Is buy-to-let worth it?
The buy-to-let market has historically been very lucrative for landlords. But changes in the past few years, such as the stamp duty surcharge, have taken some of the gloss off renting out a property. So, is buy-to-let still a good investment?
The buy-to-let market has historically been very lucrative for landlords. But changes in the past few years, such as the stamp duty surcharge, have taken some of the gloss off renting out a property. So, is buy-to-let still a good investment?
Can you still make money from 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.
Average UK house prices stood at £80,443 in August 1999. By August 2024 that had risen to £292,731, 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.
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.
That said, rises in landlord costs have made it considerably harder to make a profit than previously. So, it’s vital to consider all the risks if you’re thinking of buying a property to rent out.
What costs are involved in letting a property?
There is a lot to consider when deciding whether buying and letting out a property is worth it financially.
Buy-to-let mortgages are a specialist type of mortgage. You’ll generally need a higher deposit – usually at least 25%. And you’ll pay a higher rate of interest than on a normal mortgage. Because of this, you’ll 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. In Wales, it’s Land Transaction Tax (LTT). 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, 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.
There may also be periods without tenants when no rent is coming in, which you’ll need to factor in.
What is a good return on a buy-to-let property?
Generally, a rental yield of 5-6% is considered a good financial return on a buy-to-let. Rental yield is the amount of money you make from rent in relation to the property’s value, expressed as a percentage.
At its simplest, the gross yield is (annual rental income ÷ purchase price/value) x 100.
So, if you get £14,500 a year in rent on a house worth £270,000, your yield would be 5.4% 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?
Both legislative and market changes have combined to make some aspects of buy-to-let less attractive. These include:
Higher mortgage rates
After dropping to historic lows during the pandemic, the Bank of England base rate rose rapidly to help curb inflation. This has massively increased mortgage cost pressures for landlords.
Rates have been falling recently and are predicted to drop gradually over the coming months, but this will depend on how the economy performs.
Tax costs
Government policy on the buy-to-let market in recent years has led to changes to:
Stamp duty
In the Autumn Budget 2024, the stamp duty surcharge of 3% on second properties in England and Northern Ireland was increased to 5%. This means that on a £300,000 buy-to-let purchase, you’ll now pay £17,500 just in stamp duty costs.
Multiple dwellings relief for stamp duty, which provided tax benefits to landlords buying more than one property in a single transaction, was abolished in June 2024.
Mortgage interest relief
Since 2017, there’s been a gradual reduction in mortgage interest tax relief. Before that, landlords were able to deduct the interest paid on their mortgage from their taxable income. This essentially provided a 40% tax relief for higher-rate taxpayers.
Landlords now receive a flat-rate tax-credit, based on 20% of their mortgage interest payments.
Capital gains tax
In April 2023, the capital gains tax-free allowance was reduced from £12,300 to £6,000.
In April 2024, this was halved to £3,000, meaning landlords now need to pay more in capital gains tax when selling property. However, the rate for higher and additional-rate taxpayers was cut from 28% to 24%.
Eviction rules
In the King’s Speech in July 2024, the government announced it would abolish section 21 in England under the Renters’ Rights Bill, also known as a 'no fault' eviction notice.
Under section 21 landlords weren’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 landlords must provide a valid reason for evicting tenants.
Landlord responsibilities
Landlords face a 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). 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.
Is buy-to-let still a worthwhile investment?
Although the recent changes make buy-to-let less attractive to some people, it can still be profitable if managed well.
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 can deduct certain expenses from your tax bill, including maintenance costs and utilities.
- If you have other savings and investments, 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.
- 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.
What are the alternatives to buy-to-let?
Depending on your financial goals, it might be worth considering other options such as:
Letting a holiday home
Instead of year-round tenants, you might want to consider letting out a holiday property. This will require someone to look after it, including cleaning and preparing it between guests.
If you also use the holiday property yourself, be aware that some local authorities are imposing higher council tax on second homes. To qualify for paying business rates rather than council tax, the property will need to be let for a specified number of days in a year. Business rates are usually cheaper.
Investing in the property market
If you don’t want to be hands-on, you could consider investing in a property fund instead. However, some of these funds, particularly those investing in commercial property, haven’t always fared well in recent times.
Peer-to-peer property lending
Online platforms allow you to offer loans directly to businesses to finance real estate projects without involving a bank.
You could earn higher returns than savings, but the risks are greater as the borrower might not be able to pay you back. Plus, your money isn’t protected by the Financial Services Compensation Scheme.
How to get started in buy-to-let
If you decide to pursue the buy-to-let avenue, it’s essential to do your research. See what properties are being sold for and how much they’re 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’ll need. This will help you understand if it’s an affordable option for you.
The Editorial Team - Compare the Market
Experts in personal finance, insurance and utilities
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.