Is buy to let dead?
Is buy to let dead? That’s the question we’ll be answering this week. Read the news and you’d be forgiven for a little confusion.
One minute property investment has never been better as house prices reach new highs. The next minute new tax laws coupled with mortgage rate rises means the end of buy to let.
If the new papers are to be believed the up and coming landlord exodus will leave property prices on the floor. But wasn’t it only last year property prices were rocketing to Venus?
Time for a deep dive.
Rest in peace
It seems like there are a lot of people out there who think end of buy to let is upon us. And on the face of it they seem to know what they are talking about.
I’ve lost count of the number of ex-buy to let landlords that have come out and said they think buy to let is dead. So much so that they are exiting the property industry in droves.
These aren’t people without experience talking about things they don’t know about. They are more likely to be rich people who made a lot of money through property.
People who’ve been there, done it, got the t-shirt. I’m basically talking about successful professionals here.
Why are existing landlords getting out?
There’s no doubt, some buy to let landlords think the glory days of buy to let are over. I think there are a few obvious reasons for this. First on the list is house prices are too high.
This has a couple of implications. It means the likelihood of good house price growth in the future is reduced.
Yes, historically over the long term house prices go up, but not without a few peaks and troughs along the way.
Rapidly rising house prices like we’ve experienced over the last few years can often be followed by a period of stagnation or worse still a housing market crash.
The second implication of high house prices is a reduced rental yield.
You can quickly calculate the gross rental yield on a buy to let by dividing your annual rental income before costs with the price you paid for a house and then multiplying your result by 100.
Buy a property for £100,000, let it out for £10,000 a year and you’ve got a 10% gross yield, which many ex-landlords probably achieved back in the day, but is a lot rarer to find to day.
This according to these experience property investors is because rental yields haven’t kept up with house prices.
If you now have to pay £200,000 for that same property, with that same rental income, your rental yield has been chopped in two.
But the fact that rent increases haven’t kept up with house prices is only half the story. That’s because there are a whole host of costs that need subtracting from your rent that just weren’t there before.
The impact of tax on buy to let
Perhaps the biggest of these are tax changes.
In the good old days you could deduct mortgage interest and other allowable costs from rental income before calculating any tax liability. However, from 6 April 2020 that is no longer the case. Tax relief for finance costs is restricted to the basic rate of income tax (20%).
Essentially, relief is given as a reduction in tax liability instead of a reduction to taxable rental income. The bottom line being landlords now pay more, especially higher or additional rate tax payers.
There were some major changes to stamp duty in 2020/2021, so much so that we’ve devoted an entire article to them which you can find here if you are interested. To cut a long story short, rates went up.
Any expats who haven’t heard about this brace yourself! In most cases an expat buying a buy to let will pay 5% above standard rates.
To some people 5% won’t sound like a lot. However, trust me, to many it will be. As an example, an expat buying a £295,000 buy to let pays £19,500 in stamp duty, compared to £4,750 for a UK resident buying a house to live in. (You can see the calcs here).
On top of that, you have House of Multiple Occupancy legislation which means you can no longer just buy a big house and rent all the rooms out to separate tenants. Now you’ll need a licence and a lot of money spending to get things in order.
The impact of inflation
Anybody with a variable, tracker or fixed rate mortgage that has recently come to an end will have an idea about the impact of inflation on property.
In short, inflation causes mortgage interest rates to rise and that can cause big problems for buy to let landlords if they aren’t careful.
Landlords make money from the house price increase and rental income. However, that rental income is usually swallowed up by fees and mortgage payments.
Typically, a good buy to let will provide a little bit of money on top.
Rising interest rates means rising mortgage payments. Whilst most landlords leave room for a little increase, they don’t usually plan for massive sudden increases that come around from time to time as they did in 2022.
If your mortgage payments increase rapidly and you haven’t planned appropriately you can quickly find yourself in a situation where the rent doesn’t cover your outgoings.
This mortgage pressure doesn’t just pile pressure on landlords, it also influences the wider property market. This can put downward pressure on property prices across the board so you can find yourself having to use your salary to help pay the shortfall not covered by the tenant, whilst watching the price of your BTL drop.
Does that sound like fun to you?
Do you agree with the naysayers?
So you’d be forgiven for questioning BTL’s current viability.
But that doesn’t mean its over.
Like anything in life, you need to look at as much evidence as you can and make up your own mind about something that is important to you.
Though not always, people often have ulterior motives for saying the things they say. Saying and doing aren’t the same thing.
You may say buy to let is dead because you want to keep the good properties for yourself. It maybe because it makes a good headline. I maybe because you really believe it.
Even then, believing it, doesn’t make it so.
Change
Whilst there are tonnes of reasons for attacking the current property rental business, more and more of the buy to let is dead brigade that I come across share a single characteristic.
They don’t like change!
Granted some of these changes might mean that it’s harder than it used to be to make as much money as you once could.
But let’s be clear, hard doesn’t mean can’t. In fact I’d go so far as to say, harder than before doesn’t necessarily mean hard at all.
