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Is Buy-to-Let Still a Good Investment?

When considering whether buy-to-let is still a good investment, there are plenty of positives to consider: ongoing monthly rental income, capital gains when you come to sell, and a relatively safe and reliable place to invest your money compared to other investment avenues.

While in recent years buy-to-let investors have been impacted by tax changes, buy-to-rent is still a hugely popular investment strategy, and the UK housing market offers plenty of opportunity for those who get to know its regions and the top strategies to maximise profit. The housing market remains robust and there will always be a steady stream of individuals who need homes to rent.

So is buy-to-let still a worth investment? In this article, we weigh up the pros and cons and what investors need to consider before deciding if buy-to-let is a worth investment strategy for you.

 Why Invest in Buy-to-Let?

When answering the question “is buy-to-let still good investment”, it’s helpful to look at previous and recent trends which can indicate where the market might be heading. Looking back over the past two decades, England’s private rental sector saw rapid growth with figures more than doubling. More recently, the market has seen a slight slow down and in 2020, there were around 4.4 million households privately renting, a slight fall from the previous year which showed around 4.5 million. This slight fall is also seen with the number of buy-to-let mortgages taken out, with 64,500 in 2020 compared to around 73,300 in 2018 and 2019. While these slowdown trends are nationwide, London and Yorkshire were two UK regions where the proportion of houses in the private rental sector increased since 2019.

Despite a slight slowdown, it’s still clear why buy-to-let property as an investment strategy remains popular. In the 1980s, the average property price was around £23,000 and today it sits at £230,000. In the last decade, average houses prices have jumped around £80,000. While such huge growth is unlikely to be repeated – due to house prices reaching close to their peak in England, and affordability barriers due to salaries and mortgage rates – there is still ongoing demand for rental property. Many cities in the north of England are currently experiencing strong house price growth due to incoming investment and regeneration, making buy-to-let opportunities in Northern cities quite attractive to investors. At the same time, the high property prices mean that the rental market among young professionals – those not yet in a position to buy their own property – is particularly thriving, giving landlords a reliable and ongoing rental demographic.

Is Investing in Buy-to-Let Property Still Worth It?

Is Investing in Buy-to-Let Property Still Worth It?

Whether a UK buy-to-let property is a good investment depends on your goals. Investing in buy-to-rent property may not be for everyone and figuring out what you want to achieve from your property is an important first assessment before moving forward. It’s wise to remember that in many cases you’ll need 25% of the property price to put down as a deposit, which with house prices almost at their peak price ever, can make the initial investment slightly more difficult.

It’s also important to compare the advantages and drawbacks of property investment compared to other avenues like cash ISA accounts or investing in the stock market. For example, unlike with stocks, property is not an asset you can quickly get your money out of. At the same time, the amount of money you have to invest may change your strategy and thinking. You can read more about investment strategies and potential returns in our guides: How to Get the Best Return on a £50,000 Investment and The Best Way to Invest 100k.

What are the Benefits of Investing in a Buy-to-Let Property?

When it comes to investment strategy, there are many benefits of buy-to-let:

 Ongoing Monthly Income

Having a buy-to-let property is a great way to generate monthly income via rent from tenants. If you choose the right property with decent rental yields, it can be possible for the property to pay for itself covering repairs and mortgage payments and even generate a decent profit quite rapidly. Rental yields will change depending on the market, property and area – while average yields in the UK sit at around 5%, in some areas, rental yields can be as high as 8-10%.

 Capital Growth

When it comes to selling your property, a buy-to-let investment gives you the opportunity to generate capital growth as the property value increases over time and you get a lump sum profit at the end when you come to sell it. This potentially gives investors two income sources – ongoing monthly income and the lump sum upon sale.

Safe Long-Term Investment

While prices in the housing market fluctuate, property is still a relatively safe long-term investment that can generate profit. This is especially true compared to other investments like cash ISAs, which are harder to generate profit on, or stocks and shares which can come with high risk. While property prices do fluctuate, generally, over the long-term they tend to increase, enabling you to make a profit when it comes to selling.

What are the Drawbacks of Investing in a Buy-to-Let Property?

