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The Buy To Let Rules

A core part of the Money Tree portfolio is made up of buy to let properties. I’ve been in the landlord game for a little over 11 years now and currently manage a modest portfolio of 3 buy to let properties. Over those 11 years I’ve encountered most of the common problems, issues and surprises a landlord is likely to face so I’ve compiled my definitive list of buy to let rules.


Rule #1: Love your tradesmen

Here’s the scenario: It’s Christmas eve, you’re staying at some friends, just settling down for dinner when suddenly the phone rings and your tenant is on the other end of the phone with a burst water pipe. In this situation the last thing you want to have to do is open the yellow pages and enlist the services of an untested and untrusted cowboy plumber that will charge the earth for the inevitable bodge job they’ll do.

Buy to Let

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The above scenario is especially true if like me your properties are not local to where you live. Worrying about that dodgy boiler that keeps going every few days can be a real strain for the landlord with no trusty plumber.

Having a trusted team of tradesmen that you can call on at short notice to do you a favour is worth it’s weight in gold to a landlord.  The golden rule is to ask around and always seek personal recommendations for a tradesman.

Once you find a good one, look after them. Whether its a case of beer for Christmas, a birthday bonus or just give them a hug every time you see them make sure you develop a relationship with them. Once they know you and you’re a regular customer they’ll start looking after you.

Rule #2: Don’t Forget the Expenses

Last month I wrote out cheques for the following expenses:

£1,500 – Roof repairs
£90 – Gas safety certificate
£495 – Re-carpeting 1 room
£1,200 – Tenant finding fee
£30 – Travelling expenses to visit a property

And the above excludes the regulars such as mortgage payments and insurance premium direct debits.

Thankfully a typical month’s expenses doesn’t usually look like this. What it does illustrate however is that there are all sorts of weird and wonderful expenses that you’ll encounter along the way once you’re a buy to let landlord.

A a general rule when making calculations I always assume my expenses (excluding mortgage payments) will equate roughly 2 months worth of rent each year. This probably errs on the side of caution however it has stood me well over the years.

Rule #3: Leverage Up to Avoid Income Tax

I’m currently a higher rate tax payer so from any extra income I earn 40% goes straight to the government. My buy to let investments are aimed at being a long term play – a steady and significant source of income when my time in the rat race comes to an end. As a result I have no desire to make/take any income off them now (while i’m still working) and pay 40% tax on the income.

To avoid this, I keep remortgaging the properties every few years such that the annual mortgage interest (which is tax deductible) equates to roughly 10 months worth of rental income. Once I add on the other expenses (insurance, agency fees, boiler repairs, gas safety checks etc etc) I typically end up at just about break even point in income terms meaning I have no additional income tax liability.

If you’re going to pay down any mortgage, pay down the one on the house you live in first (assuming they’re all on the same interest rate!).

Rule #4: Don’t get too attached

I have a friend that recently renovated the house she was moving out of and planning to rent out. I gave her some simple advice – keep the decoration and fittings plain, functional and cheap. It turns out she completely ignored my advice and spent 3 times her planned budget on the work. She did the place up as if she was going to move back in and completely forgot about her target tenant.

It can be difficult to not get too attached to your property particularly if you have at one time lived in it. I think my friend ended up spending roughly £6,000 more than planned and only achieved an additional £15 per month in rent as a result of the higher specification. At that rate it’ll take her 33 years to recoup that extra £6,000, by which time I should imagine the place might need another lick of paint!

You need to change your mindset if your a landlord and think of the buy to let game as a businessUnder invest in the maintenance of your property and long term you’ll face some big, unnecessary bills and possibly have a higher churn of tenants. Over invest and you’re probably just pouring money down the drain, like my friend.

Rule #5: Location location location

It’s a property cliche but location is critical when purchasing a buy to let property. You should be looking for a convenient area that attracts the type of tenant you want, has good facilities and transport links. It can be tempting to go for the cheapest areas in town however you’ll usually attract a less reliable kind of tenant at the bottom end of the market. It all comes down the prospective yield

For example one of my properties is in an area of a city known for being where all the young families want to live. The neighborhood is walk able from the city centre, has a good selection of local shops, pubs and restaurants and is very close to a hospital and large business park. In other words there is lots of job opportunities nearby for young families (my target tenants) and plenty of amenities to keep them happy.

Rule #6: Avoid Fully Managed Contracts

A typical letting agent will usually charge around 10% landlords fee (in London, significanty less elsewhere) for which they find you a tenant, do all of the credit checks, draft the contracts and all the other paperwork such as inventories etc. This still leaves you to be the first point of contact for the tenant if anything goes wrong.

For an additional 4-7%, agents will offer you a fully managed service. For this extra cash they’ll pick up the phone and send round their plumber/electrician/whoever and only bother you with the bill after the fact. Oh and if you’re really unlucky they might charge you an admin fee every time they do it.

