• James Wyllie

Is buy-to-let a good investment?

Updated: Jul 15, 2021

Buy-to-let property with open plan living room

In recent years the question has been frequently asked as to whether buy-to-lets still provide a good investment opportunity. This has been largely prompted by changes to tax relief that landlords previously enjoyed and therefore a potential depletion in profit margins. Now, on top of this, there is the unfolding impact of COVID-19 that offers a number of new challenges to be considered. In this article we will try to make sense of the current reality for those potentially looking at venturing into the buy-to-let arena.

Some typical assumptions for a successful buy-to-let investment

Before we look at the current dynamics that are affecting the potential success of such an investment it is important to note that there are some staple factors that will determine the success of a buy-to-let investment:

Buy-to-let is a mid to long term investment

Property investments are generally a medium to long term investment and buy-to-let is no different. The appeal of buy-to-let is that there are two revenue streams; passive rental income and capital growth. Investors need to remain focused on the long term picture rather than the impact of short term situations such as dips in property prices or short periods where the property is vacant. In the long term, property prices have increased and there has been an increased move from home ownership to rental accommodation.

Location is key

As with any investment location is important, for two reasons. Property values rise at different rates across the nation and investors should consider locations that will offer to the best return in the future. The second is that the location needs to be where there is a strong rental market, in order to secure stable yields over the long term.

Be clear on whether the numbers work

There are a number of costs associated with being a landlord that need to be factored in securing a buy-to-let investment. In securing a mortgage, a broker with whole market access can secure the most advantageous funding for the investors particular needs. A lender will typically require that the rental incomes covers at least 125% of the mortgage payment.

In addition there are a host of mandatory costs such as the EPC certificate, gas certificates, landlord insurance and income tax. There are then circumstantial costs such as maintenance, letting and management fees, and periods when the property is vacant.

How does the current economic situation effect buy-to-let?

Whilst we are still to see the true affect of COVID-19, I believe that there are both opportunities and challenges that will face the buy-to-let market in the coming months and years.

Demand will continue to grow but rents may decline

The Office for National Statistics (ONS) reported that from 2007-2017 the number of households in rental accommodation grew by a staggering 64%. As the financial impact of COVID-19 takes effect, it is expected that fewer households will be able to buy their own house and will therefore be forced into, or to remain in, rented accommodation, thus providing an opportunity for landlords to achieve stable long term yields.

Whilst rental demand looks to continue in favour of landlords, there is already anecdotal evidence that rents are reducing. It is generally accepted that there is a relationship between earnings and rental growth. As the furlough scheme comes to an end, and the anticipated rise in unemployment becomes a reality, it can be expected that rental incomes will drop accordingly. The likelihood is that more tenants will be increasingly reliant on state support for living costs such as rent. It will be more important than ever for landlords to vet their future tenants and form positive relationships with good tenants in order to guarantee a reliable income stream.

The role of government in 2020

I'm not sure you will find too many current landlords that welcome the recent interventions by the government. Many would tell you that there has been a shift to a pro-tenant, anti-landlord stance, from the current government, with the loss of buy-to-let tax relief from April 2020 to the extension of the ban on evictions during the current pandemic.

There are new electricity regulations that were implemented from 1st July 2020 in England, which will provide a further potential cost to landlords, with the frequency of inspections being determined by the inspector.

There have also been changes to private residence relief, meaning that from April 2020, you can no longer claim up to £40,000 capital gains tax relief, if the residence used to be your main home. The landlord has to be living in the property as his main residence at the point of sale.

In addition to the recent measures, there is the ongoing review of Section 21, which allows landlords to end a 'rolling contract' with two months notice, without reason. Under government plans, in future, landlords will have to provide sound reason for giving notice and convince a judge that their reasons are valid. This could cause a headache for landlords with difficult tenants.

And yet, despite these measures that could appear to be 'anti landlord', the government has a vested interest in the success of the rental market. The current housing crisis, combined with increases in people unable to purchase their own property, means that successful landlords are what the government needs. With this in mind, there are growing calls from within the industry to scrap stamp duty for buy-to-let investors to stimulate market growth, and it will be interesting to see how the government responds.

Where the government will most likely look to support the rental market is through build to rent (BTR) schemes. This is where new build developments, typically 50 houses or more, are designed specifically for rental. Future schemes such as a 'help to build' scheme, as recommended by the Centre for Policy Studies, would potentially not be available on buy-to-let purchases.

New locations could provide new opportunities

Choosing the right location, as already stated, is of huge importance to any investor. There are various reports available that highlight those areas with the highest (and lowest) potential yields. TotallyMoney's report offers such detail by postcode, with L1 in Liverpool, coming top with a yield of 10%. FK3 in Falkirk is second and achieves a 9.51% yield, with G52 in Glasgow, coming third, with a yield of 8.71%. At the other end of the spectrum, there is AL5 in St Albans that achieves a yield of just 1.95% and IP13 that achieves 1.96%, thus demonstrating the point that finding the right location is of paramount importance.

But it is also important to remember that a buy-to-let investment is also about capital growth, and this will need to be factored in to the choice of location. Figures from the Office for National Statistics (ONS) show that regionally, the North, Midlands and Wales have provided the best growth in recent property prices, with Cardiff (9%), Sheffield (7%) and Birmingham (6%) the best performing cities. With the likelihood that property prices will dip in the short term, there is greater potential for capital growth in the medium to long term, for those that invest in property now, obviously providing that the funding terms secured are favourable.

Despite the current statistics available, the impact of COVID-19 could change where the best locations lie. Working from home is something that both employees and employers have become accustomed to over recent months. As businesses look to cut overheads in areas such as office space, and employees look to strike a better work/life balance (with less commuting), more rural locations, away from the traditional commuter-belt towns, may become a more favourable investment. Therefore, the savvy investor could stand to achieve higher yields in locations not yet identified through the traditional reports that are available.

The type of buy-to-let property may matter in the short term

With the current social distancing measures in place, the types of buy-to-let property (find out more here), have come under scrutiny. For example, will tenants wish to live in houses of multiple occupancy (HMO's) which contain shared living spaces such as a kitchen and bathroom? In the short term, there maybe reluctance from some prospective tenants, but in remembering that buy-to-let is a mid to long term investment, these immediate concerns should not be overestimated.

Increasingly competitive finance is available

When the country came to a grinding halt at the end of March, lenders understandably paused or readjusted their product offerings to reflect the uncertainty. This, of course, would hamper any potential investors requiring debt finance. However, in recent weeks lenders have started to come back to the market with increasingly competitive product offerings.

Albeit, in very different circumstances, parallels can be drawn with the 2008 crash, when smaller lenders, were quicker to respond to the opportunities than the big high street banks. Already, I am seeing the same happening again, which is why it is important for buy-to-let investors to use an independent broker who has full access to the market.

So is buy-to-let still a good investment?

The answer to the question is yes, but it comes with a warning. Any buy-to-let investment needs to be well researched and thought through. Strong yields can be achieved and the rental demand is expected to grow even faster due to the unfolding economic environment. This combined with long term growth in property prices mean that buy-to-let can provide good returns.

However, the current economic environment may mean that rental rates reduce and government interventions continue to squeeze returns on investments. We will have to wait and see if the government will respond to calls to offer incentives to stimulate the market.

In terms of securing finance, there have been positive moves from lenders in recent weeks with their product offerings that investors can access through a knowledgeable broker. Montpelier Private Finance is an experienced, independent broker with full market access to the best funding lines in the buy-to-let market. You can find out more about buy-to-let funding and other commercial mortgages here, or get in touch here if you have a specific case you wish to discuss.

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