is buy to let a good investment?

The Pros and Cons of Buy-to-Let Investments: Is It Right for You?

Pro: regular rental income
(that seems to be rising)

Letting a property offers a steady income stream and can enhance your savings or even serve as a retirement strategy. In 2022, Zoopla reported a “chronic imbalance” between rental supply and demand, leading to significant rent increases, especially in London, Manchester, and Glasgow, with rises of 16.1%, 14.8%, and 13.1% respectively.

This trend has persisted into 2023. Rightmove states that average monthly rents outside London hit an all-time high of £1,190 in Q1, while rents in London exceeded £2,500 for the first time. The national average asking rents outside the capital have risen for 13 straight quarters since late 2019, although the growth rate has recently decelerated to 1.5% quarterly.

In contrast, London saw a modest 0.9% quarterly increase in rents, the smallest in two years. Rightmove also notes that the current average rental yield in Britain stands at about 5.8%, marking a 0.2% annual increase.

Con: higher mortgage costs

Building a buy-to-let portfolio has become more expensive, with fewer tax perks than before. Since 2016, an additional 3% stamp duty has been levied on second homes, including those owned by landlords. This has contributed to higher initial investment costs.

Before 2016, landlords could offset their mortgage interest against their tax bill, but this has now been limited to the basic tax rate of 20%. As a result, many landlords, especially those in higher tax brackets, have seen a notable dip in profits due to the absence of a full 40% relief, according to research.

Additionally, buy-to-let mortgage rates have surged, with the current base rate of 5.25%, up from 0.1% in the fourth quarter of 2021. Rates had been on the rise but spiked further after the government’s mini-budget in September 2020. Consequently, some lenders withdrew their products.

Although the number of available buy-to-let mortgages has recovered to pre-mini-budget levels, the rates are still considerably higher than they were two years ago. 

Pro: you have more control

Should your rental properties generate enough income to sustain your lifestyle, you’ll have full autonomy over your earnings and schedule. The freedom to set your own hours, make key decisions and have total control over your life is a major motivator for many landlords to invest in property and expand their portfolio. 

Con: you’ll have more responsibilities

As a landlord, you’re saddled with both legal and ethical obligations to your tenants, and emergencies like leaks can happen at any time. For those juggling a full-time job along with managing their rental properties, the responsibility can be overwhelming. One alternative is to enlist the services of a letting agent to manage your properties, though this will naturally eat into your profits.

Pro: expenses

You’re allowed to deduct certain expenses from your rental income to determine your taxable rental profit. These deductions must be solely and directly related to the rental of the property. They can include maintenance costs, utility bills, agency fees, and insurance payments.

Con: costs

The moment you begin earning a profit from your buy-to-let property, you’re legally required to notify HMRC. You may also need to file a tax return so HMRC can determine your income tax liability. Additionally, when you sell the property, you’ll need to pay Capital Gains Tax on any increase in its value during your ownership period. Don’t overlook other expenses like the deposit, survey and conveyancing fees, renovation costs, and admin fees for inventories, deposit protection, gas safety certificates, and EPCs.

Pro: Long-term growth

The benefits of receiving short-term rental income on a regular basis are clear for many. But there’s also the bonus of long-term appreciation of the property. Increasing property values are generally an advantage in the buy-to-let market.

They enhance your property’s capital worth and offer a fairly secure long-term investment, especially when compared to other, more volatile ways of investing. The concept is that “your property’s value should grow over time, giving you a profit upon sale. And while that’s no guarantee, if you look back over the past 20 years, property prices in the UK have trebled

Con: the current market for house prices has been better

Current indications suggest a downturn in house prices, which could impact returns for landlords. Financial analysts forecast a decline in property values this year. Some analysts anticipate an 8% drop in 2023, while others expect a 5% decrease. The Office for Budget Responsibility (OBR) projects a 9% fall over the next two years.

Recent data from the Land Registry reveals that average house prices declined by 1% between January and February 2023, with yearly growth decelerating from 6.5% to 5.5%.

Should property values decline, landlords will likely see a reduction in their capital. If you hold an interest-only mortgage, you’ll have to cover any deficit if the property sells for less than the purchase price.

This is perhaps seen more as a levelling out rather than homes outright losing their value. 

Final thoughts: investing in buy-to-let

People continue to invest in buy-to-let and see it as a viable way to create another income stream and see their investment grow in value over time. But before you make any decision, it’s important to weigh up the pros and cons specific to your situation and make an informed choice based on what’s most important to you. 

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