Buy-to-let investments will yield declining and even negative returns in the coming years, and here’s why.
Buy-to-let has been the obvious entry-point for property investors in the UK for decades. And for good reasons. Good yields, rising house prices, and tax benefits made it a win-win investment. For over three decades, buy-to-lets have therefore been the default investment for most British property investors. According to the trade body UK finance, more than 180,000 mortgages were given to landlords looking to invest in properties in 2007 when buy-to-let was at its peak.
Since then, a series of changes have made this much-loved investment strategy close to obsolete – at least if your target is building a large and highly profitable portfolio over the next few years. We are expecting activities in the buy-to-let market to collapse or significantly decline due to several factors, but mainly because of the tighter government regulations and financial restrictions, meaning being a landlord loses its lustre.
Over the past five years, the government has introduced a number of regulatory changes that directly affect the buy-to-let sector. The changes in policies contribute to the decline in profit, consequently forcing investors out of the market, finding the once-profitable investment not so profitable anymore.
Why is the buy-to-let sector facing potential collapse? Here’s the breakdown:
Tougher mortgage regulations (higher deposit and rental income required)
As stringent mortgage rules come into force, borrowing becomes tougher for landlords, especially those entering the arena for the first time.
Lending requirements are continuously becoming tighter. This means that landlords will need to increase the deposits coming from their own pockets, in addition to being required to prove a higher rental income to afford repayments.
Increased stamp duty
Landlords seeking to buy properties for investment purposes have been facing increasing stamp duty levels.. In 2014, a surcharge was introduced adding a 3% charge for any buy-to-let properties.
Ultimately the Increased stamp duty impacts the profitability of an investment, as it also increases the required deposit (stamp duty is normally not financed by the lender). A £200,000 home now has a hiked stamp duty rate of £7,500.
Interest tax relief to be phased out
Possibly the most consequential policy revision putting property investors and landlords under increased tax-strain, is the gradual ending of the tax relief coming from interest costs.
Private landlords and property owners are facing a decline in tax relief which means that they can claim a smaller tax relief than what was previously the case.. This significantly increases the actual amount of tax paid on rental income.
For many investors this has had an additional effect on their total income, pushing them into a higher tax bracket, and consequently, they are now taxed at a significantly higher rate on their total income. In some cases, investors have seen no other outcome of the financial stress than to sell off parts of their portfolio. Selling off what was previously considered to be a safe investment for the sake of being able to pay taxes, is certainly not the ideal scenario.
Small investors hardest hit
Tough regulations leave small investors with no choice. A mortgage is one of the most important pieces that help people purchase a property. In the UK and also the rest of the world, new investors will generally need to get a mortgage in order to get into property investment.
Clearly, tougher regulations and hiked tax levels make the returns more volatile and even negative. Smaller investors are less likely to be successful in the market, and will not be able to get the returns they are expecting and may not even break even.
A large number of landlords likely to sell off parts of portfolio
We all know being a landlord comes with risks. And as investors, we should be prepared for the coming years as policies continue to change. Sadly, according to recent research, more and more landlords are considering or deciding to sell parts of their portfolio in the near future to prevent more losses and adjust to new circumstances.
The recent changes in regulations and tax policies are in many cases forcing landlords to exit the market. More than a hundred thousand properties have been sold by landlords since high taxes were imposed.
House prices are ultimately determined by supply and demand. When a larger number of properties enter the market as investors are trying to sell off parts of their portfolios, prices are bound to fall.
Is it time to say bye to buy-to-lets?
It can be argued that buy-to-let still provides a feasible method to get into the property investing business. However, after the outlined changes in regulations and policies, is it still the right choice for profit-hungry investors and even first-time buyers?
Given the outlined problems already mentioned, can we still realistically see an average BTL home doubling its value over the same period? Or can these properties still be considered a wise investment?
We believe 2020 is going to be tough for the buy-to-let sector. It is becoming a less efficient route to gain the financial returns you expect, and it is difficult to see traditional property investments are still the place to be putting your money in 2020.
Is it too late to get into property investment?
Our short answer is No. But property investments are getting more complex and sophisticated. There is a lot to take into account when investing in UK property, but and you will find there are still some very good opportunities available. You need to look at where development and growth are happening. The UK is currently in what many refer to as a housing crisis, which results in a situation where the demand is higher than the supply. Normally this fuels a price increase, which is generally good news for investors.
It is vital that you work with the right team of professionals, choose your deals carefully, do the proper due diligence, and ensure that your investments reflect your goals and are structured in the most efficient manner.
You are now likely to recognise the fact that what was previously considered a low-risk, easy and secure investment strategy such as buy-to-lets will not necessarily remain so for all eternity. In practical terms, this means that already from the very beginning, the risk was actually higher than most people realise.
We invite you to start raising your eyes to a new level and look at new ways to create wealth and the returns you expect.
Vitae Investments will be very happy to walk you through the options. We are confident you will be pleasantly surprised by the attainable returns of more modern investment strategies.
Get in touch today to quickly learn how you will benefit.
If you would like to learn how you can benefit from modular construction, either as an investor or a home buyer, have a chat with one of our advisors. Please email firstname.lastname@example.org, Call or Text +44 (0) 7365-515-684 or Book a free consultation here.