Unless your circumstances demand it (i.e. you live abroad) in my opinion you’d be a fool to let your letting agent pocket 4-7% of you annual rent for, what probably averages out to be answering the telephone a couple of times a year.

Rule #7: Target Your Tenants Carefully

From my experience, and for my investing style, the best target tenant is a youngish couple who have lived together for a few years and are saving for their first house together. They’ll typically have stable jobs (can easily afford the rent) and will be relatively house proud so they will usually look after the property reasonably well. They typically don’t complain about every little thing that goes wrong or needs attention and are usually a pleasure to do business with.

Of course different demographics offer different returns. Renting to students for example can produce a much higher monthly rent. You can typically charge them weekly, convert that dining room into an extra bedroom and bring in a much higher annual rent.  However with students you’re much more likely to have to find new set of tenants each academic year,  face late rent payments, have the place sat empty during the summer months and incur more regular repair and decoration expenses.

Like all investing it all comes down to a trade off between risk and reward. Before you take the plunge be sure to have a very clear picture about what type of tenants you’re targeting and then work everything else (location, house price, rental yields, decoration etc) from there.

Rule #8: Log Your Expenses

Having a buy to let property means you’ll need to start filling in a self assessment income tax return each year, if you don’t already. I remember the first time I did this it took me about 3 days to complete as I hunted around the house for various invoices, receipts and statements.

These days the whole return takes me less than 15 minutes in total. Throughout the year I simply log all of my expenditure on a spreadsheet as and when I incur it and throw all of the receipts/invoices into a folder. This way, when I come to complete my return I have all of the information at my fingertips.

By being so organised I’m also able to see my year to date profit/loss. If it looks like i’m making too much money (a potential income tax liability to me) and there is some maintenance work required on one of the properties I’ll be sure to get it done before the end of the tax year in order to minimize my tax bill.

As mentioned above you should treat your property as a business. Unless you diligently log and analyse all of your cash flows how do you expect to be able to maximize the profits you make?

Rule #9: Watch Your LTVs

House prices do not always rise. You should never be reliant on capital growth to protect yourself from a downside scenario (high interest rates and/or price crash).

Since the credit crisis mortgage lenders have been more reluctant to lend to landlords on a but to let basis on hight LTVs. These days most lenders tend to want to see a LTV of less than 75%. Personally I run a conservative strategy and prefer to run my LTVs between 50-60%. In addition i have a long term view where i never intend to sell any of my rental properties.

Rule #10: Interest Rates Will Rise

As I write this, the UK has experienced the longest ever sustained period of low interest rates. What is certain is that at some point interest rates will rise again. As with any decision to take on debt you need to give serious consideration to what would happen to your buy to let business should interest rates rise substantially.

As a general rule I run calculations to see what my repayments (on both an interest only and capital repayment basis) would look like should rates rise to 5%, 7%, 10%, 12.5% and 15%. As unlikely as these numbers may seem in the current low rate environment, you only have to go back to the early 1980’s to find a time when interest rates crept above the 15%.

Remember that if interest rates were to climb sharply I would imagine that a lot of people would be struggling to make their mortgage payments. This in itself would likely result in a house price crash so it is imperative not to rely on being able to sell at a profit if you’re struggling to meet your payments (see rule #9 above). Negative equity is a nasty beast and one to be avoided at all costs.


{ 11 comments… add one }
  • theFIREstarter February 7, 2014, 12:28 pm

    Excellent info, thanks!

    One question, a total noob one so apologies in advance: I don’t really understand the whole “re-mortgage so your interest payments match your profit” thing. I mean… I understand why you are doing this but not sure of the exact mechanics of it and how the numbers work out. Could you provide an example with real life numbers, and how your mortgage, interest, and payments look before and after you remortgage (the numbers don’t have to be from your properties of course, you can just make some up). If it’s quite long winded maybe this could be an idea for another post?

    I don’t have any buy to let properties as you have probably guessed, but will be looking to purchase one either this year or next, so I’m looking to brush up on all the required knowledge now! Thanks again!

    • Under The Money Tree February 18, 2014, 2:30 pm

      Hi. I’ll put together an example in a new post to show how the numbers stack up.

    • David December 17, 2014, 4:58 pm

      I have one BTL property but am also a bit in the dark here so any posts breaking down the numbers would be of great interest.

      Recently I have been doing research into how to make the most of this investment and everyone preaches to leverage your debt to release equity to purchase more property. While I see the value in this because of the capital gains it allows I’m constantly seeing reference to lowering you tax burden.

      Surely you need some monthly positive cash flow to reinvest?
      Everything I am reading is encouraging leveraging debt and further property purchases but what’s the difference between having a £1000 monthly income from a property where you have paid the mortgage off compared to £100 monthly income from 10 properties? If anything this seems more risky because an increase in mortgage interest rates would obliterate your monthly income in property?
      Is it just about the risk? Is it only really worth considering if you are in a higher tax bracket?