Though not all, I think it’s pretty clear that a lot of these naysayers made a lot of money very easily without really knowing what they were doing or trying very hard in the so called good times, more often than not in London.
Others have been at it so long they’ve forgotten how hard it probably was in the beginning. Yes, there have been a lot of changes since their day, but there were probably a load of changes in their day that the previous generation complained about.
Why you are likely to be wrong if you are already RIPing BTL
For me it all comes down to numbers.
If you can get somebody in a decent property paying you decent money every month you’ll struggle not to build wealth.
Decent property means one that will increase in value over time and decent money every month means more than enough to cover your mortgage payments.
When those two collide you should be in the money.
Sure it maybe possible to get better returns elsewhere, but then again maybe not. It depends on what kind of person you are, you situation in life and what you are interested in.
Think about it this way, even if the rent only partially covers your costs in the beginning, unless something dramatic occurs, and providing you are in it for the long term, and if history is anything to go buy you can’t not make money! Let me explain.
Investment returns
According to research by esteemed professors Dimson, Marsh and Staunton in the Credit Suisse Global Investments Return Yearbook 2018 historic real returns for UK property are 1.8%.
That doesn’t sound like much until you add on inflation, currently about 2% but historically more like 5%, meaning 1.8% becomes more like 4-7%. Not to mention the boost to that figure you’d get from leverage or gearing, in other words taking out a mortgage.
A 7% house price increase on a £100,00 property nets you £7,000. But a 7% house price increase on £100,000 plus £300,000 from the bank nets you £28,000. That’s a 28% house price increase. You’ve quadrupled your gains by taking out a mortgage! Yes, in the short term housing markets can crash but over the long term they’ve just about always bounced back to reach new highs so as long as you are in it for the long term you should be OK.
Without doubt a tonne of buy to let fees will have to come of that to get a net yield, but even if you only put half of that in your pocket, it would still equate to a 14% return. And by the way, that’s just playing with average numbers.
Do your research, find the right area and property type, add some value by doing it up and you might find you can handsomely beat those numbers. Lots of people say they do.
I’ll be surprised if you haven’t come across a rich landlord somewhere on your travels. I seem to bump into them everyday!
5 reasons to remain upbeat
In short, there are many reasons why buy to let still works. Here are the big ones.
(1) Capital gains
As long as you are in it for the long term, and unless you are very unlucky the price of your buy to let will go up. Most do. Check out the best UK areas for for capital gains over the last decade in the table below:
Best areas in the UK for capital gains
| Area | Percentage change in house price over 10 years |
| Waltham Forest | 127 |
| Hackney | 105 |
| Barking and Dagenham | 96 |
| Lewisham | 91 |
| Haringey | 89 |
| Newham | 88 |
| City of Bristol | 87 |
| Merton | 85 |
| Bexley | 85 |
| Greenwich | 84 |
(2) Rental Yield
Though I’ll be the first to admit double digit yields are rarer than hen’s teeth, depending on what your idea of a decent yield is, you can still find them. Check out the best UK cities for buy to let rental yield in the table below (up to last year):
Top UK cities for rental yield
| City | Rental yield |
| Middlesbrough | 7.7% |
| East Ayrshire | 7.7% |
| North Ayrshire | 7.7% |
| Inverclyde | 7.7% |
| Glasgow | 7.6% |
| Stirling | 7.5% |
| Sunderland | 7.4% |
| Country Durham | 7.4% |
| Nottingham | 7.3% |
| Hartlepool | 7.3% |
(3) Leverage can juice your gains
As already mentioned leverage adds rocket fuel to your returns. A 10% house price increase on a £100,00 property nets you £7,000. But a 7% house price increase on £100,000 + a £300,000 mortgage nets you £28,000.
That’s a 28% house price increase. You’ve quadrupled your gains by taking out a mortgage! Yes, in the short term housing markets can crash but over the long term they’ve just about always bounced back to reach new highs so as long as you are in it for the long term you should be OK.
(4) Mortgages force you to save
When you take out a repayment mortgage you are literally forced to save. Every month you must save some money. On the other hand other forms of investment typically give you the choice of whether or not to put money away. Putting money away in the good times is easy, but when things get a little tighter it becomes a whole lot more difficult.
(5) The concept of property investment is easy to understand
Unlike many other types of investment, buy to lets are easy to understand. There’s a saying that you should only invest in things you can explain to primarily school kids. Something tells me it would be a lot easier to explain a buy to let than a mortgage backed security!
Is it still a good investment?
If you are still questioning the viability of buy to let. Stop! You really shouldn’t be.
For sure, there are many alternatives that may be a better fit for you. Number one being investing in the stock and bond markets.
And for sure there are some advantages to that for some people. You can read more about this here, but just because stock and bond market investing may be better for some doesn’t mean buy to let is a bad investment.
In fact, I’d go so far as to say that there’s no doubt buy to let is still a very good investment.
The bottom line
Buy to let investment is far from dead. As long as house prices go up and there’s a rental demand buy to let will enable plenty of people to build their wealth.
