Is Buy-to-Let Worth It? The Future of UK Property
Buy-to-let investing has been a popular strategy in the UK property market for decades. Since its boom in the late 1990s with the introduction of buy-to-let mortgage products, it has offered investors the opportunity to generate income through rental payments while potentially benefiting from long-term capital appreciation. This combination of returns interested both new investors wishing to get a foot on the housing ladder with their first asset, as well as larger scale landlords and investors aiming to build significant portfolios.
However, the landscape for buy-to-let investors has changed significantly in recent years, with successive governments bringing in a swathe of changes, with some people seeing many of these changes as a cynical cash grab in taxes, whilst others are seeing underlying changes helping to improve the housing stock across the nation.
Prompting many to question whether it remains a viable investment option for the small-time landlord or new investors.
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by Robert Jones, Founder of Property Investments UK
With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
The Current State of UK Buy-to-Let
The buy-to-let market in the UK presents a mixed picture, with many saying buy-to-let is struggling or in a period of decline.
However, when you look across capital growth, rental inflation, and buyer demand it paints a somewhat different picture. The best cities to invest in UK property have achieved their highest returns for landlords for over a decade, with record-high rents and impressive rental returns.
Property prices have shown signs of stagnation in many areas recently, with some regions experiencing slight declines over the past couple of years.
This is in sharp contrast to recent boom times, where new buyers flooded the market hoping for successive periods of double-digit capital growth year on year. Those times do certainly seem in the past.
According to recent data, however, UK property prices have continued to grow this past 12 months in all regions apart from the capital, even if slower than previously seen.
Rental demand consistently is outstripping supply. According to a recent Zoopla rental market report, inflation in property rents is around 5.4%, which is the lowest it has been for almost 3 years, yet still stubbornly high.
When you consider central government and bank of England inflation targets are 2%, real inflation is still higher than anticipated at 2.2%.
You can see the significance of the rental demand is putting pressure on affordable housing for tenants.
Couple this backdrop with a consistent demand of buy-to-let property buyers as seen by the lending rates. Consistently year on year, mortgages for buy to let products remain somewhat consistent.
So what does that mean for the future of buy-to-let? It it still worth it? Are house prices still affordable? Or is this current government likely to pour cold water on the industry?
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Recent Changes in Buy-to-Let
It is no secret that the buy-to-let sector has undergone significant changes in recent years, affecting both new and existing landlords.
Our view is that these can be summed up as net positive for the industry, when you consider, buyers, sellers, tenants and landlords as a whole.
Change isn’t always all positive, and there are certainly some changes that have hit small landlords hard. However below we look at these changes piece by piece and their impact as a whole.
1. Legislative Changes:
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- The Renters' Rights Bill, announced in the King's Speech on 17 July 2024, aims to provide greater protections for tenants. Key provisions include:
- Banning Section 21 'no-fault' evictions
- Extending Awaab's Law to the private sector, requiring landlords to investigate and fix reported health hazards within specified timeframes
- Ending fixed-term tenancies, with all tenancies moving to a rolling basis
- Changes to rules around rent increases and notice periods
- The Renters' Rights Bill, announced in the King's Speech on 17 July 2024, aims to provide greater protections for tenants. Key provisions include:
2. Tax Changes:
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- Since 2020/2021 tax year, landlords can no longer deduct mortgage interest from rental income before calculating tax. Instead, they receive a tax credit based on 20% of mortgage interest payments.
- This change particularly affects higher and additional-rate taxpayers, who previously benefited from tax relief on mortgage interest.
- Capital Gains Tax (CGT) on property was reduced in April 2024 from 28% to 24% for higher and additional-rate taxpayers.
- The CGT allowance was cut to £3,000 from April 2024, potentially increasing tax bills when selling properties.
3. Stamp Duty:
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- A 3% stamp duty surcharge on additional properties, including buy-to-let, was introduced in April 2016.
- Multiple dwellings relief for stamp duty, applicable when buying more than one property in a single transaction, was abolished from 1 June 2024.
