Home Home Improvement Is a buy-to-let still a good investment?

Is a buy-to-let still a good investment?

by TimeWithThea

The buy-to-let market has served as a fruitful way to make passive income for decades. But in recent years, owning a buy-to-let has become more and more of a tax drag. That being said, people will always need homes to rent, especially with many struggling to make that step onto the property ladder. Renting is the norm and many people are now renting well into their 30s.

So, does the demand for rental property and the benefits of owning a buy-to-let outweigh high house prices, stamp duty surcharge for investment property and tax hits? Let’s talk about whether a buy-to-let is still a good investment.

What’s changed with tax?

The tax situation used to be a little kinder on landlords a few years back. Now, the tax environment is considerably tougher. In 2016, a new tax rule was introduced whereby anyone buying a second property was subject to an additional 3% of stamp duty. That works out to be quite a lot. If you were purchasing a £200,000 property, for example, a property investor would have to pay £6,000 extra than someone purchasing the same property for their own home.

Landlords also can no longer offset 10% of their annual rental income against tax for general wear and tear. General wear and tear are reasonable damage to their property that can be expected throughout tenancies such as worn carpets and lightly scuffed walls. Landlords can also no longer offset mortgage interest costs in full against income tax bills on rent and instead receive a 20% tax credit. This means that a landlord now pays tax on rental income based on revenue, rather than their profit after mortgage interest is paid.

Rules and regulations

Let’s face it – landlords have had a bit of a bad reputation in recent years, with a minority giving the majority a bad name. For this reason, landlords do have to jump through a few hoops in order to stay on the right side of the law.

Regulations are something to consider as a landlord. It can be a bit of a minefield, with around 170 regulations that are the law and over 400 obligations that landlords must abide by. To make matters more confusing, they are always changing!

There are regulations around health and safety and electrical checks within the property, energy performance certificates, tenancy deposits, property inspections and many, many more. If you are going to rent out a property, you must be committed and hands-on enough to make sure you are well aware of these regulations. Using a letting agent can help in this instance, as they can help you stay abreast of any changes.

Choose the right location

Some locations will be better to invest in rental property than others. Although generally speaking, rental property is in demand pretty much everywhere, locations with the highest buy-to-let yields tend to be in places with high student populations such as large cities. Cities are also ideal for young professionals looking for flats to rent. For rural locations, larger 2 bedroom+ family homes would be a better investment.

Expensive areas such as London are also fruitful, as many people strive to live there but cannot afford the house prices. If you can afford to put your money here, it’s well worth doing as many people decide to rent in a more affluent area, as opposed to buying in a less affluent area – simply for the lifestyle.

Be aware of the risks

No risk, no reward, right? Putting a lot of money into an investment property does of course come with its fair share of risks. If house prices fall, the value of your property is likely to fall too. Perhaps you might find yourself in a position where you need to sell up and the sale price might not cover your whole mortgage. It’s not the most likely of scenarios, but it’s important to consider.

You need to be well aware of the potential risk of taking on ‘bad’ tenants. By this, I mean tenants that may cause damage, partake in illegal activity inside your property or fail to pay rent. You can safeguard yourself against this as much as possible by thoroughly screening your tenants and making sure you compare landlord insurance to get the best cover to protect yourself against these eventualities.

When searching for your investment property, do the right calculations and make sure that you can charge the amount of rent that you need to cover your mortgage payments at least. The amount of rent that you can charge depends on a number of different things, one being wider market trends out of your control. 

Whether a buy-to-let is a good investment for you will depend on your personal circumstances. The demand is certainly still there, and if you can balance the books and spend the time committing to being an active landlord and keeping all your ducks in a row, then now could be a great time to make the leap and invest.

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