Is buy-to-let a good investment?

Find out if entering the buy-to-let market is right for you

Felicity Hannah - Virgin Money Living Mentor

by Felicity Hannah | Independent Money Mentor

Award-winning personal finance and consumer affairs journalist

There was a time when becoming a landlord seemed like the quickest route to the high life. Mortgage rates were low, rents were high and property values were rising. However, tax changes in the last few years have made it trickier to turn a profit on a buy-to-let. Tricky, but not impossible.

So what do you need to know to make it work and is there really good money to be made by turning landlord?

What has changed for landlords?

The first change a new landlord may not be expecting is the 3 percent additional stamp duty charge. That was introduced in 2016 for anyone buying an additional property like a buy-to-let or second home and it adds an immediate premium. You need to factor that into your sums so that you don’t end up with an investment property that never returns on the outlay. 

Previously landlords could offset 10 percent of their annual rental income against their tax bill to reflect the cost of fixing wear and tear. But that’s scrapped now, which can hurt your margins.

The third strike is that higher and additional rate tax relief on mortgage interest is being gradually phased out and ends altogether in April 2020. It means that landlords can’t deduct the cost of interest on their buy-to-let mortgages from their rental income in order to reduce their tax bill. That’s going to hit higher-rate taxpayers in particular with some tax bills soaring from a few hundred pounds to a few thousand. From 2020 you will still get a tax credit for 20 percent of your mortgage interest payments but that’s less generous than the old system. Of course, if you’re in a position to buy without a mortgage then this shouldn’t affect you.

Despite this triple whammy, there is good news out there for property investors too. A 2018 survey carried out by the Royal Institution of Chartered Surveyors (RICS) showed that UK rents are expected to climb by 15 percent by 2023 as tenant demand rises. Data from the Office for National Statistics show that private rental prices paid by tenants in the UK rose by 1.3 percent in the 12 months to May 2019, up from 1.2 percent in April 2019. So the changes might have made things trickier for landlords but they do not appear to have made it outright unprofitable.

To find out more about how the tax changes could impact you, visit the Government website or seek advice from a tax adviser.


Is buy-to-let still worth it?

Location makes a dramatic difference to your returns. A lot of commentators agree that buy-to-let landlords can still make a good return as long as they are clever about where they invest. 

A survey of buy-to-let yields carried out by the website Totally Money showed that locations with a high student population offer some of the highest yields.  

A yield simply means working out the annual rental income, minus any mortgage costs you incur in the year, divided by how much the property cost you to buy.

Take Nottingham, for example. Properties in the NG1 postcode – a prime location for students attending Nottingham Trent University – has an average rental yield of 11.99 percent. The NG7 postcode also makes it into the top 5, offering an average yield of 8.89 percent.

Meanwhile, Liverpool – home to three universities and 70,000 students – had six of its postcodes in the top 25 best buy-to-let areas in 2018. Of those, L7 ranks highest, delivering an average rental yield of 9.79 percent.   

The best investment area for you will depend on whether you’re planning to invest in flats for professionals, student accommodation or family homes. 

So if you’re a wanna-be landlord make like Kirstie and Phil and think location, location, location. 

Alternatives to buy-to-let

While regular income and the potential for capital gain are ticks in the buy-to-let positives chart, the major downside is the potential hassle of looking after tenants.

There are some interesting alternatives. One option is so-called ‘crowd-lording’ where a firm allows a group of people to invest in an individual property and receive a corresponding portion of the rental income and capital growth. The company that manages the investment also looks after the property on behalf of the landlords. 

Crowd-lording has been around a few years now, but a more traditional way to invest in property is via a Real Estate Investment Trust (or REIT). Visit the Money & Pensions Advice Service for more information on REITs. You can choose a REIT that invests in residential, commercial or industrial property, or one that mixes it up. The rewards can be good but, as with all investments, there is a risk of the trust putting their eggs in the wrong basket and your investment going down in value.

If you don’t mind hard work then you could invest in a holiday let. It’s much more work than a standard residential let but with the right property in a popular location it’s possible to earn more in a week than you would in a month on a long-term letting. Of course, with a holiday let you’re also more likely to have empty periods, especially if you’re not in one of the most popular tourist locations.

As with all big decisions it’s worth considering seeking the advice of a financial adviser who can help you avoid the pitfalls – because even buying a property these days isn’t safe as houses.

Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.