4. Mortgage Stress Tests:
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- Lenders have become more stringent in their affordability assessments specifically for landlords. Often requiring rental income to be at least 125% to 135% of the monthly interest-only mortgage payment amount to ensure there is enough affordability and cashflow. This same criteria doesn't apply to homeowners, and banks have since removed the mortgage stress test requirement for homebuyers to help that section of the market.
- Some lenders now factor in much higher mortgage rates when assessing affordability, known as "stress testing".
5. New Investment Strategies:
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- Many landlords are moving towards higher-yield properties, such as Houses in Multiple Occupation (HMOs), serviced accommodation and purpose built student accommodation in university towns.
- There's an increased focus on cashflow rather than simply relying on capital growth, with new landlords focused on properties in cheaper locations across England, that have lower asset costs and deliver higher yields.
6. Landlord Responsibilities:
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- Landlords face increased responsibilities and potential costs related to property maintenance, energy efficiency standards, and tenant safety.
- The Renters' Rights Bill is expected to further increase landlord obligations and make it more challenging to evict problematic tenants.
7. Compliance Requirements:
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- Landlords must ensure their properties meet evolving standards related to safety, energy efficiency, and tenant rights.
- Failure to comply with these regulations can result in significant fines and legal issues.
Is Buy-to-Let Still Worthwhile?
The question of whether buy-to-let is still worth it depends on various factors. Putting the financial aspects to one side for a moment.
Comparing today’s landlord requirements to those back in 1980 or 2000 is a world away.
There is more and more pressure on landlords to adhere to ever-increasing compliance, legislation and regulations.
This is no longer a part-time focus. You either need to be a professional landlord, full-time in the management of your own properties or you must have an experienced team behind you.
This is simpler than it sounds, it is easy now to build a team of letting agents and refurbishment teams that are qualified and up-to-date on the latest requirements.
Once you have this base covered. The financial fundamentals are still pretty sound.
Housing is a basic need and unfortunately, the facts are we are simply not building enough properties across the UK in the right areas for our population.
This lack of supply is putting significant pressure on demand from a growing number of tenants and homeowners.
House price growth is variable but trending up. Rental inflation, as mentioned is very high and demand is strong across the country, with the major cities, like Manchester, Birmingham and our capital London, experiencing exceptional demand from homeowners, investors and tenants.
So as a quick overview here are some pros and cons to consider:
Pros:
- Rental Income: With average rents rising significantly there's potential for strong rental yields compared to previous years where yields were compressed.
- Capital Growth: Despite recent stagnation, property has historically shown long-term appreciation over a long enough period, offering potential for capital growth for long-term focused investors.
- Diversification: Property can serve as a way to diversify an investment portfolio. Compared to stocks and shares it might not be as attractive is pure yields, but the combination of growth and yields, whilst the option to increase both of these with leverage is appealing.
- Tangible Asset: Unlike stocks or bonds, property is a physical asset you can see and control.
- Leverage: Buy-to-let allows investors to use mortgage financing to purchase a more valuable asset than they could with cash alone.
Cons:
- Increased Costs: Recent tax changes, higher mortgage rates, and increased regulatory compliance costs have reduced profitability for many landlords.
- Regulatory Risks: The sector faces ongoing regulatory changes, such as the Renters' Rights Bill, which could further impact profitability and increase landlord responsibilities.
- Market Volatility: Property prices can fluctuate, and there's no guarantee of capital growth. This is a nice to have but is not guaranteed.
- Illiquid Asset: Property can be difficult to sell quickly if you need to access your capital. This is often overlooked but can be a significant factor when considering your options.
- Management Responsibilities: Being a landlord involves ongoing responsibilities and potential stress in dealing with tenants and property maintenance. Even with letting agents in place, you will still be dealing with the ongoing requirements being a landlord entails and you are ultimately responsible for your asset.
- Reduced Tax Benefits: The changes to mortgage interest relief have significantly impacted the profitability for higher and additional-rate taxpayers. This has reduced the number of landlords buying properties in their own name and increased the number of investors buying via limited companies.
Financial Aspects of Buy-to-Let
In recent years, gross rental yields had been significantly depressed, as house prices grew but rental yields didn’t keep up at the same pace.
