Buy-to-Let Property Investing – Is It Worth It?
Written on 8 August 2019 by
Buy-to-let investors and landlords certainly haven’t had an easy ride over the last few years. In this post Ruban Selvanayagam, co-founder of sell house fast firm Property Solvers, has given his thoughts towards the current state of play and how savvy operators can capitalise on the new status quo.
It’s taken just a few years for the buy-to-let sector to evolve from its perception as a relatively simple way to lock away savings and build a pension pot to a landscape that seems to only attract professionals.
Amongst the prominent barriers to entry are the Stamp Duty surcharge, Prudential Regulation Authority (PRA) stress-testing criteria and, of course, Section 24’s notable restrictions on mortgage interest relief.
Those at most risk are the highly geared. Effectively taxing revenue and not profit (unlike practically any other business), one of the effects of Section 24 is to inadvertently push some landlords into the higher tax-paying threshold.
In such circumstances, with lenders combing through financial affairs during the underwriting process with meticulous detail, it’s no longer possible for landlords to simply refinance their way out of trouble.
Yet there is a notable proportion of landlords who operate on low or no loan to value ratios. For them, although the various changes are frustrating and have led to the exploration of other asset classes (in and outside of property), they can comfortably run their portfolios without too much concern.
This is often the same for the many ‘accidental’ landlords who have never had any intention of growing a property portfolio and are planning to hold on to their second properties until they retire. Many have no borrowings against their second properties, making them excellent nest eggs for later years.
But what about those that are serious about developing a career as a professional property investor and landlord in 2019?
Becoming a Landlord
One thing is for certain, having capital to invest in buy-to-let property is a must and the days of ‘no money down’ are over. Lenders will require a minimum 25% deposit and there’s no way of avoiding a Stamp Duty surcharge (alongside the normal purchase costs).
Perhaps more than ever before, having a qualified accountant involved in your business is a must. You ned to understand your future tax position once you are earning extra income from a rental property owned in your personal name – principally to counter the effects of Section 24 but also to ensure that your financial affairs are run in the most efficient manner.
Whilst there is second layer of income tax and the higher interest pay rates, these days it often makes more sense to acquire rental properties in a Limited company (special purpose vehicle) structure.
By and large, purchasing single-let properties in the south of the country is going to require a higher deposit to secure funding. This is because the prices and therefore payments on borrowings are higher. Lenders need enough rental coverage so that the debt is comfortably serviceable.
Indeed, without downplaying the challenges, at the time of writing there’s a strong argument that regions like the North and Midlands offer better value for buy-to-let investors.
Buy-to-Let Risk Management for Existing Landlords
Although some landlords have taken a tenuous ‘hope for the best’ approach, the majority have been proactive in dealing with the changes.
Much will depend on the overall level of borrowing and each landlord’s individual financial position. For those in the higher or additional rate tax bands, as mentioned above, the risks are generally greater. Those that can keep their pre-tax income under the threshold usually have less to worry about.
Some overly exposed portfolio landlords have been shifting their holdings into Limited company structures. Here, very careful analysis with a suitably experienced qualified accountant is fundamental. There are capital gains tax and stamp duty liabilities upon transfer. Indeed, the process is not as simple as many have been led to believe.
Bar exceptional circumstances, it’s not possible to simply swap any existing personal secured lending arrangements to a Limited company as the property will need to be effectively refinanced within the new entity. Also, at the time of writing, Limited company buy-to-let borrowing rates are generally higher.
Alternatively, selling up may be a feasible idea – particularly amongst those who have accumulated significant equity. This can be a good way to deleverage a portfolio or simply free up some cash to enjoy life!
Note that capital gains tax is unavoidable here, although there are some annual reliefs available (double if for those that own property with a spouse).
Is Buy-to-Let Worth It?
The short answer is yes. The demand for rental properties is showing little sign of abating. It’s arguable that there may well be a growing undersupply – even when factoring in the impressive growth of the institutional build-to-rent sector in recent years.
With an estimated 4,000 and 5,000 buy-to-let properties being sold on a monthly basis, there’s certainly opportunity to pick properties from tired landlords or those that are simply looking to cash in.
As well as educating yourself on the tax implications, understanding key metrics such as gross/net yields, ROI and operating profits as well as broader influences like refurbishment costs and capital growth potential will help you weed out the good buys from the bad. Remember to also account for the wider macro risks, perhaps the most pertinent being Brexit.
Savvy property investors are embracing the fresh level of professionalisation spreading across the sector. Indeed, from a positive perspective, the modern environment for landlords somewhat filters out the over-zealous ‘get rich quick’ mentality that has stained the industry for so long.
In conclusion, whilst the goal posts may have shifted, becoming a successful property investor and landlord is far from unattainable.
This is a guest post from Ruban Selvanayagam, co-founder of sell house fast firm Property Solvers and does not reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and Charcol Limited will not accept liability for them.
The Next Steps for Buy-To-Let Investments
Whether you are investing in buy-to-let properties for the rental income or for the potential capital appreciation, choosing the right mortgage is a must.
Before applying, use our buy-to-let mortgage calculator to estimate how much you can borrow to fund your property purchase.
Alternatively, you can visit out buy-to-let mortgage best buys to compare the deals available.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.