      • Under The Money Tree December 17, 2014, 5:44 pm

        Yes, like most investments how you run a but to let is purely about risk/reward. The idea you’re hearing is that paying income tax should be avoided at all costs so keep re-mortgaging so that your mortgage interest equals your net income (thus avoiding income tax) and rely on rising prices to give you big capital gains in the long run. This strategy works fine until prices start falling and/or rates rise.

        Over time I’ve come to use a low risk buy to let strategy. I’m happy to de-leverage and pay a little income tax along the way as my mortgage interest reduces and my net profit each month increases. As the time approaches when I want to live of the property income de-leveraging seems like the only sensible thing to do even if I could reduce my tax liability by increasing my risk profile.

  • BeatTheSeasons February 18, 2014, 12:32 pm

    Re rule#3
    Isn’t it true that interest is only tax deductible on the loan amount up to the original purchase price (or value when first let) of the property? So if you originally purchased at 75% LTV you can only remortgage for the first 33.3% increase in value?

    • Under The Money Tree February 18, 2014, 2:28 pm

      Correct. You can only remortgage up to the amount of the original purchase price to ensure the interest is tax deductible. However lets say the property doubles in value, you could remortgage to > the original purchase price so long as the money is used to reinvest into more rental property.

      • theFIREstarter March 19, 2014, 8:53 am

        Aha, all becomes clear now! I think I get it now.
        This sounds like a great strategy, just gotta make sure you don’t get whacked with a huge CGT bill later on down the line I guess. I look forward to the other post about remortgaging example anyway as it’s always nice to see it put down in black and white. Cheers

  • Hamzah May 12, 2014, 1:09 pm

    I think your rule #3 needs a health warning. I suspect you have seen sufficient house price inflation in your portfolio to maintain acceptable LTV ratios, but that might not be the case for people investing later in areas outside the South East. My portfolio has gone from an acceptable LTV (to the mortgage provider) to one that would be considered far too high and painful to redress should they chose to enforce the covenant to make a capital repayment back to original LTV. I think planning for interest rate increases and reducing gearing should be very much on a BTL investor’s mind at the moment.

    Nice blog BTW, I’m finding admitting to being a BTL investor is rather against the current Zeitgeist of the personal finance blogosphere so best discussed in it’s own space!

    • Under The Money Tree May 15, 2014, 9:47 am

      @Hamzah – I fully agree. There are obviously very strong feelings about BTL landlords out there!

      I’ve added another rule concerning LTVs and Interest rates. Out of interest how has your BTL portfolio’s LTV increased in these times of rising prices and low/stagnant rates?

  • Shazspun June 11, 2014, 4:27 pm

    Hi – just found your blog after following MMM and then ERE and like this piece on BTL.

    I’m at the other end of the age scale unfortunately (nearing 50) and I’m now trying to find ways of building up a small pot to enable myself and hubby to retire a bit early as the realisation hits home that we don’t want to work until 67 (or will it be later?).

    Luckily we have paid off our own home – several years ago and have been adding monies into our pension pots and trying to grow income that way – however we are probably not going to draw this down this until we’re in our 60’s to maximise its efficiency. I’m now trying to put together a 5 year plan which will enable us to perhaps retire at 55.

    I looking at BTL or is it LTB as our current home would fit the bill nicely having done some research into the opportunities to rent in the area we live in. This would mean we would need to down-size slightly but that’s OK as there are only 2 of us and it would make sense to let our current large home and get maximum returns on this rather than buy a flat to let.

    I need some advice/help though on how we could make sure we got the maximum benefit towards paying for the new property we would move to and not getting stung by HMRC with a tax bill. I’m happy to re-mortgage this one to a LTV of about 75% But can still see us paying 28% in tax against anything over the interest payment and expenses we make on the rent (due to the continued low rates). As I’m a lower tax rate payer, hubby is a higher rate one, am I able to declare any rent payment under my tax assesment or does it always depend on the what names the BTL mortgage? If so we would get stung.

    Any advice on other websites which would show me how the whole BTL tax thing works would be great.

    Congrats on getting to where you have at such a young age. I only wish these websites with advice had been around when we were young as I reckon we would have been retired about 10 years ago!

    • Under The Money Tree June 16, 2014, 12:54 pm


      Whoever is liable for income tax depends on who’s name the property is in. If the property is jointly owned for example and you have a joint mortgage then you will both ‘earn’ half of the income which will be taxed at your respective marginal tax rates.

      It might also be worth bearing in mind that in general smaller properties like flats tend to be more suitable to letting. There is usually less maintenance for a start and the demand for smaller properties tends to be higher meaning you might get a higher yield and find it easier to find suitable tenants quickly.

      Without knowing your situation it’s hard to offer advice but if I were you I would be wary about re-mortgaging and taking on more debt if you are looking to retire in 5 years time. Maybe you’d be better off selling, downsizing and buying a small buy to let flat in your name (to keep the income tax bill down)?

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