That trend has since inverted, with house prices slowing and rental inflation running away.
For many years, new and established property investors had a target of 6% gross rental yields and 4% net for their portfolio. This was seen as a good target to cover costs and keep a profitable asset base when combined with capital growth.
This is no longer viable for the average investor, who also has a mortgage of anywhere from 50-75% loan to value.
Now, whilst each location is of course different, and provides different average house prices and yields. Simply put, a 6% gross rental yield often isn’t enough to effectively fund the ongoing running of the property.
When you consider the management costs, maintenance, insurance, mortgages and in some cases additional costs like landlord licensing.
8% gross yield is often required as a minimum to ensure the property cash flows positively if you have a significant mortgage to cover.
Of course, for cash buyers, this is less of an issue as they do not have mortgage costs to consider.
The Future of Buy-to-Let in the UK
Looking ahead. Much of the planned changes to the rental market have come in recent years.
Energy performance changes are still anticipated as housing stock is levelled up and requirements to achieve EPC rating C for rented properties remain a target for successive governments.
However, with significant recent mortgage and regulatory changes already taking place, the future looks stable.
To succeed in this evolving landscape, buy-to-let investors will need to:
- Stay informed about regulatory changes and adapt their strategies accordingly
- Focus on areas with strong rental demand whilst showing potential for capital growth
- Consider diversifying when building your property portfolio or exploring alternative rental strategies if the asset costs are too high in their target market
Alternative Property Investment Strategies
As the traditional buy-to-let market faces challenges some investors are exploring alternative strategies as a way to make the financials work in areas where the traditional buy-to-let yields are simply too low.
These alternatives include
1. Houses in Multiple Occupation (HMOs):
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- HMOs involve renting out individual rooms in a property to multiple tenants.
- They can offer higher yields but come with additional regulatory requirements and management complexities.
- Many local authorities require HMO licensing, which incurs additional costs and compliance obligations.
2. Short-term Lets and Holiday Rentals:
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- Platforms like Airbnb have made it easier for property owners to enter the short-term rental market.
- This can potentially offer higher returns than traditional long-term rentals, especially in tourist hotspots or areas of high demand from companies for accommodation from one week to a couple of months. Too short for a traditional AST but too long for a comfortable stay in a hotel.
- However, it often requires more hands-on management and may face regulatory challenges in some areas as local residents have been getting priced out of buying homes.
3. Purpose Built Student Accommodation (PBSA)
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- In the right university town demand is extremely high and expected to continue
- The cost of this asset is often much lower than other housing stock like 2-bedroom terrace houses or 3-bedroom semi-detached.
- Re-sale might be difficult, with a limited market of only selling to other investors and not a homeowner.
FAQ
Q: What is buy-to-let?
A: Buy-to-let refers to the practice of purchasing a property specifically to rent it out to tenants, rather than living in it yourself. It's an investment strategy aimed at generating rental income and potential capital growth.
Q: What is a single let?
A: A single let refers to a property rented out to a single tenant or household under one tenancy agreement. This is the most common form of buy-to-let, where the entire property is let as one unit.
Q: What is a multi-let?
A: A multi-let, also known as a House in Multiple Occupation (HMO), is a property rented out to three or more tenants who are not members of the same household. Each tenant typically has their own bedroom but shares common areas like the kitchen and bathroom. There are also specific HMOs designed for students.
Conclusion
While buy-to-let investing in the UK has become more challenging in recent years due to regulatory changes, tax reforms, and market conditions, the consistent and high demand from tenants means it can still have growth prospects and strong rental returns.
The key to success in today's market lies in thorough local market research, strategic property selection, efficient management, and the ability to adapt to changing regulations.
Investors must carefully weigh the potential for rental income and capital growth when buying rental property against the increased buy-to-let costs and responsibilities of being a landlord.
You should ask yourself if this is an industry you wish to be in for the long term.
Do you have a strong desire to consistently improve the quality of your properties for yourself and your tenants?
A long-term focus is needed, and for investors with a long-term plan, buy-to-let can still offer brilliant opportunities for a steady income and generational wealth building.