January 13, 2021

Can You Still Make Money from Buy to Let?

Nick Making Money, Investing property, sponsored post 9 Comments

In the past buy-to-let seemed a relatively easy way to make money.

So long as you had the capital – or were able to borrow it – you could buy a house, put tenants in it, and collect a steady income from rental payments, along with potentially a lump-sum profit if you sold up at a higher price later on.

In recent years, though, tax and regulatory changes have made buy to let less appealing – to a point where many wonder if there is still money to be made this way. So in my post today I want to address this question.

Let’s start, though, by looking at the upside…

The Attractions of Buy to Let

As stated above, property investors get a double benefit. They enjoy rental income from tenants for as long as they own the property, and also have the potential to make a substantial lump sum profit when the time comes to sell.

A further attraction of buy to let is that your tenants effectively pay off your mortgage for you. So if, for example, you are buying a £400,000 property, you might ‘only’ need to find a deposit of £100,000. As long as your tenants’ rental payments cover your mortgage repayments (with a bit to spare), after 25 years or so the mortgage will be paid off. You will then fully own a second property, having originally paid only a quarter of the full property price. And that doesn’t even allow for the prospect of capital growth. If your property eventually sells for £600,000, you’ll have made an additional £200,000 capital gain.

• Of course, you don’t have to borrow to fund your buy-to-let. If you already have the capital you need, investing in a buy-to-let property will provide you with a steady income while the capital value of your property (hopefully) appreciates over time.

Buy to let can also be a good way of diversifying your investment portfolio. Rental income is relatively stable, especially if you have a number of properties and tenants. And property values aren’t directly related to the state of the stock market. So while property doesn’t provide a method for hedging your stock market investments directly, it can certainly help spread the risk.

Of course, property prices took a knock in the 2008 credit crunch and subsequent recession, and more recently were affected by the pandemic (though prices generally are on an upward trajectory again now). In the longer term, though, prices have been on a strongly upward trend since the 1970s. On average, house prices have grown faster in the UK than they have in any other European country.

There’s every indication that prices will go on rising in the coming years as well. The UK currently has a serious shortage of housing, caused by various factors. To start with, the UK population is growing rapidly. This inevitably means demand for housing will go on rising, thereby driving up the price of property. According to the Office of National Statistics there will be an annual shortfall of housing in the UK of over 100,000 properties each year for the next decade. This could mean a shortfall of one million properties by 2025 if current trends continue.

Various factors have combined to boost rental demand, including immigration, more people living alone, people moving around the country for work reasons, and rising house prices stopping first-time buyers getting onto the housing ladder. The latter is obviously challenging for young people, but it’s great news for landlords whose buy-to-let properties are being let extremely quickly, while their rental income keeps increasing. All of the above means that residential property can represent a profitable and attractive investment option.

What Are The Drawbacks?

One obvious drawback for anyone wanting to invest directly in property is that it’s expensive! And if you can only afford a single property, you are taking the risk of putting all your eggs in one basket. To mention just a few things…

• There may be periods when you don’t have tenants (voids, to use estate agent jargon). At these times your property will be costing you money rather than making it for you.
• Bad tenants are all too real and can be a nightmare for landlords. If they don’t pay their rent, it will take time and money to evict them. And that’s not to mention the costly damage to your property a malicious – or just careless – tenant can cause.
• There will be maintenance and repair bills to pay. If something expensive goes wrong – the roof or the central heating boiler, say – the cost of the necessary work may wipe out several months of profits for you.

In general, being a landlord – at least, a responsible one – is a hands-on role. While you can outsource some aspects of managing your property to an agency (for a fee) you will still have to keep a watchful eye on your property and tenants to ensure that your investment is protected.

A further drawback is that property isn’t a liquid asset. Yes, putting your money in bricks and mortar gives you a degree of security – but if you need to access your capital urgently this may be difficult or impossible. Even if you’re able to find a buyer quickly, if the timing is bad you could end up selling at the bottom of the market and making only a small net profit or even a loss.

And there’s more bad news for buy-to-let investors. As I said earlier, legal changes over the last couple of years have made the whole buy-to-let process more costly and burdensome. For one thing, from April 2016 anyone buying a residential buy-to-let property (or second home) has had to pay an extra 3% in Stamp Duty. In some quarters this has been dubbed the Landlord Tax.

Another major legal change has affected landlords who use mortgage loans to purchase buy-to-let properties. Before April 2017 landlords were allowed to deduct all of the interest they paid on buy-to-let mortgages from their taxable income. In effect, that meant they paid tax on their net profit from rentals rather than their turnover. The government decided to change the rules, however, arguing they gave buy-to-let landlords an unfair advantage over ordinary homeowners. So from April 2017 landlords were only allowed to claim relief on 75% of their mortgage interest. From April 2018 that dropped to 50%, and it kept falling by 25% a year until it reached 0% in 2020. It was then replaced by a less attractive tax credit equivalent to 20% of mortgage interest (which was particularly disadvantageous to higher rate taxpayers). All of this has meant that borrowing money to fund a buy-to-let has undoubtedly become less attractive (and profitable) than it used to be..

Other changes affecting landlords have come in too. For example, from April 2018 all new tenancies and renewals have had to be rated ‘E’ or better on their Energy Performance Certificates, with fines of up to £5,000 for landlords who don’t comply. Most recently built homes should qualify for this rating, but landlords of older, less energy-efficient properties may have to spend large sums bringing them up to scratch. And, of course, this all adds to the administrative burden for landlords, even if it is ultimately helping to save the planet!

One effect of all this has been that some smaller landlords have decided that buy-to-let is no longer worth the effort for them, and they are selling up and moving out of the sector.

So Is There Still Money to be Made?

My answer to this is a qualified yes.

There is definitely still money in buy to let, but it is no longer the ‘one-way bet’ it might once have appeared. You should therefore research opportunities carefully and adopt a highly professional and businesslike approach to the whole process.

A key consideration here is ‘yield’. This is the net amount (rental minus costs) you can expect to make from a buy-to-let property per year, as a percentage of the purchase price. Yield can be compared with the interest rate paid on a savings account. By this means you can assess how profitable a buy-to-let opportunity is and whether it makes sense as an investment vehicle. Clearly, if the yield is less than you could get by leaving your money in the bank, there is not much point in investing this way.

The website Totally Money recently analysed data from nearly half a million properties across England, Scotland and Wales, to calculate the buy-to-let yield for each postcode. The results were eye-opening to say the least. They found that buy-to-lets in the top 25 postcode areas were still delivering excellent returns. At the top was Liverpool, where landlords can enjoy 10% yields. Falkirk (9.51%) and Glasgow (8.71%), both in Scotland, came second and third respectively. Even postcodes at the lower end of the top 25, such as Lancaster and Aberdeen, were returning respectable yields of over 7%. All of these are clearly far better rates of return than you could get from a savings account, and you will have an asset that is hopefully increasing in value as well (see below).

Location is therefore a key consideration for any potential buy-to-let investment and must be researched thoroughly. In addition, the best area for your investment will depend on whether you intend to put your money into flats for professionals, student accommodation, family homes, etc. At the risk of stating the obvious, there needs to be solid demand in the area from would-be tenants for the type of rental property you intend to buy.

• Of course, while it’s very important, yield/income potential isn’t the only consideration for property investors. In the longer term you will likely be hoping for capital growth as well – so ideally you should be looking to invest in properties in up-and-coming areas rather than those in long-term decline.

Getting Started

Having weighed up the pros and cons, if you do decide that buy-to-let is right for you, here are some top tips to get you started…

• Speak to a professional independent financial adviser to discuss your plans. They will help you decide how much to invest and the level of return you should realistically be aiming for.
• You should also speak to a mortgage broker to find out what deals are available and ideally get approval in principle for a mortgage. This means you will be well placed to make an offer as soon as you find a suitable property.
• If there is a particular area you are considering, visit several times to get a feel for the place. That applies especially if it’s a location you’re not already familiar with. Check out the housing stock, public transport, car parking, shopping and schools, hospitals, and so on. Try to speak to other landlords in the area and local letting agents to get an idea of the size and nature of the rental market and the sorts of rentals that may be achievable. Always remember that the bottom line for any buy-to-let investor is return on capital or yield.
• Once you find a potential property (with or without existing tenants) research it carefully as well. Obviously before buying you will need to do all the usual searches and a structural survey. As with all property sales, you can expect this process to take several months to complete.
• Arrange insurance for your buy-to-let. Along with the usual buildings insurance, you should almost certainly have landlord insurance to protect you from financial losses associated with renting out a property. This will typically cover such things as fixtures and fittings, public and landlord’s liability, subsidence, replacement of windows, locks and keys, and so forth. It will also normally cover malicious damage caused by tenants, along with rent arrears and legal expenses (though the last two may not necessarily be included as standard). You can compare landlord insurance here.
• To find tenants you can either go through an agency or do this yourself. Obviously going through an agency will add to your costs but can save you a lot of hassle, especially if you haven’t the time (or inclination) to be too hands-on.
• Even if you pick your own tenants – and perhaps already know them personally – draw up a legally-binding contract. That means everyone knows where they stand from the start and can help to avoid potential unpleasantness later on.
• Review your buy-to-let mortgage arrangements regularly and be prepared to switch to a better deal when your current one expires.
• Ensure that your rental income is declared in a tax-efficient way and set against any allowable expenses. A good accountant will be able to help with this.
• Your accountant will also be able to advise you about the pros and cons of running your buy-to-let through a limited company. This comes with additional costs (and paperwork) but for landlords of multiple properties in particular the tax benefits can be significant – not least because you can claim all the interest paid on your buy-to-let mortgage/s against income rather than just 20%.
• And finally, once your first buy-to-let is up and running successfully, consider adding more. Multiple properties will give you a bigger income and will also reduce the risk inherent in putting all your eggs in one basket (as discussed earlier).

In Conclusion

If you’re considering buy to let, I hope this article will have helped you make up your mind. There is undoubtedly still money to be made this way, but you do need to choose your location and property carefully, and approach the whole process in a professional and businesslike way. That applies from the initial planning stage right through to the day-to-day – and year-by-year – management of your property.

As ever, if you have any comments or questions about this post, please do leave them below. I would also be very interested to hear from any readers who have invested in buy-to-let themselves, along with any tips (or warnings!) they would like to share.

Disclosure: this is a sponsored post.