ALTERNATIVE PROPERTY INVESTMENT: BUY TO LET NO LONGER WORTH IT?
Jessica Chambers
June 8th, 2022
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Traditionally in the UK, the most popular type of investment in property is to buy a property and let it out to the residential property market. For years now, buy to let or BTL has been the investment king, it provides a regular monthly income and healthy capital gains with the constantly increasing house prices.
In recent years the government have made it harder to be an independent landlord and targeted BTL specifically. It’s now a less lucrative place to put your money than it once was, they restricted the tax relief, regulated mortgages and increase stamp duty for second property owners. It feels clear that they are trying to curtail the amount of independent Buy To Let properties in the UK.
In the last section we eluded to a lot of the changes that have happened to the Buy To Let industry in recent years, here are a few of the main ones that have made this method of investment less profitable in recent years.
Stamp Duty On Second Homes
After the Stamp Duty Holiday ended the standard stamp duty rates have now returned to their pre-pandemic levels. A tax that seemingly has been ever increasing in recent years, stamp duty is an amount payable on the purchase of a property, and if it’s your second home which a buy-to-let likely is, then the amount you have to pay is higher.
Stamp Duty varies depending on the overall property value of the home, but you’ll have to pay a surcharge of 3% on the standard rate.
Mortgage Interest from Rental Income
Pre-2020 you could deduct any mortgage interest rate from your rental income when calculating your taxable profit, meaning you got taxed significantly less. There was a new relief introduced called “tax credit” which meant that your overall taxable profit was significantly reduced, as an example if you had a rental income yearly of £15,000 then you would have £2,160 extra profit than you would now.
Private Residence Relief Restriction
As a landlord you can claim Private Residence Relief, it essentially means that you don’t have to pay Capital Gains Tax, which is usually due on the sale of a property that isn’t your main residence. Private Residence Relief (PRR) is something that automatically applies when you sell your property, but to benefit from it at some point in time it needs to have been your main residence.
In April 2020 the relief period that you could claim for reduced from 18 months to 9, halving the potential amount you could claim back on the property.
Before we dig into whether you should explore some alternatives to a BTL property. As you can see, there have been a lot of recent changes in the past few years to reduce the profitability of this type of investment, but even with all of those in mind, is it still a method that is worthwhile considering?
Although there are issues with tax, whether it is worthwhile is really dependent on the type of investment that you’re looking for and ultimately what your goal from the investment is. We’ve listed below some of the advantages and disadvantages of investing in a buy-to-let to help you determine whether it’s right for you.
Advantages:
- Despite the tax increases, you’ll still be earning a steady rental income. The earning potential is typically presented by yield, these can range from 3% to 12% typically – this is exactly where we can help! Interested in finding out more about getting a great property yield? Get in touch.
- Property in this country, as long as you hold it for a long enough duration, typically increases in value. It can be a great opportunity for capital growth.
- There’s a high demand for rental property, so you can typically command a decent rental price.
- You can get the insurance that will cover if the property is unoccupied for a significant period.
Disadvantages:
- Overall the tax is higher than it once was, which cuts the profits significantly.
- There are costs to consider such as insurance, wear & tear and more.
- There’s always a risk as with any investment that your property could fall in price.
- Being a landlord is a time-consuming responsibility, and if you want to pass the management to someone else, this will cut into your profits.
If you can find a fantastic deal with a below market value property and a high yield, then a buy to let investment can still be extremely lucrative, even in spite of the tax changes. If you are willing to put your time to the management side of it, then you can also increase the amount of profit you make yearly.
If a standard Buy To Let doesn’t quite sound like it might be for you or you’ve deemed it no longer worth it as a property investor, then you do have some alternative investment options. So, where are the investors turning? We’ve listed some popular alternatives for you below:
Holiday Lets
It’s technically still a buy-to-let but it’s a higher profit and more popular option. The meteoric rise of holiday lets has been in correlation with the popularity of Airbnb. It means that you’re letting your property out in the short term, usually a week at a time, to holidaymakers. This increases the amount of admin and costs with cleaning to consider and increased maintenance costs, but the income for this type of rental is considerably higher and makes it worthwhile.
If you are planning on investing in this type of property location is so key, that you need to pick an area that is going to be popular enough to attract a regular flow of holidaymaker interest.
Diversify BTLs (Short Term & HMOs)
There are alternative options to traditional buy to let’s that are also worthwhile considering as they are generally higher in profit. Similarly to holiday lets, short term lets are typically when a tenant stays for a few months, often professionals that move around for work purposes, and during this term, they will pay a higher rate than a longer-term tenant. Similarly, Houses of Multiple Occupation will bring in a significantly higher rental fee due to housing several individual tenants within one property.
Property Investment Funds
As a true alternative, you might consider diversifying with a property fund. It’s a passive way of investing that spares you all the hassle of actually being a landlord – you invest in the market as a whole rather than any one property.
Shares
You might have heard of investing in stocks and shares, they are considered high-risk investments and can increase and fall in value extremely quickly. If you diversify a portfolio of shares you can spread the risk and earn a steady yearly profit, but it’s still risky!
Bonds & ISA’s
These are a relatively stable and low-risk form of investment – although they can vary in risk depending on which bond or ISA you go for. They are usually loans that are made to large companies and repaid over a set time with fixed interest, so you get a steady return.
Start your property portfolio today!
Traditionally in the UK, the most popular type of investment in property is to buy a property and let it out to the residential property market. For years now, buy to let or BTL has been the investment king, it provides a regular monthly income and healthy capital gains with the constantly increasing house prices.
