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A Beginner’s Guide to Buying a First Rental Property in the UK!

Published by Susan Basnet
Posted Date: June 7, 2024 , Modified Date: June 6, 2024

Embarking on the journey of purchasing your first rental property in the UK is a thrilling venture, filled with opportunities and challenges. This comprehensive guide aims to provide novice landlords with essential insights, step-by-step advice, and crucial tax considerations to ensure that the process of acquiring your first rental property is not only successful but also enjoyable.

Let's delve into the details and unravel the key aspects of venturing into the realm of property ownership and becoming a landlord.

Choosing the Right Rental Property

As you navigate the world of property investment, one of the primary decisions revolves around the type of property you wish to acquire. Your budget and preferences will likely lead you to either a new build or an older property. Understanding the dynamics of each option is crucial:

New Build 

Opting for a new build often means minimal repair and maintenance costs, thanks to the use of modern materials. This not only makes the property appealing to potential tenants but also ensures that your initial investment remains relatively untouched. However, it will not come cheap, depending on the location of the property.

Older Properties 

For those with budget constraints, older properties may be a more viable option. However, be prepared for higher regular costs, as these properties often require extensive renovations and timely repairs. Balancing the initial investment against long-term benefits is key.

Rental Property: Preparation and Furnishing

Purchasing the property is just the beginning; the next step involves preparing the space for occupancy. Depending on your intended rental model, you'll need to furnish the property with essential amenities such as cooking facilities, sofas, tables, and beds. While preparing a furnished property incurs significant costs, the long-term advantages in attracting tenants make it a worthwhile investment.

buying a first rental property in the UK

As a landlord, the safety of the tenants is your responsibility. As such, there are several arrangements that must be made to ensure the safety of your tenants. The regulation is strict especially if the property is a House of Multiple Occupation (HMO). For e.g. HMO properties must have fire doors on each bedroom, and on each entry doors on the kitchen, smoke alarms, carbon monoxide detectors, etc.

Rental Property: Key Considerations

Before officially stepping into the landlord role, several critical considerations demand your attention ranging from yield calculation to financing your purchase.

Rental Yield Calculation

For a successful venture into the rental market, thorough research on the property is a must, including calculating the potential yield. Ensuring that your initial investment is repaid within a reasonable timeframe is essential for long-term financial sustainability. Calculation of the rental yield is not complex. It simply involves dividing the expected annual rental income by the property value and multiply it by 100.

A decent rental yield varies depending on the areas. In Metropolitan areas, properties generally have a yield ranging from 3-5%, whereas this could be above 5% in regional areas.

Upfront Costs

Beyond the initial purchase, landlords incur numerous costs that need upfront payment. Beginning with the stamp duty and land tax, landlords bear other upfront costs such as, conveyancing and legal fees, valuation fees, building inspection fee, etc. These are mandatory costs and cannot be avoided. 

Mortgage

The financial aspect of buying a rental property is equally important. Few individuals can afford to purchase a property outright. You may need a buy-to-let mortgage if you are buying a property with the intention of renting out.

guide to buying a first rental property in the UK

Typically operating on an interest-only basis, buy-to-let mortgages offer lower monthly payments. The major drawback of such mortgage is the outstanding balance at the end of the term. Mortgage providers usually require rental income to cover at least 125% of repayments, ensuring financial viability.

Target Tenants

Determining your target tenants is a strategic decision that can impact the property's occupancy. Long-term tenants can minimise void periods, providing stability. Conversely, short-term renters, often found through booking sites, may offer flexibility but can lead to more frequent turnovers.

First Rental Property: Tax Implications

As broad as the rental market in the UK, the regulations governing the market is equally wide. Understanding the tax implications of property ownership and how those apply to your situation is crucial for financial planning. Following are some of the major tax implications as a result of your property purchase:

Stamp Duty Land Tax (SDLT)

Stamp duty Land Tax (SDLT) is the mandatory tax applied to land and building buyers in the UK. This is a fixed tax paid on the basis of purchase price of the property, whether it’s your first property purchase, and whether you are a UK resident for tax purposes. Following are the relevant rates for SDLT in the UK:

Purchase Price

SDLT Rates

UK Residents

Non-UK Residents

Up to £250,000

Zero

2%

£250,001 to £925,000

5%

7%

£925,001 to £1.5m

10%

12%

Above £1.5m

12%

14%

If you do not own any other properties, and the purchase price is below £625,000, the property qualifies for the first-time buyer’s relief. Under this relief, there is no SDLT liability on the first £425,000, and 5% SDLT applies on the price between £425,001 to £625,000.

Income Tax

The profits from the rental business will be subject to tax at the relevant tax band. The profit computed is added to your non-savings income along with other income and the relevant tax is then applied.

guide to buying a first rental property in the UK

If your Net income falls below £100,000, you can claim personal allowance to reduce the taxable income. For the tax year 2024/25, the personal allowance is £12,570. However, the personal allowance decreases for every £2 by £1 when the net income exceeds £100,000, meaning the personal allowance will be zero when the income is £125,140.

Rental income may elevate your total annual income, potentially pushing you into a higher tax bracket. There are several ways to potentially reduce your taxable income and consequently our income tax liability. For example, if your civil partner or spouse is a basic rate taxpayer and you are a higher rate taxpayer, you may consider buying the property in your spouses’ name.

Council Tax

Council tax is the tax payable to the local council on the residential properties. Either you or the tenants will be liable to pay the council tax, depending on several factors. You, as a landlord, pay the council tax on the following circumstances:

  • The property is a House of Multiple Occupation (HMO),
  • The tenants are all under 18,
  • The property is a care home, hospital, hospital, or women’s refuge.

Good news: If all the tenants in the property are on the exemption list, for e.g. full-time students, there won’t be any council tax liability on the property. However, you still need to register your property for the council tax.

Conclusion

In conclusion, venturing into property ownership and becoming a landlord is a multifaceted journey. This guide has provided a comprehensive overview of the essential aspects involved in buying your first rental property in the UK. Armed with this knowledge, you can navigate the challenges and capitalise on the opportunities that come with property investment. Good luck on your path to becoming a successful landlord!

Need expert advice on buying a first rental property in the UK?

Contact us today for efficient and hassle-free assistance.

Susan Basnet
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