For first-time landlords that are thinking of purchasing a property in London, it can be tempting to go down the buy-to-let route. While it can prove to be a good investment, it's also wrought with risk that can cause big losses in the long run.
1. Low rental yields
London may be the city that never sleeps, but it’s also the city that won’t help you to make much profit from your property. For added security and peace of mind, aim for a university hotspot.
Liverpool – Research carried out by totallymoney.com has shown, Liverpool has one of the highest rental yield rates in the UK. It’s home to three universities, which is music to a buy-to-let investors’ ears, as it means a healthy stream of tenants. The average asking price is 10% lower than that of London-based properties affording you a higher yield of up to 11.79%.
Manchester – This area is teeming with potential and also has a strong property market. There are four universities, two premiership football clubs, a busy airport and the MediaCityUK, meaning it’s budding with students and young professionals. Here, you stand to make an average of 10% profit on your property.
Birmingham – Rental yields in the second city, range from 5% up to 10%. This is an area to keep a finger on the pulse of for long-term profit and capital growth. At present, the average asking price is £157,600, but with phase one of HS2 in the pipeline and the Commonwealth Games confirmed to take place there in 2022, the value of housing in the West Midlands is set to rise.
For means of comparison, rental yield in some of London’s prime areas can be as low as 1.5%
2. Tax, Tax, Tax
The magical T word, can often be the bane of your existence when you are trying to make your venture as profitable as possible.
In April 2017, a change in legislation came as a blow for landlords, as the government announced plans to gradually reduce tax reliefs on mortgage interest payments. This will have a drastic effect on your earnings if you're on an interest-only mortgage.
To help break it down, Nationwide Building society gave this example: "Someone with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. Under the new system, the net profit would plunge to £960."
That is not all, for landlords buying an additional buy-to-let property for more than £40,000, there is a further 3% to pay on top of the standard Stamp Duty Land Tax rate. At the end of the interest-only mortgage term, if you decide to sell the buy-to-let property, please be mindful of the fact that you will have to pay a Capital Gains Tax if your income exceeds the threshold.
While not strictly tax related, the new energy efficiency regulations are not to be ignored. Failure to ensure any new tenancies or renewed contracts meet at least an E rating on the Energy Performance Certificate, will result in a £4,000 fine.
3. Time well spent?
Entering into a buy-to-let agreement is a big commitment, as well as managing your own home, you are taking on double the work by investing in new housing.
You'll get to pocket more profit if you choose to maintain the property yourself rather than hiring an agent. While initially this sounds like the smart option, it can often be very time consuming. You may have to give up your evening and weekends to advertise your vacancy, as well as sort any grievances with your tenants or any faults that occur onsite.
In addition to dedicating extra time, keeping up with the maintenance of your rental housing could be to your detriment if it is based in and around London. On average, you'd be quoted up to £300 a day for tradesman in the capital, while it’s significantly less in Northern England.
4. What could go wrong?
Anything that involves investment can be risky but buy-to-let mortgages in particular carry a higher risk. If this is your first time starting a property portfolio, we recommend that you always have a nest egg of money set aside.
You cannot guarantee your property will have tenants throughout the course of your mortgage, so you will still have to cover the loan repayment out of your own pocket. To combat this, while you are putting together your deposit, also save enough money to cover at least six months so you can avoid getting into arrears if you hit a void.
If you do run into trouble, there isn’t the same level of consumer support for buy-to-let property owners as there is for other types of investments.
Be careful to check your insurance policy scrupulously, as bad tenants could cause damage to your property that can be very expensive to fix. If your policy doesn’t cover the cost of the repairs you could be faced with a loss on your investment.
5. Things to bear in mind
In order to make a profit from your buy-to-let mortgage, you should ensure that your rental income is at least 25% more than your monthly mortgage cost. As well as repayments, there are other expenditures to consider such as maintenance of the property and agent fees. Failure to do the correct calculations can have a negative impact on your bank balance.
For Landlords that are concerned about the impacts to their portfolio, reach out to our team directly and let's discuss how we can help.
Normette Homes specialise in providing guaranteed rent and free management services.