Investing in a buy-to-let property is profitable but there are downsides that you should consider before going ahead. Here’s what you should know.
Property is a reliable investment, especially as we’ve continued to see UK house prices rising over the recent years, so it’s smart for you to decide to invest in a buy-to-let.
According to the Nationwide Building Society’s house price index, the average UK prices have risen each year since 2013 with the fall in 2012 just 1.1%. The last time we’ve seen a significant drop like this was in 2008 when the average house price fell by 14.7% over the year because of that financial crisis 2007-08.
However, this doesn’t tell you the full story. If you did buy a property in Greater London just before this drop in the third quarter of 2007, it will still be worth an average of 66% more in the same period of 2021 (this will be different depending on the specific areas). But you would have had to wait until 2013 until it was worth more than the amount you bought it for in 2007.
Where you buy matters also. Property’s in Northern Ireland were worth an average of 27% less in the third quarter of 2021 than they was in 2007 due to prices rising quickly before the financial crisis and many years of prices falling after.
Is buy-to-let worth it?
Whether a buy-to-let property is a good investment depends on what happens in the wider economy and what’s going on in the area where you are brought the property. It also depends on the type of property you buy as some sorts of homes will be more in demand in certain areas than others. Also, the rent you can charge and how it changes will have an impact too.
Although investing in buy-to-let doesn’t guarantee that you’ll make money there are two major things you can do to increase your chances:
Research the local area you’re planning to buy in and the type of property you should buy carefully by looking at house price and rental data and speaking to estate agents
Invest over the long term
You should consider the pros and cons of a buy-to-let investment below and weigh up the costs versus the benefits before you decide whether it’s right for you.
Pros and cons of investing in a buy-to-let
Pros
- Potential house price growth
- Income that covers your mortgage repayments (hopefully)
- Costs that can be offset against tax
Cons
- Costs if property is empty
- Responsibility for maintaining the property
- Extra stamp duty to pay
- The hassle to find tenants
- Advantages of buy-to-let
- Potential house price growth
Although house prices have changed over the years, property is still a good investment for the long term.
Property prices will go up and down, but if you’ve owned it for at least 10 years there is more of a chance that the value will have increased by the time you have decided to sell the property and make you make a healthy profit.
take in mind that if the value of the property goes down and you have a mortgage on it you could find yourself in negative profit – where the loan will be worth more than the house – so would have to make up for the shortfall yourself if you sold it.
- Income to cover your mortgage repayments (hopefully)
Renting your property to tenants who will pay your mortgage for you and provide some extra income is the key to a successful buy-to-let investment. In fact, you’ll need to be able to prove the rental income will be able to cover your mortgage interest payments by at least 125% to 145% to get a buy-to-let mortgage.
Local rents can go down so you may have to reduce how much you charge to stay, which could eat into your profits.
If you do take advantage of a low buy-to-let mortgage rate you could increase your profit further which means your monthly payments will be lower, so your profit margin is likely to be bigger.
- Costs can be offset against tax
You must pay tax on any income that’s above £1,000 from letting a property you own personally but you can use to cancel out some of your expenses against the amount you pay tax on. For residential property these include:
- Fees paid to letting agents
- Council tax and bills (if you pay them for the property)
- The cost of advertising your rental property
- Money paid for maintenance and repairs
You can also get tax relief to cover replacements of ‘domestic items’, such as, beds, carpets, and sofa’s, you’ll need to make.
But the tax relief isn’t as generous as you may think. Previously you could also be able to deduct finance costs, such as mortgage interests, but this was phased out between 2017 and 2020.
You can get a reduction in your tax bill of 20% (the normal rate of income tax) of your finance costs, or 20% of your property profits or total income once your personal allowance has been deducted if they’re lower. This change means you’ll have to pay more tax if you’re a high-rate taxpayer.
If your income from your letting property is over £2,500 after expenses or £10,000 or more before expenses, you’ll need to write down a self-assessment tax return and remember to report it to the HMRC. If it’s lower than £2,500 you should contact HMRC about paying it.
Disadvantages of buying-to-let
- The costs if property isn’t let
There is no guarantee that your property will be occupied all the time, and when it is empty you will still need to make your mortgage payments from your own pocket and continue to pay any other bills or costs.
- Extra stamp duty to pay
Since 1 April 2016 anyone buying an ‘additional’ property, which means owning more than one, has had to pay an extra 3% in stamp duty land tax (SDLT) in England and Northern Ireland on top of the normal rates. This applies if you’re purchasing a buy-to-let property and already are a homeowner.
- Responsibility for maintaining the property
This means you will need to be on hand 24/7 in case your tenants have a problem. If the pipeworks or washing machine breaks down it will be your job to get it sorted, and these things can be very costly to repair or replace. There will also be wear and tear on the property.
- The hassle of finding tenants
If you can find tenants quickly and easily it will save you money and potential headaches. However, you will need to:
- Advertise your property
- Check your references when you find your potential tenants
- Find your tenants
- Fully vet them
- Arrange the deposit and ensure it is held in an appropriate scheme
- Sort out the paperwork
It can also take care of any issues during the tenancy, although all of this will come at a cost, which can reduce the profits you make. Full management could cost up to 20% of the rent and affect your profits.
- Capital gains tax when you sell
When you sell a property which isn’t your main home you have to pay capital gains tax also known as (CGT) on any profits you make. Which means it’s likely to apply when you sell your buy-to-let property.
You can make up to £12,300 a year before paying the capital gains tax. After that, you’ll pay 18% if you’re a basic-rate taxpayer and 28% if you’re a higher-rate taxpayer.
For more potential pitfalls of investing in a buy to let property, read this list of profit-draining landlord costs you may not have considered.
