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Is buy-to-let worth it?

In the past, buy-to-let has almost seemed like a licence to print money for landlords. But, after recent changes, is it still an attractive investment?

In the past, buy-to-let has almost seemed like a licence to print money for landlords. But, after recent changes, is it still an attractive investment?

Written by
Sajni Shah
Consumer expert on money and utilities
Last Updated
4 APRIL 2023
7 min read
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How you make money through buy-to-let 

Buy-to-let can seem an attractive option as it offers both the chance of a regular return – the monthly rent – and capital growth – the value of the property growing over time. 

On top of this, average UK house prices stood at £56,576 in January 1996 and, despite a dip around 2008 due to the financial crisis, in May 2021 that had risen to £254,624, according to the Land Registry. 

This means landlords could benefit from a big rise in property value over the lifetime of a buy-to-let mortgage. And, if the rent has always covered the mortgage, this can make buy-to-let very profitable when you come to sell. 

Naturally, the size of the profit would depend on the type of property, how much you paid for it in the first place and where it is – as all parts of the UK have had different levels of house-price growth. 

While there’s no guarantee that house prices will continue to rise in the same way as they have done over the past 25 years, there is still a shortfall in the number of homes being built to meet demand.

Buy-to-let: costs to consider 

But obviously, if you are buying and letting out a property, there are lot of other things you have to consider in order to decide whether it’s worth it both financially and personally. 

Buy-to-let mortgages are a specialist type of mortgage. You’ll generally need a higher deposit – usually at least 25% or more – and you’ll pay a higher rate of interest than on a normal mortgage. Because of this, you have to make sure your sums add up. 

You’ll also need to think about stamp duty or Land and Buildings Transaction Tax (LBTT) its equivalent in Scotland or Land Transaction Tax (LTT) in Wales. You’re likely to pay a higher rate if you already own another property. 

On top of that you may have to pay for: 

  • renovations to the property you buy
  • repairs and maintenance
  • landlord insurance
  • fees to letting agencies, if you use one, or listings and adverts to find tenants
  • legal fees for property purchase, rental agreements and evictions where necessary
  • ground rent
  • Capital Gains Tax when you sell the property.

How to calculate property yield 

Landlords and would-be landlords should know what the yield – the financial return – on their property is. At its simplest, the gross yield is (annual rental income ÷ purchase price) x 100

So, if you get £9,000 a year in rent on a house that cost £200,000, your annual yield would be 4.5% gross. To calculate the net yield, you would need to deduct your expenses from the total rent. 

Before you buy, it’s helpful to work out what the yield is likely to be, as this will help you see if the property will be a good buy from a rental point of view.

What's changed with buying to let? 

A number of factors have combined to make some aspects of buy-to-let less attractive. 

Tax changes

Before 2017, landlords could deduct finance costs, like mortgage interest, from their earnings to reduce the income tax they needed to pay. This meant buy-to-let mortgages had a higher level of tax relief than standard residential mortgages, but over the years, this has been reduced to basic rate.

From the 2020/21 tax year, landlords have been able to offset just 20% of their mortgage interest payments on their tax returns. To work out how this could affect you, see what these changes mean in some HMRC worked examples.

On top of this, changes to Capital Gains Tax (CGT) from the 2020/21 tax year mean that landlords have to pay any CGT owing within 30 days of selling a property, instead of declaring it on their tax form. In the past, landlords would have had over a year to pay the money owed.

In 2016, a stamp duty surcharge of 3% was introduced on second properties – partly to cool down the buy-to-let property market. The tax also kicks in at a much earlier point – at £40,000 in England – which can add considerably to the costs of buying. In Wales, the stamp duty surcharge is 4%. In Scotland, it's 6%.

Eviction changes 

In May 2023, the government announced it will abolish section 21 in England under the Renters’ Reform Bill, also known as a 'no fault' eviction notice. This is expected to be introduced sometime in 2024.

Under section 21 landlords aren’t legally required to give tenants a reason for eviction. This allowed landlords to repossess their properties at short-notice, leaving tenants vulnerable.

