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Is buy-to-let a good idea?

4-minute read

Is buy-to-let a good idea?
Josh Hall

Josh Hall

27 June 2017

Are you thinking of becoming a landlord? Whether you’re looking to invest in just one property or build a portfolio, it can be hard to know where to begin – or, indeed, whether or not it’s a wise move at all.

In the last five years buy-to-let has seen the impact of huge property price increases, legislative changes, new tax treatment, and deep economic uncertainty across the country. But despite this, a Simply Business poll earlier this year found that 63 per cent of buy-to-let landlords would recommend following in their footsteps. So is buy-to-let still a good investment? And what do you need to consider before you spend?

What’s happening to property prices?

The property market across the UK is slowing. May saw the third consecutive month of price falls, a pattern which hasn’t been seen since the height of the financial crisis. The average sale price dropped by 0.2 per cent during the month, following a 0.4 per cent fall in April and 0.3 per cent in March.

Many commentators are expecting prices to drop even further. There is a common belief that a major price correction is on the way, following years of hyper-inflated property prices, especially in the capital. Anecdotal evidence reported by agents and vendors also suggests that properties are remaining on the market for longer, asking prices are being gradually axed, and sellers are bracing for further falls in the coming six months. In short, for the first time in several years, it looks like it’s becoming a buyers’ market.

However, this picture is currently most evident in London, which has seen a dramatic slowdown. Outside the capital, the effects of Brexit and broader economic uncertainty are still being felt in property prices, but at a slower rate. In some parts of the country asking prices remain at all-time record highs, yet to be touched by the exodus of foreign capital from the major districts of London.

This mixed picture presents both risks and opportunities for buy-to-let investors. For those who believe that a price correction will be followed by another boom period, we could be approaching an attractive time during which to snap up a bargain. However, the combination of lower prices, cheap mortgages, and the impact of schemes like Help To Buy, could also push more people into home ownership in the short term – although most surveys suggest that the private rented sector will continue to grow significantly over the next five years.

What about rental yield?

Rental yield is a key consideration for any prospective buy-to-let landlord. This figure tells you your rental income as a proportion of the value of the property, and is an important measure for estimating return on investment. Check out our rental yield guide for landlords for more information.

The picture for rental yields varies across the UK. Simply Business reported a recent LandInvest survey, which listed the top ten areas for rental yield. Romford came out on top, followed by Luton, Dartford, and Rochester.

However, many areas of the UK have seen rental yields declining, with some seeing drops in return of as much as 12 per cent in the last year. If you are investing with the intention of securing a healthy rental income, you need to be very careful about where you put your money. Commuter belt towns are still performing well, but bear in mind that these areas, especially in the South East, have also seen several consecutive years of significant property price increases, meaning that they are out of reach for many investors even with record low mortgage rates.

Is buy-to-let tax changing?

Tax and legislative changes must also be front of mind when considering whether or not buy-to-let is worth it. The private rented sector has been hammered by a series of changes in the last Parliament, and many expect this pattern to continue. Indeed, some legal commentators believe that the recent Housing White Paper is intended to dilute the power of small landlords and instead concentrate it further in the hands of large, institutional investors. This move is also tied up in the government’s own house-building targets, which it appears to believe can only be achieved with the help of capital-rich private sector investors.

For small, individual landlords, the most important recent change relates to mortgage interest payments. Moving forward, buy-to-let landlords will no longer be able to offset their full interest bill against tax, which will see outgoings rise very significantly for many investors. In the 2017 Queen’s Speech the government also confirmed the long-trailed introduction of a ban on letting agent fees. The effects of this ban are yet to be seen, but some landlords have warned that it will either eat into their bottom lines or force them to increase rents.

However, other elements of buy-to-let legislation remain favourable for private landlords. Last year the government voted down a Labour proposal to make homes in the private rented sector “fit for human habitation” following intense pressure from Conservative MPs, many of whom are landlords themselves. It is widely believed that a Labour government would reintroduce the plan, along with a raft of other changes intended to rebalance the private rented sector further in favour of tenants.

So is buy-to-let a good idea?

Ultimately, the choice of whether or not to invest in a buy-to-let property or portfolio depends on your goals. If you’re looking for significant capital appreciation, you should be prepared for a potentially rocky ride in the coming years. If you’re looking for rental yield, think carefully about the location of your property.

All of that said, it’s worth remembering that there is a consensus that the private rented sector will grow, in whatever form, very significantly. A recent survey from Knight Frank suggests that as many as one in four Brits will be renting by 2021. If you think strategically, buy-to-let could therefore still represent a major investment opportunity.

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