If you’ve been paying attention to headlines in previous months, you may have seen that the UK’s housing market is currently undergoing a ‘mini-boom.’ According to the Telegraph, house prices jumped by 7% in 2020 with the average property now being worth £231,000.
However, according to a report by Halifax, published in the Guardian, 2021 could bring a fall in house prices of up to 5%. Other experts have suggested that the end of the Stamp Duty holiday in March 2021 could also result in a fall in property values.
This uncertainty demonstrates why it’s important to think carefully before becoming a Buy to Let landlord, as property may not be the perfect investment it first appears. Here are four things you should consider before becoming a Buy to Let landlord.
Rising house prices have made Buy to Let an attractive option – but other investments have outperformed property
In recent years, house prices have seen strong growth due to a combination of low interest rates, growing demand, and limited supply. This has meant that property has been seen as a potentially lucrative investment.
This growth in prices has led to a rise in rents. According to the Office for National Statistics, the average rent in England reached a new high in 2020 of £725 per month.
However, while property prices have surged in recent years, there are other investments which have outperformed property. You can see this on the graph below, which compares UK house prices with the value of a basket of global equities and a balanced managed fund between January 2006 and January 2021.
Notes: Comparison based on no income/dividends reinvested and shows only capital growth. This comparison is gross of fees, charges and taxation. The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,585 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The “IA Mixed Investment 40-85% Shares” covers mixed asset portfolios which include between 40-85% shares.
Source: FE Analytics
Furthermore, whilst there is a widely held view that property always appreciates in value, the graph demonstrates that this is not always the case. You can see in the period around 2008/2009 that property prices fell in the UK as a consequence of the global financial crisis.
There can also be significant risk attached to property investments too.
The associated costs of property investment may reduce the size of your returns
Whilst the growth in house prices can make investing in property seem like a lucrative option, it may not be as profitable or as easy as it initially appears.
The most obvious problem is that property investments are illiquid, which may present a problem if you should face unexpected financial difficulty and need your money quickly. According to the Post Office, the average UK home takes 114 days to sell which could present a problem if you needed quick access to your funds.
Another issue that you may not have considered is the associated costs of renting out a house, which can eat into your profits even when house price growth is strong.
For example, if you were to buy a 2-bedroom terraced house here in Stone you would have to pay around £160,000. You could then reasonably expect to rent out this property for around £625 per month.
This would make a total annual rent of £7,500 giving you a respectable return of around 4.7% on your investment. However, this doesn’t take into consideration the associated costs.
Firstly, it’s likely that you’d want to borrow to fund the purchase of the property. Even with mortgage rates at record lows, you might reasonably expect the mortgage payments to represent two-thirds to three-quarters of your rental income.
In addition, you would likely have to pay fees to a letting agency if you don’t want to be dealing with calls from tenants at all hours of day and night. Typical letting agents’ fees range from 10% to 15% of the rent and there may be one-off costs for finding a tenant.
You’d also face the cost of property insurance, maintenance, and safety checks. You’d have to redecorate and repair the property in-between tenants, and you’d face the normal costs associated with owning a property, from replacing the boiler to fixing leaks and repairing the roof.
2020 research revealed that the cost of maintaining the average Buy to Let investment across the UK is £2,313.
You also need to consider the possibility of difficult tenants, which can seriously affect your returns. This is an issue that has been highlighted during the pandemic, as the government’s implementation of the eviction ban has made it difficult to evict such tenants.
One prominent example, which was featured in the Telegraph, involved a problem tenant who changed the locks, refused to pay rent, and then sublet the property. Whilst the landlord eventually won her legal battle against them, the incident had cost her over £55,000 in lost rent, legal fees, and property damage.
Once you factor in these risks, associated costs, and the tax on the remaining profits, you may find that investing in property isn’t as attractive as it may appear on the surface.
There are tax implications to consider when becoming a Buy to Let landlord
Another thing to bear in mind if you’re considering becoming a Buy to Let landlord is that you’ll need to factor in the tax implications when calculating your potential profits.
For a start, as you are buying a second property, you will have to pay a 3% surcharge on top of your regular Stamp Duty payments. You will also have potential Capital Gains Tax to pay when you come to sell the property – this could be up to 28% if you’re a higher- or additional-rate taxpayer.
Furthermore, as of April 2020, you are no longer able to deduct any of your mortgage expenses from rental income to reduce your tax bill. This means that if you’re a higher or additional-rate taxpayer, you can’t offset your mortgage repayments against the rental income received; instead, you’ll receive a tax-credit which refunds tax at the basic 20% rate.
It’s worth comparing the tax treatment of Buy to Let property to, for example, an ISA where any returns are free of both Income and Capital Gains Tax.
The tax implications of becoming a Buy to Let landlord can be difficult to navigate, which is why you may want to speak to a financial adviser.
Speaking to a financial adviser can help you determine if it’s the right decision for you
While the headline yield figures for Buy to Let can seem attractive, the truth is that investing in property comes with associated costs and tax implications. In addition, it’s an illiquid investment that can be hard to dispose of, and UK property prices have risen more slowly over the last decade than other asset classes.
That’s why if you’re considering becoming a Buy to Let landlord, you should seek professional financial advice. Speaking to an adviser can help you to determine if investing in property is the right decision for you when compared to the other options.
Get in touch
If you’re considering becoming a Buy to Let landlord but aren’t sure if it’s the right decision for you, please get in touch. Email firstname.lastname@example.org or call us on 01785 876222.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy to let (pure) and commercial mortgages are not regulated by the Financial Conduct Authority.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.