The abolition of section 21 means that landlord must provide a valid reason for evicting them. ‘No fault’ evictions would no longer be legal.

Landlord responsibilities 

Landlords face a growing list of responsibilities and, while many of these are sensible – like annual gas and electricity safety checks and fitting smoke and carbon monoxide alarms – the list keeps growing.  

For example, landlords are now also responsible for things like checking the immigration status of potential tenants

You’ll need to provide tenants with an Energy Performance Certificate (EPC) and, since April 2020, all privately rented properties must have a minimum EPC rating of E. If the property doesn’t reach that standard, landlords are expected to spend up to £3,500 on improvements.  

The government has also updated its model tenancy agreement, which can be used as the basis of lease agreements made with tenants, to remove restrictions on well-behaved pets. 

See the government guide to landlord responsibilities.

Have buy-to-let profits changed? 

It’s tricky to say. While costs have increased, rents have also risen. 

Profit will also depend on many things including: 

  • What you paid for the property
  • Where in the UK the property is
  • How often you have voids – periods without tenants – when no rent is coming in 

One bad tenant who mistreats the property or fails to pay their rent can be an expensive problem to resolve, eating into profitability.

When is buy-to-let worth it? 

Buy-to-let can really be a good way of building up capital in a property while earning an income at the same time. But make no mistake – you can’t just sit there and wait for the money to roll in.

You have to be prepared to be a landlord. This can involve things like dealing with furious tenants when the central heating has packed up, the shower isn’t working or the loo is blocked. You’ll need to do your research before you buy about the right types of properties for particular locations and your target tenants – like students, families or professionals. You’ll have to be well organised both around the property and dealing with the financial side of things for your tax bills. 

Pros of buy-to-let 

  • Buy-to-let can offer a higher return on your money than savings. It can give you both regular income and capital growth.
  • It can potentially be a good way to supplement retirement funds, with regular income every month, or selling up and living from the proceeds if you’ve amassed enough.
  • You’ll be able to claim most costs for tax purposes.
  • If you have other savings and investment, buy-to-let can be a way of diversifying your assets to reduce risk – particularly as the property cycle doesn’t necessarily mirror the boom and bust of shares. You’ll also have a tangible asset.
  • There is always demand for decent, affordable places to rent. 

Cons of buy-to-let 

  • Being a landlord can be more hands-on than other kinds of investments. Making sure the property is maintained to keep the tenants well and safe is essential.
  • Higher costs for things like stamp duty, surveys and conveyancing can put up the cost of your initial investment. And, if you use a letting agent, you may have to pay fees, as well as legal fees every time you change tenants.
  • Finding a mortgage might be trickier than a normal residential mortgage and you’ll need a much larger deposit.
  • You’ll need to keep good accounts and may want to pay an accountant to do your tax return. You’ll pay Capital Gains Tax when you sell up.
  • Buy-to-let may be a good long-term investment, but it could be riskier in the shorter term.
  • Nightmare tenants can prove both costly and stressful. Finding the right tenants can be time-consuming with checking references and finances.
  • If you need money in a hurry, selling a property can take months – so it could be hard to get your money out quickly.
  • If you buy property outside your local area, you could spend a lot of time travelling backwards and forwards to inspect the property or carry out repairs.

Similar investments to buy-to-let 

Instead of year-round tenants, you might want to consider letting out a holiday property. But this will require someone to look after it, including cleaning and preparing it between guests.

You could consider investing in a property fund, although some of these funds, particularly those investing in commercial property, haven’t always fared well in recent times.

How to get started in buy-to-let 

Do your research: see what properties are being sold for and how much they are renting out for, to get a good feel for the market. 

Talk to a buy-to-let mortgage advisor and see how much you could borrow and how much of a deposit you will need. This will help you understand if it’s an affordable option for you.

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Sajni Shah - Consumer expert on utilities and money

Sajni is passionate about building products, allowing Compare the Market to help you make great financial decisions. She keeps track of the latest trends and evolving markets to find new ways to help you save money.

Learn more about Sajni

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