In recent years the government have made it harder to be an independent landlord and targeted BTL specifically. It’s now a less lucrative place to put your money than it once was, they restricted the tax relief, regulated mortgages and increase stamp duty for second property owners. It feels clear that they are trying to curtail the amount of independent Buy To Let properties in the UK.
In the last section we eluded to a lot of the changes that have happened to the Buy To Let industry in recent years, here are a few of the main ones that have made this method of investment less profitable in recent years.
Stamp Duty On Second Homes
After the Stamp Duty Holiday ended the standard stamp duty rates have now returned to their pre-pandemic levels. A tax that seemingly has been ever increasing in recent years, stamp duty is an amount payable on the purchase of a property, and if it’s your second home which a buy-to-let likely is, then the amount you have to pay is higher.
Stamp Duty varies depending on the overall property value of the home, but you’ll have to pay a surcharge of 3% on the standard rate.
Mortgage Interest from Rental Income
Pre-2020 you could deduct any mortgage interest rate from your rental income when calculating your taxable profit, meaning you got taxed significantly less. There was a new relief introduced called “tax credit” which meant that your overall taxable profit was significantly reduced, as an example if you had a rental income yearly of £15,000 then you would have £2,160 extra profit than you would now.
Private Residence Relief Restriction
As a landlord you can claim Private Residence Relief, it essentially means that you don’t have to pay Capital Gains Tax, which is usually due on the sale of a property that isn’t your main residence. Private Residence Relief (PRR) is something that automatically applies when you sell your property, but to benefit from it at some point in time it needs to have been your main residence.
In April 2020 the relief period that you could claim for reduced from 18 months to 9, halving the potential amount you could claim back on the property.
Before we dig into whether you should explore some alternatives to a BTL property. As you can see, there have been a lot of recent changes in the past few years to reduce the profitability of this type of investment, but even with all of those in mind, is it still a method that is worthwhile considering?
Although there are issues with tax, whether it is worthwhile is really dependent on the type of investment that you’re looking for and ultimately what your goal from the investment is. We’ve listed below some of the advantages and disadvantages of investing in a buy-to-let to help you determine whether it’s right for you.
Advantages:
- Despite the tax increases, you’ll still be earning a steady rental income. The earning potential is typically presented by yield, these can range from 3% to 12% typically – this is exactly where we can help! Interested in finding out more about getting a great property yield? Get in touch.
- Property in this country, as long as you hold it for a long enough duration, typically increases in value. It can be a great opportunity for capital growth.
- There’s a high demand for rental property, so you can typically command a decent rental price.
- You can get the insurance that will cover if the property is unoccupied for a significant period.
Disadvantages:
- Overall the tax is higher than it once was, which cuts the profits significantly.
- There are costs to consider such as insurance, wear & tear and more.
- There’s always a risk as with any investment that your property could fall in price.
- Being a landlord is a time-consuming responsibility, and if you want to pass the management to someone else, this will cut into your profits.
If you can find a fantastic deal with a below market value property and a high yield, then a buy to let investment can still be extremely lucrative, even in spite of the tax changes. If you are willing to put your time to the management side of it, then you can also increase the amount of profit you make yearly.
If a standard Buy To Let doesn’t quite sound like it might be for you or you’ve deemed it no longer worth it as a property investor, then you do have some alternative investment options. So, where are the investors turning? We’ve listed some popular alternatives for you below:
Holiday Lets
It’s technically still a buy-to-let but it’s a higher profit and more popular option. The meteoric rise of holiday lets has been in correlation with the popularity of Airbnb. It means that you’re letting your property out in the short term, usually a week at a time, to holidaymakers. This increases the amount of admin and costs with cleaning to consider and increased maintenance costs, but the income for this type of rental is considerably higher and makes it worthwhile.
If you are planning on investing in this type of property location is so key, that you need to pick an area that is going to be popular enough to attract a regular flow of holidaymaker interest.
Diversify BTLs (Short Term & HMOs)
There are alternative options to traditional buy to let’s that are also worthwhile considering as they are generally higher in profit. Similarly to holiday lets, short term lets are typically when a tenant stays for a few months, often professionals that move around for work purposes, and during this term, they will pay a higher rate than a longer-term tenant. Similarly, Houses of Multiple Occupation will bring in a significantly higher rental fee due to housing several individual tenants within one property.
Property Investment Funds
As a true alternative, you might consider diversifying with a property fund. It’s a passive way of investing that spares you all the hassle of actually being a landlord – you invest in the market as a whole rather than any one property.
Shares
You might have heard of investing in stocks and shares, they are considered high-risk investments and can increase and fall in value extremely quickly. If you diversify a portfolio of shares you can spread the risk and earn a steady yearly profit, but it’s still risky!
Bonds & ISA’s
These are a relatively stable and low-risk form of investment – although they can vary in risk depending on which bond or ISA you go for. They are usually loans that are made to large companies and repaid over a set time with fixed interest, so you get a steady return.
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We’re a specialist property sourcing company that regularly supplies our investors database with fantastic deals and we’re always on the lookout to find great below market value property deals that will still provide fantastic returns even with all the recent buy to let tax changes.
If you are interested in finding out more, then feel free to get in touch with one of our experts.
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Simply put, we’ll get you the best possible deal. Our sister company, The Property Buying Company, have been in the property buying industry for years & we have access to all their stock which is at a price point that is ready for investors to buy and make a great return on.
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