FAQs

Here we'll answer your most Frequently Asked Questions (FAQs)

Buy-to-let property

What is buy-to-let?

How does buy-to-let work?

Why invest in buy-to-let property?

How do I know which property to choose?

Can I get a mortgage with buy-to-let?

What are the costs associated with buy-to-let?

How does buy-to-let compare to other asset classes?

What are the benefits/risks of investing in buy-to-let?

Off-plan buy-to-let property

What are the advantages of buying off-plan?

What is the difference between freehold/leasehold?

Yields

What kind of yields can I expect from a buy-to-let property?

What is the difference between NET yields and gross yields?

How do I calculate gross and NET yields?

What does it mean by ‘assured NET yields’?


What is buy-to-let?

Buy-to-let is the name given to properties purchased with the intent of renting them to the Private Rented Sector (PRS). Buy-to-let is a popular investment asset, as the UK has a strong property market and high demand for rental accommodation.


How does buy-to-let work?

Buy-to-let is a relatively straightforward concept, in which investors buy a property with the specific intention of renting it out, thus becoming landlords. Once they have purchased the rental property, it is then put on the rental market and a tenant moves in, paying the landlord a pre-agreed monthly amount to live in the property. Formal documentation is signed which fixes the tenancy for a set amount of time (generally between 6-12 months), in which the tenant is responsible for paying the rent during that time. Bills and utilities are generally the responsibility of the tenant during their tenancy, but the maintenance of the property is the responsibility of the landlord. Even though a tenant legally lives in the property, the property belongs to the landlord, so they receive the rent paid by the tenant, as well as any capital appreciation the property accrues from any significant increases in value, which is why buy-to-let is a financially viable and often lucrative investment venture.

It is also important to think about potential returns. Does it offer high yields? is the potential for capital appreciation positive?

Considering all aspects of a potential buy-to-let property before your purchase is the key to a successful investment.


Why invest in buy-to-let property?

Investing in bricks and mortar has always been a popular choice as it is a tangible asset which you have control over, with a steady growth in value expected over time. Buy-to-let allows you to make the most of that growth (also known as capital appreciation) as well as another stream of income - the money made from renting your property out. These generous incomes available make buy-to-let a very attractive investment proposition.


How do I know which property to choose?

Choosing your perfect property can be tricky—there are a lot of different elements to consider. First and foremost you need to assess your finances to see how much you can afford to invest (bearing in mind that buy-to-let is generally a long-term asset and so capital is usually tied up for a considerable length of time), and also whether investing in buy-to-let will affect your tax position. Visit our Tax and Property section for tax guidance, but it is always advisable to seek professional financial advice before investing.

Once you have decided on your budget, you next need to think of your ideal tenants—would you like to rent to families, young professions or students? If targeting families, a home close to amenities like shops and schools would be highly advantageous. If your tenants of choice are young professionals, city-centre apartments close to bars and restaurants always rent well to this demographic. Student tenants are best served by Homes of Multiple Occupation (HMOs) or Purpose-Built Student Accommodation (PBSA), but be aware that if you are targeting the student segment there are regulations to the buying and selling of student property.

Next you need to think about your financial returns—will a property in a specific area targeting a specific tenant type get you your required return on investing? Is it lucrative? Is there a proven track record in the area you are considering of significant capital appreciation? Considering all aspects of a potential buy-to-let property before your purchase is the key to a successful investment.


Can I get a mortgage with buy-to-let?

Yes, generally you can get a mortgage on buy-to-let properties, but there are strict regulations in place governing lending for non-owner-occupied properties. There are specifically-designed buy-to-let mortgages that are different from residential mortgages offered by selected lenders, and are subject to specific criteria including price of the investment property and expected rental yields, with each lender different as to their criteria for a buy-to-let mortgage. Generally high-street banks do not offer mortgages on off-plan properties, but that doesn’t mean they don’t exist—you might just have to venture towards specialised lenders to find them. Buy-to-let mortgages can differ greatly, so it is advisable to seek the advice of a professional mortgage adviser to discuss your individual needs. Refer to our Buy-to-Let Mortgages section for general advice on procuring a buy-to-let mortgage, or else contact Knight Knox Mortgage Solutions for more tailored advice.


What are the advantages of buying off-plan?

By its very definition, an off-plan property is one that has not yet been built, or is still in its construction period, and thus is seen as a ‘riskier’ investment than a traditional, built property. However, there are clear rewards to mitigate the perceived risks, with the main one being that off-plan properties are generally priced significantly lower than market value, which means that you are buying a property at today’s rates with the expectation that the property’s value will rise in tandem with the market when the time comes for the property to complete.

Of course this capital appreciation depends on the location you choose to purchase your off-plan property, but if you are savvy and invest in big Northern cities like Manchester and Liverpool (locations whose housing and rental markets are expected to continue to grow in the foreseeable future), you can almost guarantee some level of capital appreciation to have accumulated in the property before your first tenant has even moved in.

Like all investments off-plan properties do have risks attached, but these can be completely mitigated by purchasing in tried-and-tested property hotspots, and through a developer who has a proven track record of completing their developments on time and to an impressive standard.


