Investing in UK rental property: Is buy-to-let still worth it?

What's the difference between a buy to let and a property investment in the UK?

Although similar it’s not quite an issue of semantics. In fact, a buy to let is a singular type of property investment and it has been both popular and profitable in the UK for a few decades now. Basically, a buy to let is a property you buy with the aid of a buy to let mortgage. So, what’s a buy to let mortgage? It’s simply a loan you take out to buy a property that you’ll rent out. 

Besides the distinction between living in a property and leasing it, there are some differences between a standard residential mortgage that can dictate whether buy to let is a successful investment or not. Namely, these are the slightly higher interest rates and deposit commitments, and the fact that most buy to let mortgages are interest only. That means during the term of the loan, you only pay back interest and not the capital value.

As an investor, this is great for monthly yields because repayments are lower, but you’ll need a robust plan to pay back the full amount of the loan at the end of the term. This is usually done by selling the property – and hoping it has accrued value over the mortgage term.

Why was buy to let so popular and profitable?

Mainly due to the sustained performance of the property market and its supply issues. However, the rise of buy to let not only benefitted from this, but some would argue also attributed to it.

Buy to let made it possible for almost anyone to own an investment property. In the past, this may have been restricted to the super-rich or those with enough cash reserves to buy a property outright and subsequently, demand for property increased ahead of supply. 

Official figures state 1.7 million buy-to-let mortgages were loaned between 1999 and 2015, as the private rented sector doubled in size. They became so popular that outstanding buy-to-let mortgage balances now stand at over £230 billion.

During this period buy to let investments outperformed every other asset class in the UK and many people became full-time landlords and acquired portfolios of buy to let property.

A report found that on average, every £1,000 invested in a buy-to-let asset in the final quarter of 1996 was worth £14,987 by the end of 2014, a compound annual return of 16.2%. The returns comprised around 70% capital gains and 30% yields. 

Since then there have been some changes to the buy to let equation – particularly to do with tax and mortgage repayments – and it has led to many people arguing it is no longer a great investment.

So, is buy to let still as profitable now?

Current performance of UK property investments

There is little doubt UK property still produces high returns. Let’s not forget that the current macroeconomic environment has seen sluggish performance across many other assets over the past 12-24 months, but on the whole, both rental yields and capital values have increased for UK property investors throughout the pandemic and Brexit.

At the start of 2022, the average property price in January was £24,000 higher than a year earlier. That’s almost 80% of the average gross salary in the UK and accounts to a 9.6% annual return on investment.

The average yield in the UK is around 4% already and housing giant Zoopla recently reported rents are likely to rise 4.5% by the end of 2023. 

However, like with any investment, there is significant fluctuation across the market.

For house price growth, these were the top-performing city markets in the UK last year:

  • Liverpool
  • Manchester
  • Nottingham 
  • Sheffield
  • Leicester

While these cities produced the highest yields on average throughout 2021:

  • Sunderland
  • Hull
  • Manchester
  • Birmingham 
  • Liverpool

Again, it is worth noting that even within these top-performing cities and many other locations across the UK, certain types of properties or postcodes can produce significant overperformance.

What does the future look like for buy to let property investments in the UK?

As intimated, the strength of buy to let and any property investment that is hoping to achieve rental yields is dependent on the supply and demand of the UK’s private rented sector.

The number of households in the UK’s private rented sector is now around  4.5 million in 2017. It’s a number that’s increased by almost 65% in a relatively short period of time.

‍Furthermore, it is a young market. The 25 to 34 years age group represented the largest group in the private rented sector – accounting for just over a third of tenants (35%).

Perhaps most pertinently, figures just released by the Office for National Statistics in the UK, revealed private rental prices paid by tenants jumped 2.3% in just the 12 months to February 2022. This means that as we move through 2022 – buy to let landlords have just seen the sharpest annual increase in their income since December 2016.

It’s not surprising then that more than two-thirds of landlords are increasingly confident about their investments and the investment market in the coming months.

What markets to invest in

Most real estate assets across the UK would probably turn out to be a good long-term investment – especially if you could achieve regular tenancy and minimise void periods. It is a very robust national market

However, there is considerable variation across markets – variation in purchase price, yield and capital appreciation.

It’s widely accepted that in the medium to long-term tier-one regional markets such as Manchester and Birmingham currently offer investors the biggest ROI prospects.

London will always be attractive to overseas investors too – and is of course the city with the largest single private rented sector.

What property to invest in?

Covid and the pandemic do seem to have affected the buy to let landscape in one way. It has significantly altered what tenants are looking for in a home with home working/hybrid working much more important to their lifestyle than before.

City centres remain the prized location, but there are some other notable features that investors can prioritise in their property search:

  • Access to superfast broadband
  • Private or communal gardens
  • Open plan and good-sized living spaces
  • Off-street parking
  • Locations close to parks and other public green space

What about buy-to-let taxes?

Is it worth buying to let and investing in property? The main reason people even ask this question is due to the tax and tax relief changes that happened a number of years ago.

It is now 6 years since the government introduced the 3% surcharge in stamp duty on the purchase of additional properties.

A year later the government started reducing the amount of their mortgage payment that landlords could use for tax relief. 

It is this latter change that has had a larger impact on landlords’ finances and it has usually made profit margins a little bit slimmer.

Since this change, many investors have set up a limited company and used it as an investment vehicle. This could reduce the level of tax payment from around 40% on your income to 19%. Of course, wherever tax is concerned, it’s important to seek independent advice.

Even though it now could be said the market favours cash investors and company investors, these nuances are often outweighed by the process of choosing a strong asset in a location with favourable supply and demand dynamics.

What about inflation?

As mentioned many investments are currently underperforming in the macro-econmic environment we find ourselves in. It’s an investment landscape in which inflation will become a major player once more.

Inflation in the UK is now at X%, the highest in 30 years – and it looks set to rise further in the coming months and years.

However, it is generally observed that property investment works well as a hedge during high inflation periods. 

This is because housing and housing costs are so intrinsically linked with the overall health of the economy and both property values and rental rates tend to rise synchronously alongside inflation.

Indeed, even investors with portfolios weighted heavily towards equities and other assets are now looking to diversify towards the property market.

Use a specialist agent to mitigate risk

Given the strength of the UK property market and the current investment environment, you’re likely to conclude that buy to let and UK real estate is still a very enticing option.

But generating a profit and sustained revenue stream is not easy. Especially for the inexperienced or those who are not familiar with the intricacies of the tenant market in the UK.

Chestertons can guide you. We only source properties in hotspot locations across the UK’s major tenant markets and we have been particularly successful in meeting the demand of overseas and expat investors who want to enter the buy to let market.

Please get in touch if you want to know more about the market trends or feel like you are ready to invest yourself.

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