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Is Buy-to-Let a Worthwhile Investment?

When it comes to investing in property, it’s often hard to know where to start. It also isn’t easy to find the real estate investment that perfectly suits your needs. Setting up a buy-to-let investment has several positives for people at all stages of life or those getting started on the housing investment ladder. Buy-to-let (BTL) could be an excellent investment for those who are beginning to think of retirement and are wanting to build a nest egg. Buy-to-let could also be an option if you plan to downsize after the kids have left home but want to hold onto your property to create a steady revenue stream. But what kind of returns can you expect on a buy-to-let, and is it still a good investment in the current housing market? How does it compare to other similar investments, and what are the challenges you may face?

When it comes to investing in property, it’s often hard to know where to start. It also isn’t easy to find the real estate investment that perfectly suits your needs. Setting up a buy-to-let investment has several positives for people at all stages of life or those getting started on the housing investment ladder. Buy-to-let (BTL) could be an excellent investment for those who are beginning to think of retirement and are wanting to build a nest egg. Buy-to-let could also be an option if you plan to downsize after the kids have left home but want to hold onto your property to create a steady revenue stream. But what kind of returns can you expect on a buy-to-let, and is it still a good investment in the current housing market? How does it compare to other similar investments, and what are the challenges you may face?

What returns can you expect on a buy-to-let?

The returns that you can receive vary depending on the location of your rental property. If we take a look at the top-ranking UK areas for buy-to-let returns last year, Liverpool is ranked #1 with an average 10% yield.

Rank

Postcode

Postcode Town

Properties for Rent

Median Rental Value

Properties for Sale

Median Asking Price

Yield

1

L1

Liverpool

187

£750

368

£90,000

10.00%

2

FK3

Falkirk

30

£495

39

£62,450

9.51%

3

G52

Glasgow

46

£595

66

£82,000

8.71%

4

L11

Liverpool

55

£650

31

£90,000

8.67%

5

TS1

Cleveland

65

£425

34

£60,000

8.50%

6

KA1

Kilmarnock

68

£450

75

£64,995

8.31%

7

L6

Liverpool

153

£575

59

£85,000

8.12%

8

LE1

Leicester

176

£667

116

£100,000

8.00%

9

LS2

Leeds

111

£825

32

£125,000

7.92%

10

S1

Sheffield

219

£750

68

£115,000

7.83%

[DATA CREDIT: https://www.totallymoney.com/buy-to-let-yield-map/ Data correct as of 30/09/20]

At the other end of the buy-to-let spectrum, some postcodes in highly populated cities such as London and Birmingham offer comparatively low yields. What’s even more interesting is that Sheffield makes an appearance on the ten worst and ten best areas to invest in for buy-to-let. Where an S1 postcode yielded 7.83%, an S7 made only 2.19%

 

Rank

Postcode

Postcode Town

Properties for Rent

Median Rental Value

Properties for Sale

Median Asking Price

Yield

1

WC1X

London

440

£2,825

76

£1,484,408

2.28%

2

RG10

Reading

68

£1,100

34

£585,000

2.26%

3

GU10

Guilford

71

£1,295

116

£699,950

2.22%

4

KT7

Kingston upon Thames

41

£1,350

47

£737,475

2.20%

5

S7

Sheffield

98

£638

61

£350,000

2.19%

6

B73

Birmingham

69

£680

60

£375,000

2.18%

7

W8

London

400

£3,356

59

£1,962,500

2.05%

8

GL6

Gloucester

50

£795

92

£470,000

2.03%

9

IP13

Ipswich

34

£650

62

£397,500

1.96%

10

AL5

St Albans

115

£1,300

107

£800,000

1.95%

[DATA CREDIT: https://www.totallymoney.com/buy-to-let-yield-map/ Data correct as of 30/09/20]

As well as the rental yield, the capital gain for your buy-to-let property could grow with the housing market if you ever come to sell. Similarly, if the market faces a downturn, both your rental yield and potential capital gain may fall.

Is UK property still a good investment in 2020?

