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Should you invest in a buy-to-let property?

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Investing in a buy-to-let property can be profitable but there are downsides you need to consider before going ahead. Here’s what you need to know.
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Buy to let

Many people see property as a reliable investment, especially as we’ve continued to see UK house prices rising in recent years, so decide to invest in a buy-to-let. 

According to the Nationwide Building Society’s house price index, average UK prices have risen each year since 2013 with the fall in 2012 just 1.1%. The last time we saw a significant drop was in 2008 when the average house price fell 14.7% over the year as a result of the 2007-08 financial crisis.

However, this doesn’t tell the whole story. If you bought a property in Greater London just before this drop in the third quarter of 2007, it would still have been worth an average of 66% more in the same period of 2021 (this will vary between individual areas). But you would have had to wait until 2013 until it was worth more than you bought it for in 2007.

Where you buy matters too. Property in Northern Ireland was worth an average of 27% less in the third quarter of 2021 than it was in 2007 due to prices rising quickly before the financial crisis and many years of prices falling afterwards.  

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Is buy-to-let worth it?

Whether a buy-to-let property is a good bet depends on what happens in the wider economy and what’s going on in the area where you are buying. It also depends on the type of property you buy as some sorts of homes will be more in demand in certain areas than others. The rent you can charge and how it changes will have an impact too.

Although investing in buy-to-let doesn’t guarantee that you’ll make money there are two major things you can do to increase your chances:

  • Research the local area you’re planning to buy in and the type of property you should buy carefully by looking at house price and rental data and speaking to estate agents

  • Invest over the long term

You should also take into account the pros and cons of buy-to-let investment below and weigh up the costs versus the benefits before deciding whether it’s right for you.

Pros and cons of investing in a buy-to-let

Pros

  • Potential house price growth

  • Income that cover your mortgage repayments (hopefully)

  • Costs can be offset against tax

Cons

  • Costs if property is empty

  • Extra stamp duty to pay

  • Responsibility for maintaining the property

  • Hassle of finding tenants

Advantages of buy-to-let

1. Potential house price growth

Although house prices have fluctuated over the years, property can still be a good investment long term.

Property prices will go up and down, but if you own it for at least 10 years there is more chance that the value will have increased by the time you come to sell the property and that you’ll make a healthy profit.

Bear in mind that if the value of the property goes down and you have a mortgage on it you could find yourself in negative equity - where the loan is worth more than the house - so would have to make up the shortfall if you sold it.

2. Income to cover your mortgage repayments (hopefully)

Renting out your property to tenants who will pay your mortgage for you and also provide some extra income is the key to a successful buy-to-let investment. In fact, you’ll need to be able to prove the rental income will cover your mortgage interest payments by at least 125% to 145% to get a buy-to-let mortgage.

Local rents could go down though so you may have to reduce how much you charge to stay competitive, which could eat into your profits.

If you take advantage of a low buy-to-let mortgage rate you could increase your profit further because it will mean your monthly payments will be lower so your profit margin is likely to be bigger.

3. Costs can be offset against tax

You have to pay tax on any income above £1,000 from letting a property you own personally but you can offset some of your expenses against the amount you pay tax on. For residential property these include:

  • Fees paid to letting agents

  • Council tax and bills (if you pay them for the property)

  • The cost of advertising your rental property

  • Money paid for maintenance and repairs

You can also get tax relief to cover replacements of ‘domestic items’, like beds, sofas and carpets, you need to make. 

The tax relief isn’t as generous as it used to be though. Previously you were also able to deduct finance costs, such as mortgage interest, but this was phased out between 2017 and 2020. 

You now get a reduction in your tax bill of 20% (the basic rate of income tax) of your finance costs, or 20% of your property profits or total income once your personal allowance has been deducted if they’re lower. This change means you’ll pay more tax if you’re a higher-rate taxpayer.

If your income from letting property is £2,500 or more after expenses or £10,000 or more before expenses, you’ll need to use a self-assessment tax return to report it to HMRC. If it’s below £2,500 you should contact HMRC about paying it.

Disadvantages of buy-to-let

1. Costs if property isn't let

There is no guarantee that your property will be occupied all the time, and when it is empty you will need to make your mortgage payments from your own pocket and continue to pay any other bills or maintenance costs.

2. Extra stamp duty to pay

Since 1 April 2016 anyone buying an ‘additional’ property, which means you’ll own more than one, has had to pay an extra 3% in stamp duty land tax (SDLT) in England and Northern Ireland on top of the usual rates. This applies if you’re purchasing a buy-to-let property and already own your home, for example.

Rates in England and Northern Ireland:

Updated 19 December 2021
BandUsual SDLT rateAdditional property SDLT rate
£0-£125k0%3%
£125k-£250k2%5%
£250k-£925k5%8%
£925k-£1.5m10%13%
Above £1.5m12%15%

For example, if you buy a residential buy-to-let property for £220,000 you would pay:

  • 3% on the first £125,000 = £3,750

  • 5% on the remaining £95,000 = £4,750

  • Total SDLT due: £3,750 + £4,750 = £8,500

Before 1 April 2016, you would have paid 0% on the first £125,000 and 2% on the remaining £95,000 = £1,900.

In this example, the increase in SDLT means you now need to pay £6,600 more to purchase a buy-to-let property if you already own another property.

There are different rates and bands in Scotland, where stamp duty is called land and building transaction tax (LBTT) and Wales, where it’s called land transaction tax (LTT). You need to pay an extra 4% for additional properties in Scotland and Wales.

Rates in Scotland:

Updated 19 December 2021
BandUsual LBTT rateAdditional property LBTT rate
£0-£145k0%4%
Above £145k-£250k2%6%
Above £250k-£325k5%9%
Above £325k-£750k10%14%
Above £750k12%16%

Rates in Wales:

Updated 19 December 2021
BandUsual LTT rateAdditional property LTT rate
£0-£180k0%4%
Above £180k-£250k4%8%
Above £250k-£400k5%9%
Above £400k-£750k8%12%
Above £750k-£1.5m10%14%
Above £1.5m12%16%

3. Responsibilty for maintaining the property

This means you will need to be on hand 24/7 in case your tenants have a problem. If the boiler or washing machine breaks down it will be your job to get it sorted, and these things can be very costly to repair or replace. There will also be wear and tear on the property.

4. Hassle of finding tenants

If you are able to find tenants quickly and easily it will save you money and potential headaches. However, you will need to:

  • Advertise your property

  • Check references when you find potential tenants

  • Arrange the deposit and ensure it is held in an appropriate scheme

Alternatively, you can get an agency to manage your property for you. It can:

  • Find your tenants

  • Fully vet them

  • Sort out the paperwork

It can also take care of issues during the tenancy, although all of this will come at a cost, which could reduce your profits. Full management could cost up to around 20% of the rent.

5. Capital gains tax when you sell

When you sell a property that isn’t your main home you have to pay capital gains tax (CGT) on any profits you make. This means it’s likely to apply when you sell your buy-to-let property.

You can currently make up to £12,300 a year before paying CGT. After that, you’ll pay 18% if you’re a basic-rate taxpayer and 28% if you’re a higher-rate taxpayer. 

For more potential pitfalls of investing in a buy to let property, read these 10 profit-draining landlord costs you might not have considered.

Renting your property out can be stressful, especially if you encounter unexpected expenses. Compare landlord insurance to get the protection you need for less.