other investments, your capital is at risk, returns are not guaranteed, and buy-let investing should be seen as a medium to long term investment strategy.

Last updated: 13 July 2016