Buy-to-let: A good investment?
Is 2020 a good year for landlords in the UK?
With tax changes coming into force for landlords in 2020, does being a landlord still make financial sense? We take a look at the opportunities and the challenges of buy-to-let property ownership, and give our advice on how to maximise your buy-to-let investment in a tax efficient way.
What does buy-to-let mean?
Buy-to-let is the term given to buying a property which you are going to rent out, rather than live in yourself. If you’re not buying the property outright with cash, you’ll need a buy-to-let mortgage. These mortgages will usually have higher fees due to the bigger risk for the mortgage provider.
Is buy-to-let a good investment?
Continued demand for rental properties – Investing for the future is a good idea. If you’re in a financial position to do so, a buy-to-let property can be a great investment.
With increasing house prices, certain parts of the UK remain too expensive for many to be able to purchase a property. In fact, analysis by Verismart, suggests that the UK will become a nation of predominantly renters by 2045, with 55 per cent of the population living in the rental sector. An increase in demand for rental properties is likely to mean an increase in rents.
If we consider the data from the Office for National Statistics which shows that private rental prices in the UK rose by 1.3 percent in the 12 months to May 2019, the market is already in good health.
Competitive mortgage rates – At the moment, it’s historically cheap to borrow money. Mortgage providers are competing for business and there are lots of low rate deals to be had.
More tangible than stocks and shares – If you are looking for a long-term investment which feels more tangible than stocks and shares, a buy-to-let could be a good alternative. You can manage your own stocks and shares, buying and selling through a broker, but many people invest in a trust, which is managed by others.
A buy-to-let property allows you to be more in control of your investment, and potentially add value to your investment in a way you can’t with other mediums. Although as with any investment, profits can go up and down.
Your investment can grow in two ways – With a buy-to-let investment, you have the chance to make a profit from the sale of the property if house prices have gone up. That’s what many buyers bank on, and long term it’s hard to see property prices dropping off a cliff.
A buy-to-let can also provide a rental yield. This is what your tenants pay in rent minus the maintenance and running costs, such as agent fees and repairs.
What are the challenges of buy-to-let?
The buy-to-let market has been tightened over recent years, with more regulation and changes to the tax system. But how have these affected any potential profit from an investment?
Mortgage tax relief – Well, changes to mortgage tax relief have been gradually introduced since the 2017/2018 tax year. From April 2020, landlords won’t be able to deduct any mortgage interest payments from their rental income. They will only be able to claim a 20% tax credit on mortgage interest via their tax assessment with HMRC.
Capital Gains Tax (CGT) – Remember that if you decide you want to sell your buy-to-let property, any profits will be subject to CGT. It’s worth considering this as a cost which you’ll need to deduct from profits made on your investment.
Providing energy efficient homes – Something you may not have considered is the initial cost of making sure the property you buy meets the new Minimum Energy Efficiency Standard (MEES) regulations. The regulations necessitate that rented homes should have a minimum EPC rating of E. Costs to carry out the work are capped at £3,500 per property.
How to maximise your buy-to-let profits
Location – Think location, location, location. With property values differing so much and the expected price rises dependent on where you buy, it pays to spend some time researching the best buy-to-let areas.
Figures released by Simply Business reveal that London and Manchester are the most attractive cities to invest in for 2020. Some 36% of landlords either voted for London or Manchester as the top places to invest. Given the drop in London house prices by 1.8% in 2019, it’s a surprise and shows that the capital remains a strong option.
Your future tenant – Location is extremely important, but it might help to think about who your ideal tenant would be. Are you looking for students, professionals or families, for example? Your tenant choice may have an impact on the location.
Capitalise on a weaker market – Now, not everywhere in the UK is seeing a weaker property market, but if you do your homework, this could be the best time to join the buy-to-let club.
Warren Buffet said: “The best chance to deploy capital is when things are going down.” So, with slower property prices and more individual investors walking away from buy-to-let, perhaps now is the best chance to start your investment.
Seek the advice of professionals – There are ways to minimise the effects of the regulatory and tax changes for buy-to-let. It’s not a one size fits all approach though and depends on the size of your portfolio, whether you’re married, if you’re a basic or higher rate taxpayer, etc.
You could increase your profits by using a limited company to hold your properties, for example. That way, you’ll pay corporation tax on profits, rather than income tax. An accountant that offers buy-to-let advice can suggest the best financial structures, how to make the best use of your tax breaks and how to secure financing.
There are of course other ways to invest your money, but if you are favouring buy-to-let, then there is still profit to be had for those who do their homework.