Why and how Buy to Let stacks up as an investment

Why do people Buy to Let?

For a decade, from the late ‘90s until 2008, Buy to Let boomed. And while many landlords – particularly ones who’d invested in new build flats – took a financial hit during the credit crunch, the last 10 years or so have been pretty good to investors.

But you’ve probably seen some of the headlines more recently about landlords selling up. So if you’re currently a landlord and wondering what to do next, or if you’re considering buying a rental property, you might be concerned. Is Buy to Let still a good investment?

Why are some landlords selling?

Over the past few years, the two main reasons that have been given for landlords exiting the market are tightening legislation and increased taxation. This year, rising mortgage rates and concerns around the Renters (Reform) Bill that’s currently making its way through Parliament are being blamed. But while we’re certainly hearing a few landlords quoting those reasons, we’re not seeing a ‘mass exodus’ and although some landlords are selling, others are buying.

What we are seeing quite a lot of is landlords who have come to the end of their Buy to Let investment journey. They began to invest when Buy to Let mortgages first became available, they’ve been landlords for 20-25 years, and they’ve achieved their financial goals. Many are now around retirement age, and selling to benefit from a lump sum of equity was always part of their plan.

The reality is that although costs are increasing at the moment and there is a lot to know and understand about the legal side of letting, it can still make a very good investment. Here’s our round-up of the rental market today and why we believe Buy to Let still stacks up.

The market: high tenant demand, strong rental price growth and good property values

Beginning with capital values, average price growth has been strong across the UK for some time. Between January 2018 and December 2022, the average sold price went up by 29.4% (Land Registry) – which equates to around 6% a year over five years.

But it is true that now prices are dropping slightly. According to Zoopla:

• In June, sellers had to accept offers at 3.8% below their asking price on average
• Prices are likely to fall by up to 5% during the rest of 2023 - mainly due to the effect of rising mortgage interest rates

Nevertheless, in light of the good growth in recent years, we’re looking at this as more of a market correction than anything more sinister.

Meanwhile, rents are continuing to rise and year-on-year increases have reached their highest level since the ONS started recording the series. In the year to May:

England (excl. London)    +4.7%

Wales                                  +5%

Scotland                             +5.4%

Northern Ireland              +10% (year to March)

Those figures are for all tenancies, but Zoopla data shows that for new lets alone, the average annual increase over the year to April was 10.4% (9.1% excl. London).

Zoopla is predicting that although growth is likely to slow as affordability pressures increase, it will still be up at around 8% by the end of the year. There are three key reasons for this:

• As Richard Donnell, Executive Director of Research at Zoopla says, there is ‘an ongoing chronic imbalance between supply and demand’
• Average rents as a percentage of earnings are 28.3% , which isn’t unreasonable
• Despite the cost-of-living crisis, most tenants are finding it ‘somewhat’ or ‘very’ easy to pay their rent

So, as long as you’ve been making annual increases to your tenant’s rent, your income should still be strong, even if costs are rising. And if you’ve had your property for five plus years, you’ve probably seen a decent increase in your equity that should more than compensate for any current dip in your rental profits.

5 key benefits of Buy to Let

In addition to the strong current rental market, here are five more key reasons why a Buy to Let mortgage could continue to be a good investment:

1. It’s a financial investment that lets you leverage the bank’s money. For virtually every other type of investment, you have to put up 100% of the capital. But with property, you can put down a deposit, borrow the rest to buy it and still keep all the profit! (Less tax, of course.)

Here’s a simplified example of how you could invest £60,000:

• If you put it in shares, when the market rises by 10%, you make £6,000
• If you use it as a 25% deposit on a Buy to Let property and get a mortgage for the remaining 75%, you’ve got an investment worth £240,000 – so when the market rises by 10%, you make £24,000

By investing in property, you benefit from the growth on the bank’s money as well as your own and make four times the profit. Of course, you’ve got mortgage payments and other ongoing costs, taxes and fees, but in addition to capital growth, you’ve got rental income that could cover most of those costs.

2. You can build in extra equity – even at the point you purchase. If you can find a motivated seller or secure a discount with a cash purchase (you can mortgage the property later), you may be able to buy a property below its true market value, meaning you’ll immediately gain equity. Or you could buy something that you can add value to through converting, renovating or extending – making sure that the cost of the work is less than the equity you’re gaining.

3. It can give you a more balanced investment portfolio. With financial investments, it’s advisable to spread your risk by investing in different types of assets – e.g. shares, pensions, business start-ups, gold and property. So Buy to Let could work well for you if you’re looking for a long-term investment.

4. You can invest in something that suits how you’d like to get returns.  If you want to supplement your income or pension on an ongoing basis, you can buy a rental property that will deliver good monthly profits – on the understanding that you might not get quite such good capital growth over time. Or, if you’re not too worried about rental returns and your priority is building as much equity as possible so you end up with a decent lump sum in 15-20 years, you can invest in a property that’s more likely to increase in value well and just covers its costs month-to-month.

5. Mortgage rates should fall in the future. Although mortgage interest rates are currently higher than they have been for over a decade, they should come down again as the rate of inflation and base rate fall. So, the good news is that if you can find an investment that stacks up in this market, you could see even better profits in the future.

As with any business, succeeding in Buy to Let depends on you understanding your market, carrying out proper research and being able to budget accurately and track your profits over time. So here are five steps to follow before buying any investment property: 

1. Carry out really good research on local prices, rents, supply and demand, working with expert sales and letting agents in the area
2. Analyse likely income, expenditure and returns over the next 1, 3, 5 and 10 years
3. Check that the property will cover its own running costs and generate a profit on top each month
4. ‘Stress test’ the figures, factoring in longer-than-average void periods and higher mortgage rates to see where the break-even point is
5. Make sure you have a good financial cushion so you can always afford to maintain the property over time

If you’d like to discuss any property investment or need some help understanding the local market, just get in touch with the team at your nearest Your Move branch – we’re always here to help.