There have been quite a few changes in how landlords are taxed and charged in recent years. Since 2016 landlords who are purchasing an additional home to their primary residence must pay a 3% stamp duty surcharge. This would mean if you were buying a property worth £125,001 - £250,000 instead of paying the usual 2% stamp duty, you would instead be paying 5%.

As well as this, additional tax relief for landlords has been phased out as of April 2020. This means that the cost of interest on your potential buy-to-let mortgage can no longer be deducted from rental income to reduce the tax bill. This affects not only those paying higher rates of tax but also landlords who would move from the basic to higher tax bracket. You can still obtain a 20% tax credit to offset your mortgage interest payments. For a full explanation of these recent changes, check out the gov.uk website.

Property price growth has been relatively slow in recent years, and it has been slowed further still due to the COVID-19 pandemic. It is the view of many analysts and economists that the property market may not bounce back for several years. William Buckhurst, Head of Fund Research at Vermeer Partners, recently told the FT Adviser, "it is hard to see an immediate move upwards in UK house prices given the inevitable economic recession that is going to follow Covid-19". He continues, however, by saying that in the super long term "UK house prices looks positive". This is based on the fundamental nature of supply and demand, coupled with a growing population and low mortgage rates. In the short term, due to the recent economic downturn, fewer people will be looking to invest in buying a primary residence. They may instead turn to renting.

What complications can you face with a buy-to-let property?

There are a few things you should bear in mind before you start to think of getting a BTL property. If you're older, getting a mortgage can be increasingly difficult. There is no fixed age limit for getting a mortgage, but most lenders will not give mortgages out to those over 65. The issue is so dire that in a recent study shows that 83% of homeowners over 55 were unable to secure a home loan. If you are successful in obtaining a mortgage, you will still have to ensure a steady stream of rental income to cover mortgage payments.

When applying for a BTL mortgage, in comparison to a regular mortgage, the fees and interest rates are much higher from most lenders. The majority of buy-to-let mortgages are interest only, and you will have to pay a deposit of around 25-40% of the property’s value. The bigger the deposit, the better the rate you are likely to get on your loan.

Typical landlord complications will still apply. Any costs for repairs or other ongoing issues will all come out of your profit margins on top of fees. You will also have to dedicate a good amount of your time towards property upkeep and maintenance. There are obvious liquidity issues as the money invested in the property will be tied up for the long term. You are also liable to pay capital gains tax on any profits made should you come to sell the property. With this being said, landlords posted impressive profits in buy-to-let sales last year. If you’re able to obtain reliable tenants, then rental income can be a lucrative stream of revenue.

Are there any alternatives to buy-to-let properties?

If you're not quite ready to leap into being a landlord, there are a few alternative investments you may want to explore.

Real Estate Investment Funds

Putting your cash into investment funds centred around the real estate market takes away the landlord aspect. Your investment will track the housing market indexes.

Real Estate Investment Trusts (REITs)

When you invest in a REIT, you combine your capital with several other investors to buy commercial real estate. A REIT would allow you to profit from property without actually having to buy outright.

Holiday Lets

Although similar to a buy-to-let, a holiday let in a desirable vacation zone could net you a much larger income. You don’t have to worry about acquiring long term tenants, but you will have to put a lot more effort into maintenance.

In summary, a buy-to-let investment may only be right for you if you match specific criteria;

  • You’re willing to make a long term financial commitment which will reduce your liquidity.
  • You're ready to get hands-on with your property and landlord responsibilities.
  • You understand that your gain/loss is tied to the housing market, exposing you to large amounts of risk.
  • You understand the inherent risk involved with borrowing funds to finance your investment. Even if your capital depreciates, you will still be liable to repay your mortgage.

If your investment approach ticks all of these boxes, BTL property has the potential to provide a steady yield. You have to be thoroughly knowledgeable of the industry before signing on the dotted line though, as there are plenty of pitfalls.

Joshua Moynehan

Joshua Moynehan

Following his career as a stockbroker, Joshua decided to pursue his passion for writing professionally and has since used his existing experience and expertise to create a wealth of informative content around finance, technology and the arts. In his spare time, Joshua enjoys travelling, gardening and keeping fit.
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