Acquiring buy-to-let (BTL) property can be a useful way to spend surplus capital, gain a valuable asset, and boost your secondary income streams. It might provide a long-term boost to your financial — and consequently emotional — wellbeing.
BTL properties are typically acquired for the purpose of renting out to prospective tenants as a means of generating income and for potential capital gain.
Read on to discover four potential types of BTL property and their various pros and cons.
1. Standard residential property
You may end up purchasing a BTL property aimed at the standard residential market with tenants such as working professionals or families.
If you find the right tenants, residential properties can have a range of benefits for landlords including:
- Tenants opting to remain for long periods spanning a few years, which can provide you with a regular rental income to rely on
- Regular review periods when the lease ends with the opportunity to raise the cost of rent
- A deposit paid upfront, covering at least a month’s rent but typically more (to cover potential damage caused by tenants or lost rental income if they break the terms of their lease)
- The option to form a relationship with your tenants and boost your emotional wellbeing through added trust in their ability to care for the property.
Residential properties come with upkeep costs for general maintenance, such as plumbing, structural, or heating issues (that aren’t the direct result of tenants’ negligence).
Tenants also have significant protections, so if you do end up with difficult ones, they may prove tricky to move on before the end of their lease. Also, claiming any damages back through the deposit scheme might not be straightforward if the tenant disputes any charges.
2. Student accommodation
Providing residential accommodation for students can be a cheaper and more secure form of rental income.
Students are typically less discerning than working families and so you may be able to reduce decorative costs. However, student accommodation is typically furnished, so you will need to factor in the cost of sofas, beds, and appliances like washing machines.
The student market offers a regular stream of potential tenants with a new influx each academic year. Students can offer benefits to landlords, such as:
- Fewer “void” periods, as students typically agree 12-month leases and new student tenants are usually lined up before the end of the current lease
- No long-term contracts so if tenants are difficult, they are easier to move on
- Excellent rental yields with Aspen Woolf reporting well-run properties in the right areas can see yields of up to 20%
- Rent usually being paid upfront at the start of each term, which is great for cash flow.
Students do come with their own set of challenges. There is likely to be a greater chance of wear and tear at the property and you might need to replace key furnishings on an annual basis. They are also likely to need guarantors to cover their rental obligations.
3. Commercial property
Commercial property is frequently acquired with existing tenants already in place when ownership of the property changes hands, which can greatly reduce any initial void period.
It can also offer a more reliable and immediate revenue stream with tenants often paying at least three months’ rent in advance. Leases are also typically much longer with tenants signing up for years at a time.
The maintenance of commercial properties can be lower too, as leases often state that the tenant bears responsibility for repairs, whereas residential landlords usually cover the costs.
Commercial properties do have some serious downsides to consider as well. When vacated, they can take a substantial time to fill with new tenants, especially during economic downturns. This can happen suddenly if a tenant goes bust and their business closes.
Even once a tenant is found, the legal checks and processes can mean it takes a long time before they actually move in and start paying rent.
Additionally, it may be more difficult to secure borrowing on commercial premises than it is to borrow against a residential property.
4. Holiday lets
Holiday lets target the tourist demographic and focus on letting out residential properties for short-term periods from as little as an overnight stay.
They can have lower occupancy rates for the year, but the rental charges are typically much higher when worked out as a daily cost.
Holiday lets also count as a trading business in the eyes of HMRC, whereas standard BTL properties are seen as an investment.
This can have tax advantages, such as:
- Mortgage interest relief can be provided by deducting any interest from the profits of your holiday let
- Capital allowances can be claimed for the cost of refurbishing or upgrading the property
- Potential other tax reliefs available to “furnished holiday lettings”.
However, holiday lets can also be subject to:
- Business rates (which carry their own set of advantages and disadvantages)
- VAT once holiday let income surpasses the £85,000 threshold.
Holiday lets are also more time-consuming, as you’ll effectively be managing a holiday business that comes with a range of marketing, administrative, and customer service duties.
Get in touch to talk about your buy-to-let mortgage
If you would like to discuss your buy-to-let mortgage options, please get in touch. We’ll be happy to answer your questions and discuss your mortgage needs.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.