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Thinking of investing in buy-to-let? Read this first

Buy-to-let property investing has boomed over the past few decades. It has become a popular way of generating wealth as investors have benefited not only from a regular monthly rental income but also soaring property prices.

However, over the past two years, the buy-to-let landscape has changed dramatically. And if you’re planning on getting into this market, there are several factors you need to consider first.

Rising costs

Firstly, renting out property is no longer as lucrative as it once was. During the past few years, to try and cool the housing market the government has tweaked the tax system to make buy-to-let investing less attractive to investors.

A 3% stamp duty surcharge on second homes and a gradual reduction of mortgage interest tax relief, which will reach the basic rate of 20% for all landlords by 2020, will weigh on returns for all investors going forward.

What’s more, the government has been introducing regulation to stop rogue landlords taking advantage of tenants and increasing tenants’ rights.

The cost of complying with these increasing demands could be too much for small-scale landlords.

Extra work

Secondly, as a landlord, if something goes wrong with the property you will have to find the money to pay for it and organise repairs. On top of this, finding and vetting tenants can be time-consuming.

Of course, you could pay a letting agent to take care of everything, but this would consume more of your rental income. Fees amounting to 10% or more of the monthly rent take are common.

Slim returns

Thirdly, for all the time and effort involved managing a property, the returns aren’t that attractive.

Using a back-of-the-envelope calculation, the average tenant’s rent bill was reported as being just over £900 per calendar month at the beginning of this year. That’s around £10,800 per annum. At the same time, the average home price at the end of Q1 was in the region of £226,000, or £232,780 including the stamp duty surcharge.

Based on these numbers, I estimate the average rental yield is 4.6% for landlords getting into the market today. If you deduct a 10% per annum letting agent fee and income tax, you’re left with a yield of around 3.4%. I should, at this point stage, that these figures are only rough estimates.

Also, many buy-to-let investors use mortgages to improve returns, this adds another variable and cost. With these tiny profit margins, it will only take one broken boiler or leaky shower to eliminate a year of income.

Capital gains are usually a significant factor in buy-to-let investors’ considerations as well. Here the prospects are brighter. Mid-single to low-digit home price growth is expected for the next few years, although this will differ between regions. Still, if you take a 3.5% annual income and, say, 2.5% yearly capital appreciation, buy-to-let investing could, according to my figures, produce a 6% return.


Personally, I’m not convinced that this level of return justifies all the work involved. There are equities in the FTSE 100 which support a dividend yield of more than 7%, and with these stocks there’s much less work involved.

So, after considering all of the above, it seems to me that the best days for buy-to-let investing are now over.

Source: Yahoo Finance UK