Is Buy-To-Let Still A Good Investment?
As a first time buyer buy to let has historically been one of the best investments that you could make in terms of returns, with profits coming from both residual rental income and capital appreciation.
There have been numerous studies and reports showing the great returns in buy-to-let. For example, back in April 2014 a high-profile report commissioned by Paragon Mortgages compared a number of different investments of £1000 made in 1996 and looked at what they would be worth in 2014.
It was clear from this study that buy-to-let was a great investment, however, stats don’t always tell the full story and it should be noted that starting the research in 1996 gave buy-to-let an unfair advantage due to the huge spike in prices that followed in the late-90s.
A couple of years later in January 2016, the National Association of Estate Agents estimated that there were in fact 10 potential buyers for every property on the market! They went on to speculate that property prices would rise by a further 50% within 10 years!
Buying Property to Rent – Leverage Your Investment with A Geared Buy-To-Let
Leverage is available in property investment in a way that it isn’t present in other financial investments – property can be purchased with a deposit so an investor with £100,000 available to invest could invest in three properties at the cost of £100000 each by putting down the deposit.
This would give a £300,000 investment that the investor could start making an immediate return on for just an initial £100,000.
With property, there is also the possibility of getting a really good deal – selling a property can often be a necessity with a specific time-frame for an owner and significant savings can be made if the owner is willing to drop the price to facilitate a quick sale.
If you happen to have liquidity then as a cash buyer deals can often be made on properties that would not support a mortgage – with some structural defect, a sitting tenant, etc – and large gains could be made as soon as the property is purchased and the problem is sorted out.
Ultimately whilst it’s true that buy-to-let is a more expensive financial investment it still retains a high degree of stability compared to a volatile stock market, plus the low-interest rates which make savings unattractive are in fact a plus point to those who borrow to fund their property investment.
The fact that the pros outweigh the cons is borne out to some extent by a 2017 Simply Business survey which found that 63% of experienced buy-to-let landlords would recommend that investors invest in buy-to-let – http://www.simplybusiness.co.uk/knowledge/articles/2017/04/is-being-a-buy-to-let-landlord-worth-it/
First Time Buyer Buy-To-Let – What you Need To Know
As a first time buy-to-let investor the first point to establish is that a residential mortgage is different to a buy-to-let mortgage and as a first time buy-to-let investor lenders will view you as a riskier borrower and will often have more requirements than if you were an experienced landlord.
For example, they are likely to ask for a higher deposit or a higher ratio of rental income to mortgage payments. It is not uncommon to be asked for a 25% deposit as a first time buy-to-let investor and there are also admin fees to be paid which must be factored in.
Another thing which people often forget in their excitement to get into the property market is that as a landlord you must have a tenant and that there will be times when your property may be empty – if you have a mortgage for your buy-to-let investment then you would be wise to make provision for paying the mortgage during those periods when you may not have a tenant.
Buying Rental Property – Consider Rental Yield
Rental yield is obviously a key consideration for any buy-to-let investor – this is the figure that tells you how profitable your investment will be.
Rental yield is a percentage that measures rental income as a proportion of the property value and as well as giving you a profit estimate it is also used by financial institutions as a key factor in buy-to-let mortgages.
So what kind of yield should you be looking for in buy-to-let?
There are (discussed below) a number of additional costs associated with buy-to-let which you don’t find with Student Accommodation or Care Home investments;
Buy-To-Let Landlords – Profiting With Capital Appreciation
Buy-to-let investors have two paths to profit with their property investment – residual rental income, plus capital appreciation, which is essentially how much the property increases in value over the term of the investment.
Historically, with the way property prices have risen, landlords have been able to look forward to a windfall when they implement their exit strategy as well as monthly rental income.
This explains why the south-east was for so long the preferred region for many property investors – not only were high yields available but the capital appreciation was extremely attractive. However, now we find ourselves somewhat on the other end of the equation as the market slows in the south-east, having been through a period of hyper-capital appreciate making purchase prices too high for most investors.
Investors are now looking north of the capital to find the affordable investments that will bring a good yield and some capital appreciation.
Buy-To-Let Stamp Duty
Although rents have generally increased year-on-year it is undeniable that buy-to-let as an investment strategy is not as attractive as it once was due in part to changes in stamp duty around multiple home ownership.
Whilst properties under £125000 have no stamp duty if it is to be a primary residence, a property that is to be rented out would have a stamp duty charge of 3% even if under £125000
Stamp duty is of course not the only charge that landlords must consider. There are solicitors and surveyor’s fees to be paid, not to mention any repairs or upgrades that are required, for example, rewiring and boiler replacement are often required before a property is fit for the rental market.
The costs for these upgrades to make a property legally safe for tenants to live in can run into thousands, or even tens of thousands of pounds depending on if you are letting as a single property or if rooms are let individually and a ‘house in multiple occupation’ (HMO) licence is required.
At the other end of the investment, the exit strategy can also be costly with further legal and agent fees payable and capital gains tax is levied at 10% or 18% depending on income.
It’s not all doom and gloom, however, regardless of all the fees buy-to-let properties can still be very profitable, based on the age-old formula;
Buying Property To Rent – State of the Market
All reports on the property market indicate that the market is slowing down.
The average house sale price has dropped by about 1% this year and the feeling among many property commentators is that it will fall even more as we gear up for a major price correction in the housing market.
As well as sale prices, rental prices have just dropped for the first time in 7 years – the fall in sale and rental prices is primarily affecting London and it is expected that London, currently over-priced, will be affected more than other UK regions, which suggests that buy-to-let investor and indeed any property investor should be looking to invest outside of the capital.
Periods of change and readjustment naturally create risks and opportunities for investors, however, it is important to do your research and understand what you are getting into, Mark Dampier confirms that:
Buy-To-Let – Legislative Changes
As discussed buy-to-let has additional costs following taxation and legislative changes in Parliament and many see the Housing White Paper published early in 2017 as an indication that the government is attempting to move the market from one full of smaller private landlords to one which is dominated by larger institutional investors.
The white paper specifically identifies ‘family friendly’ longer-term rental agreements with institutional investors as a way to ‘fix’ the ‘broken’ housing market and instil some stability and fairness for tenants.
More tangible changes for landlords include the fact that they will no longer be allowed to claim tax relief on their interest payments.
On the positive side landlords came out on the right side of the vote on ‘rental properties being fit for human habitation’, although it is likely that a Labour government would attempt to push through that same legislation should they gain power. However, with many Conservative MPs being landlords themselves we should perhaps expect fewer additional parliamentary assaults on buy-to-let landlords.
Whether property investment in general or buy to let hotel investment in particular, is the right investment for you will depend on your investment goals.
The days of huge capital appreciation seem to be over, for now, however, rental yields deliver a good residual income and generally keep pace with inflation.
So, whilst buy-to-let can be a more expensive investment to make, it can still be made to work.
It is also worth noting that even with a market slowdown and a major price adjustment property will continue to remain unaffordable for many for the foreseeable future.
Indeed, a recent survey by The Guardian estimates that by 2021 as many as one-in-four Britons will be renting which suggests that with the correct advice and strategy buy-to-let investment can be a good investment now and in the future.
At Sterling Woodrow, we pride ourselves on helping new buy-to-let investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment.
To claim your complimentary property investment consultation with one of our senior property investment managers simply click the button below and complete the short form below and we will call you back at the appropriate time.