What is the difference between freehold/leasehold?

Freehold means you own both the property and the land it stands on outright, whereas leasehold means you are effectively leasing the land the property is built on from the land’s freeholder for a specific amount of time. These leases can last any amount of time (as little as 40 years or all the way up to 999 years), and during this time leaseholders are expected to pay maintenance fees, annual service charges and ground rent to the freeholder, who is legally responsible for maintaining the common areas of the building (details of which will be provided in the lease).

It is a good idea to check whether your property is a freehold or leasehold before purchase, and if it is the latter you need to be sure how long the lease on your buy-to-let property is.


How does buy-to-let compare to other asset classes?

Residential buy-to-let is one of the most popular types of property investment because it is familiar to investors in comparison to the industrial or commercial markets. Yields on buy-to-let investment are both strong and consistent, and are on top of capital appreciation which is an extra layer of returns for investors. The long term story of investing in property is one of continual success even when taking minor short term blips into account.


What are the benefits/risks of investing in buy-to-let?

Benefits of buy-to-let Risks associated with buy-to-let
Stable, buoyant and lucrative market Housing market, like all other markets, isn’t protected against external shocks like a financial crisis
Capacity for significant capital appreciation Property value may decrease if the market falls
Tangible ‘bricks and mortar’ asset Risk with off-plan that the property may be delayed or may not get built
Rents growing across the UK, meaning increasing investor returns Need to ensure the market can sustain growing rents
Supply/demand imbalance means consistent tenant demand Risk associated with ‘void periods’ (when the property is sat untenanted for long periods)


As with any investment you make, there are risks and benefits associated with the purchase. However, to ensure it is the right choice for you, you need to ensure that the benefits far outweigh the perceived risks. Generally, as long as you use the help of dedicated property professionals to maximise your available budget, and invest wisely in popular rental hotspots that have a history of both rental and house price growth, generally this will alleviate all potential risks in the market.


What kind of yields can I expect from a buy-to-let property?

Yields vary across the country, depending on where and what you buy. Contrary to popular belief, London actually offers some of the worst rental yields simply because house prices are significantly higher than all other UK cities, and the rents cannot keep up. Therefore, data shows that regional locations such as the Northern Powerhouse cities offer the best rental yields in the UK, regularly above 5%. Rates can go up or down, but by investing in cities like Manchester, Liverpool and Leeds can promise annual NET yields of around 5-6%.


What is the difference between NET yields and gross yields?

When the term gross is used (i.e. gross yields, gross rental returns), this means the value before deducing any costs. Therefore, NET yields refer to the value after deducing all associated costs.

For example, a property could deliver annual rents of £9,000 (gross rental returns), yet when you deduct costs like ground rent, maintenance and other ancillary costs, the actual true rent is more likely to be around £7,000 (NET rental returns), which is the amount of profit for the landlord after all costs have been deducted.

Remember that the levels of gross and NET rental returns vary depending on the price, type and location of your property.


What are the costs associated with buy-to-let?

There is no definitive answer to this question, as it all depends on factors like whether you are going to manage the property yourself, whether you’re buying freehold or leasehold (as ground rent and maintenance fees may be applicable), and how you are planning to finance your buy-to-let property (if financed with a mortgage, will have to factor in adviser costs, repayments and interest).

However, fixed costs that you will definitely have to factor into your buy-to-let purchase are unavoidable costs like Stamp Duty and solicitors’ fees, as well as setting aside contingency money for repairs and due maintenance on your property (it is generally recommended to put aside between 2-3 months’ rent for any repairs or void periods you may experience).


How do I calculate gross and NET yields?

Yields are the return-on-investment per year, expressed as a percentage, when you divide the property’s cost by the amount of income it will generate.

For example, if a property costs £150,000 and receives a gross annual rent of £10,000, this can be worked out by dividing the gross annual rent (£10,000) by the property’s value (£150,000) and multiplying that figure by 100 to get the gross yield (6.6%). However, to get the NET yield, you would do exactly the same sum but using the NET annual rent (the overall rent minus any costs, which in this case would be £8,000), so the NET yield would be 5.3%.

Gross yields give you a representation of what the investment will give you, but NET yields are a better indication of what kind of profits you should receive after all costs. Use our Yield Calculator to find out what yields your property could achieve. .


What does it mean by ‘assured NET yields’?

Assured NET yields refers to a rental guarantee developers offer landlords, meaning that for a specified fixed period (generally 1 year, 2 years or 5 years), rental income on the property is guaranteed. Whilst this is generally good for nervous investors as it guarantees rental income for a fixed period even if there is no tenant in the property, assured yields can often hinder the organic growth of rents in the property.

For example, if an off-plan property provider was offering NET yields of 5% guaranteed for 5 years, this is good for the landlord as it means they will have 5 years’ uninterrupted rental income of 5%. However, it stints the organic growth of rents, because during the assurance period rents cannot go up, so landlord will receive the same amount of rent across the whole 5 years, even if the market has moved and rents have increased significantly.

Knight Knox no longer offer properties with assurance periods, as past experience has shown that our properties, once built, can generally command higher rents than first expected.


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