What is buy-to-let?

Buy-to-let (BTL) means a private individual buying residential property and renting it out to tenants.

Take me to your lender

Buy-to-let mortgages are available from some lenders, though the choice has diminished since the start of the credit crunch. The type of loan is also significantly more expensive than a standard residential mortgage due to the perceived high risk of you defaulting on payments.

All the usual fixed and variable mortgage rates are available - though trackers are usually linked to LIBOR (London Inter-Bank Offered Rate) instead of the base rate - as well as the option of interest-only or repayment mortgages.

One big difference is that BTL mortgage lenders take account of rent you will earn as well as your 'day job' salary. BTL mortgages aren't regulated by the Financial Service Authority (unlike traditional home loans), so it's especially important you speak to an independent mortgage adviser to find the best deal.

Lump sum

All lenders will be rigorous in their checks on affordability of the loan; they will also insist on bigger deposit - the minimum will be between 20-25%.

Doing the sums

Each mortgage lender has a method to calculate how much you can borrow, but as a general rule of thumb, the rent you charge must be between 125% and 150% of your monthly interest repayments. For example, if your monthly mortgage repayment is £1000, your tenants should pay you £1250 to £1500 a month. This is called a rent to interest calculation.

Taxing

You pay tax on rental income just as with any earnings. The Government allows you to claim back tax on interest repayments, rental insurance, property maintenance, professional fees, ground rent and service charges.

Preparation

Even when you have bought a house and have found suitable tenants, you can't just start renting it without some legal preparation. For example, since October 2008, the law states that landlords need an energy performance certificate (costing between £75 and £100), and a gas safety certificate (around £100), in place before the tenant moves in. This must be renewed annually.

Your tenants' deposit

Since April 2007, landlords must put their deposit into a government-authorised Tenancy Deposit Protection Scheme.

Young landlords

According to the Association of Residential Letting Agents (ARLA), BTL is by no means a way of making a quick buck.

"As a general rule, the start-up costs can be prohibitive and we would urge young people to be certain before making such a long-term investment," says spokesman Malcolm Harrison.

"One exception is students whose parents help buy a house to rent out while they are at university, and this can prove a sound investment."

Learning the hard way

Aaron Budd was 22 when he bought a three-bedroom flat in west London. He thought his three school friends would make perfect tenants.

"I thought this would be a great investment and that I was one step ahead. I soon found friends are not the ideal tenants, as they had little respect for the flat. Eventually I had to ask them to leave, which was stressful. I wish I'd employed a lettings agent early - it would have saved me heartache and I might not have lost mates in the process."

Onward and upward

Trainee lawyer Farah ul-Haq was 24 when she bought a two-bedroom house in Crawley, west Sussex. "I had some inheritance and knew I'd be happy to live at home with my mum and sister. I researched the area for more than a year and spent ages finding good contacts, including a letting agent, to take care of dealing with my tenants. I don't plan to sell for six or seven years and then I hope to have a nice amount of cash to invest in my own dream home."

Tips for BTL

• Never buy property that will overstretch you
• Carefully research your property to make sure it's suitable for tenants and think objectively
• Student lets can provide some of the best returns, so look at hotspots such as Bristol, Brighton and Oxford
• Finding and vetting new tenants can be tricky, but a lettings agency will charge around 10% of the monthly rental income during the course of the tenancy to take care of this
• If you want the agent to manage your BTL - so they, not you, will be your tenants' first port of call - it will cost more like 20% of monthly rent for the duration of the tenancy
• Remember hidden costs, including furniture and fittings, management and insurance
• Take into consideration the fact there will be void periods without tenants - on average at least two weeks per year
• BTL landlords are at high risk of identity theft, so redirect your post and visit www.creditexpert.co.uk/ for advice.

Updated: 25/05/2010

By Elizabeth Nicholls