What are the Drawbacks of Investing in a Buy-to-Let Property?

A key hurdle landlords face today is a more challenging tax environment than in previous years, with the need to factor in the costs of stamp duty, insurance, wear and tear and other costs to ensure their property remains profitable.

Stamp Duty

Since 2016 there has been an additional 3% stamp duty tax to pay for anyone buying a second property (find out more information about buying a second home, or some of the ways to avoid stamp duty on a second home in these articles. ) Previously, landlords benefited from being allowed to offset 10% of their annual rental income against tax for wear and tear of their property and mortgage interest relief meant that landlords could offset mortgage interest costs against income tax bills on rent. Today, with the additional stamp duty and removal of mortgage interest relief, profits on an investment property are being squeezed.

Capital Gains Tax

When it comes to selling, capital gains tax on residential property is higher than other investments. Capital gains tax on a residential property is 28% for upper taxpayer brackets and 18% for basic tax rate payers, in contrast, on other assets, it’s 18% and 10%, respectively, which can eat into the potential profits a property offers. For property investors growing a portfolio, one way to mitigate the impact of these tax changes is to invest through a limited company, which still gives you access to mortgage interest relief to reduce your tax bill. This setup is more beneficial to higher rate taxpayers and those with multiple properties.

Time and Risk

When embarking on a buy-to-let investment, potential landlords need to be aware of the time they will need to put in in terms of researching the market, buying rental property and managing the property including dealing with tenants and handling repairs. The buying process can at times be lengthy, and if you manage a property yourself without a property management company there may be a lot of work to undertake. Similarly, property markets fluctuate and if the market drops, your property prices fall, reducing your capital. You’ll also need to consider factors like void periods inbetween tenancies and rental arrears which can increase the risk.

Repairs and General Costs

Being a landlord comes with a lot of responsibility, and when letting out a property, landlords need to ensure they adhere to many regulations and laws. These include things like energy performance certificates and electricity and gas safety checks required on a regular basis.

Is Buying-to-Let Still a Good Investment?

 While there are some drawbacks and many responsibilities that come with being a landlord, there are ways to help make your investment as profitable as possible from the offset, which makes buy-to-let still a good investment.

One thing to consider is the rental income and property type. Landlords may have a property that is single let – one that they rent out to one person or family. However, a HMO – House of Multiple Occupation – is a property that you rent out to more than one tenant, each with their own contract, such as in a shared student accommodation.

While single let is more straightforward to manage, a HMO will generally bring in higher monthly rent. The monthly income tax on HMO rental income will be higher, but generally landlords will make more money. However if the market changes or the property isn’t purchased in the right area, HMOs can be harder to fill. It’s important that landlords weigh up the pros and cons and decide which type of property is right for them.

Another thing to consider is making sure that the property offers a good rental yield. Rental yield is the percentage of return you make back on the purchase price of a property each month. While the capital gains from selling a property creates a nice return, the ongoing rental income is part of the major appeal of purchasing a buy-to-let property. A good rental yield in the UK is around 5% – 7% gross rental yield – making sure you take off ongoing expenses such as tax and maintenance costs to get a clear picture of the rental yield you can expect. To get the best rental yields, landlords should try to find the sweet spot of low property prices while getting a high rental income from tenants. Find out more about what makes a good rental yield in the UK.

Can You Get Rich from Buy-to-Let?

Can You Get Rich from Buy-to-Let?

 In recent years, changing tax regulations such as the stamp duty surcharge, changes to mortgage relief and the tax on capital gains have squeezed the profit available to landlords when compared to previous years. There are also more regulations that landlords must adhere to to ensure their property is safe and up to standard for tenants. Despite this, savvy investors that get to know the market, that are aware of up and coming areas that offer value, low property prices and high rental yields means that there is still plenty of profit to be made in a buy-to-let investment. Opportunities, especially in cities in the north of England are particularly interesting for investors at the moment.

So is buy-to-let still a worth investment? We think yes, and for investors willing to take the time to explore the market, build the right investment strategy and avoid common pitfalls, investing in buy-to-let can still be lucrative. To find out more about investing in a buy-to-let property or about the markets that will offer the most opportunity in the coming years, get in touch with our team.