In recent years, buy-to-let investors and landlords might feel as if they have been deliberately targeted, with changes to mortgage interest tax relief, the introduction of stamp duty surcharges, and a seemingly endless range of new legislation and regulation to contend and comply with.
Which begs the question – is buy-to-let still worth investing in? Here, Stuart Williams, founder and chief executive of buy-to-let and off-plan property investment company Thirlmere Deacon, explores more.
Rewarded by strong house price growth
According to Williams, over the past 10 years, investors who have purchased a buy-to-let property in southern cities such as London and Oxford have reaped the rewards of considerable house price growth during that period.
“Those who got in early to the BTL market have reaped the returns. A report written in 2015 by economist Rob Thomas showed that buy-to-let returns over the previous 18 years had beaten those from every other major asset class available,” Williams says.
“Since buy-to-let mortgages were introduced in 1996, Thomas calculated that net annual returns have averaged at 16.2%, compared to a lower average return of 6.2% on UK equities.”
Williams says most experts point to longer-term trends that underpin the future performance of residential property investment, with the UK's population growing and there quite simply being too few homes for the existing population.
“That’s a situation that’s likely to endure for the medium to longer-term,” Williams adds.
He says the number of people renting continues to increase, with a third of UK’s millennials set to still be renting into retirement. The UK has the fifth-highest number of tenant occupiers when considering the UK and the 27 EU nations, Williams continues, while VeriSmart forecasts renters will account for 55% of the housing market by 2045.
“Despite the pandemic, investing in buy-to-let is still delivering impressive capital returns and rental income in parts of the UK,” Williams says. “Recent research from Aldermore's new Buy to Let City Tracker, which assesses buy-to-let performance in 50 UK cities, has ranked Manchester as top with Cambridge (2nd) and London (3rd).”
The indicators used in Aldermore’s research include the average rent, the best short-term returns through yield, the long-term return through house price growth over the past decade, the lowest number of vacancies as a proportion of total housing stock and the percentage of the city population in the rental market.
“Manchester takes the top spot as it’s one of the largest rental markets in the UK, with 31% of its population private tenants, second only to Bournemouth, which ranks 35th on the tracker despite 33% of its population living in the private rental market,” Williams explains. “Manchester’s main selling point for BTL landlords is that it delivers excellent rental returns and long-term house price growth.”
Manchester also benefits, Williams adds, from some of the lowest vacancy rates of any city included in the tracker, with only 0.5% of its properties vacant, giving landlords a better chance of avoiding void periods.
“Average rental prices of £428 per room per month sets monthly income for landlords above average, while property prices have risen 41% over the past decade,” Williams says.
“Clearly the BTL market is still offering good returns for investors, provided they focus on affordable parts of the UK, where there are strong yields and the potential of good capital growth.”
Below, Williams outlines some tips on making the right buy-to-let investment.
It’s a big mistake to buy a property in an area you know little about. Investors need to research the local area and understand market conditions. Rental yields vary from town to town and it’s important to buy in an area with strong rental demand.
Think about the potential of the town for buy-to-let – for example, is the town in a commuter belt? Are there good transport links? Are there good schools for young families? Where do the students want to live?
In most cases, investors tend to invest in property close to where they live. This is a great advantage as they are likely to know this market better than anywhere else and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.
Don’t be emotional
It can be easy to follow your emotions when purchasing a property. The golden rule is don’t buy a house because you love it and would like to live there yourself. You need to love the deal and not the property. Any property you invest in must deliver on the financials. Would you invest in Coca-Cola because you like the drink or because the shares pay dividends?
Many investors do not factor in the costs of owning a buy-to-let property with contingency funds. If you do not have a contingency fund in place to cover unforeseen circumstances, then you could fall into financial difficulty and potentially lose your property.
As a general guideline, 25% of one year’s gross annual rental income should be put aside to cover rent arrears, void periods, maintenance, repairs and refurbishment, white and brown goods replacement and the ongoing rental costs, such as gas safety certificates and letting agent fees.
This contingency may not be used and should not be seen as an additional annual cost, just part of the investment business plan from the outset for investment protection.
It’s vital to do the maths before investing, or you could be seriously out of pocket. You need to buy an asset, not a liability, and it needs to put money in your pocket every month. Before you think about looking around properties, sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get.
Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. Ensure you know how much the mortgage repayments will be and if it is a tracker, allow for the rates to fluctuate in your calculations.
Once you have the mortgage rate and potential rent sorted, then you must do the numbers carefully and work out how your investment will perform. Ensure you factor in maintenance costs and work out how you will cope if you have void periods between occupancy. These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker, allow for rates to rise.
Have a great team to rely on
Property is a team sport. A BTL investor needs the support of an experienced investment consultant, mortgage broker, lawyer, accountant and builder.