Thinking of investing in buy-to-let? Read this first

Buy-to-let seems like a great way to make money but are the returns really all that impressive?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buy-to-let property investing has boomed over the past few decades. It has become a popular way of generating wealth as investors have benefited not only from a regular monthly rental income but also soaring property prices. 

However, over the past two years, the buy-to-let landscape has changed dramatically. And if you’re planning on getting into this market, there are several factors you need to consider first.

Rising costs

Firstly, renting out property is no longer as lucrative as it once was. During the past few years, to try and cool the housing market the government has tweaked the tax system to make buy-to-let investing less attractive to investors. 

A 3% stamp duty surcharge on second homes and a gradual reduction of mortgage interest tax relief, which will reach the basic rate of 20% for all landlords by 2020, will weigh on returns for all investors going forward. 

What’s more, the government has been introducing regulation to stop rogue landlords taking advantage of tenants and increasing tenants’ rights. 

The cost of complying with these increasing demands could be too much for small-scale landlords.

Extra work

Secondly, as a landlord, if something goes wrong with the property you will have to find the money to pay for it and organise repairs. On top of this, finding and vetting tenants can be time-consuming. 

Of course, you could pay a letting agent to take care of everything, but this would consume more of your rental income. Fees amounting to 10% or more of the monthly rent take are common.

Slim returns

Thirdly, for all the time and effort involved managing a property, the returns aren’t that attractive. 

Using a back-of-the-envelope calculation, the average tenant’s rent bill was reported as being just over £900 per calendar month at the beginning of this year. That’s around £10,800 per annum. At the same time, the average home price at the end of Q1 was in the region of £226,000, or £232,780 including the stamp duty surcharge. 

Based on these numbers, I estimate the average rental yield is 4.6% for landlords getting into the market today. If you deduct a 10% per annum letting agent fee and income tax, you’re left with a yield of around 3.4%. I should, at this point stage, that these figures are only rough estimates.

Also, many buy-to-let investors use mortgages to improve returns, this adds another variable and cost. With these tiny profit margins, it will only take one broken boiler or leaky shower to eliminate a year of income.

Capital gains are usually a significant factor in buy-to-let investors’ considerations as well. Here the prospects are brighter. Mid-single to low-digit home price growth is expected for the next few years, although this will differ between regions. Still, if you take a 3.5% annual income and, say, 2.5% yearly capital appreciation, buy-to-let investing could, according to my figures, produce a 6% return.

Conclusion

Personally, I’m not convinced that this level of return justifies all the work involved. There are equities in the FTSE 100 which support a dividend yield of more than 7%, and with these stocks there’s much less work involved. 

So, after considering all of the above, it seems to me that the best days for buy-to-let investing are now over.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »