Buy-to-let has changed dramatically in recent years, with cuts to tax relief and regulatory changes making it a less attractive investment than it has been in the past.
As rent and property values continue to rise, however, there are still plenty of people who consider it a sound way to grow their money and are adding to their property portfolios.
Here CashLady explores whether buy-to-let is really a good investment, looking at the challenges and costs faced by landlords, along with the benefits of becoming a multiple homeowner.
Why buy-to-let has changed
The buy-to-let sector has faced a raft of changes in recent years, with an increase in taxation and new regulations on fees and licensing coming into play.
There is no doubt that the sector was due a shakeup, with more protection offered to tenants from unscrupulous lettings firms and landlords.
At the same time, the government increased the amount of tax, known as stamp duty, due on second properties at the time of purchase.
This was in a bid to slow down rising house prices, believed to be driven by buy-to-let landlords pushing up property values, squeezing first-time buyers out of the property market.
What do the changes mean for buy-to-let landlords?
Stamp duty and income tax
The most obvious change in the buy-to-let market has been increased stamp duty by the Government.
Coming into force in 2017, it sees landlords, or anyone buying a second home, pay an extra three percentage points of stamp duty, which can potentially add thousands of pounds to the purchase.
The amount of stamp duty due rises according to the property price.
- Properties up to £125,000, are due 3% stamp duty, it was previously zero tax
- Properties between £125,001 and £250,000 tax increased to 5% from 2%
- Properties between £250,001 and £925,000 increased from 5% to 8%
- Properties between £925,001 and £1.5 million increased from 10% to 13%
Looking at the figures, this means the tax payable on a £200,000 property is now £7,500, up from £1,500, before the changes in 2017.
The government also reduced the generosity of mortgage interest relief (MIR) that can be offset against tax bills to curb landlords with higher incomes receiving preferential tax treatment.
Regulatory changes to fees
Another change to the industry sure to hit landlords is changes to the ways that lettings agents can charge tenants.
Good news for renters but bad news for property owners, it means that agents can no longer charge for things like credit reference checks, which will be passed onto owners.
Other charges faced by landlords
Along with stamp duty and other costs associated with purchasing a new property, such as survey and solicitor costs, buy-to-let landlords have to consider on-going costs.
These could include mortgage payments if the property was not bought outright.
The mortgage will need to be paid every month whether tenants are living in the property or not – remember there could be periods where the property is empty.
If you are planning to use a lettings agency to manage the property, then you will need to pay lettings fees worth a percentage of the rent – this can be around 20%.
There are also regular charges for rents and service charges if you purchase a leasehold property, and maintenance and repair – if the boiler breaks, it is up to you to cover the cost of fixing it.
Is buy-to-let a good investment?
There are certainly more charges and less tax relief than there has been in the past but buy-to-let can still be a good investment.
Moneywise.co.uk highlights the benefits of receiving a steady rising monthly income, noting that rents rose by an average of 1.5% in November 2018.
It also reports that property values continue to rise, with average house prices in the UK increasing 5.3% in the year to October 2018 to £231,095.
Gary Smith, a financial planner at Tilney tells Moneywise that the best investment is potentially in cheaper properties, hit by less stamp duty, with expected returns higher than bank interest rates.
He is, however, quick to point out the additional costs that need to be taken into consideration, he says:
“Buy-to-let properties still remain popular as investors look at the relatively high rental yields that can be achieved when compared to interest rates and annuity rates,
“But while rental yields are high on lower-value properties, they tend to reduce as the value of the property increases.”
He adds that the gross yield is not what an investor will receive in their pocket as they must consider the other ongoing costs associated with renting out a property.