With the coming raft of tax increases announced in the last six months, you may be wondering if buy-to-let properties are still the best place to shelter your investments. Well despite some blustering in the media, any fears about buy-to-let seem like a lot of hot air. The basic economics of the sector demonstrate its potential. There are currently an estimated 4.8 million households living in rented accommodation in the UK, up from 2.5 million a decade ago. This surge in demand looks set to continue, with PWC suggesting a quarter of the UK population (7.2 million households) will be renting by 2025.
While the number of tenants looks set to rocket, the supply of available properties is only increasing at a limited pace. However, there are plenty of new challenges for landlords to overcome.
In April, we’ll see a 3% hike in stamp duty on buy-to-let purchases which will make investing in additional properties more expensive. If you want to buy a house at the current average price (£292,077), you’ll soon have pay a total of 8% in stamp duty (£23,336). In addition to this extra purchase cost, you won’t be able to claim the full 10% wear and tear tax allowance anymore, as it will now be based on receipts. Next year will also be the start of the planned cuts to tax relief on mortgage repayments. Then there’s also the possibility of a future interest rate rise, so you’ll have to shop around for the best mortgage deals. To conquer these challenges, you’ll need to consider your buy-to-let investments carefully to earn a decent profit.
Which areas offer the highest total returns and yields?
When investing in property, time-tested advice is often the best. The three most important factors are always location, location, and location. But the incoming tax changes could mean that cash returns are not the only point on which to focus. You should consider looking for an area with higher % yields – even if monthly income is lower in absolute terms.
As you’d expect, London tops the regional list for both rents and house prices. At the end of 2015, the average rent in capital was £1,251 per month – more than double the average market rent in the rest of the country. But while London has offered great total returns, yields here are only 4.1% according to the Buy to Let Index from Your Move and Reeds Rains. As this is below above average for England & Wales (4.9%), you may be better buying somewhere else.
Currently, the best yields of any region are found in the North West at 6.8%, closely followed by Yorkshire and the Humber with 6.4%. If you can achieve these yields, making money through buy-to-let remains viable. Rents in Yorkshire & Humber are also at an all-time high right now, while averages in other regions have dipped slightly from their previous peaks. Both these regions also have much lower house prices compared to down south, so you’ll also pay lower stamp duty fees in absolute terms. The South West currently offers the lowest yields of any region (3.6%) meaning it may be more challenging to generate monthly profits here.
Individual towns and cities can offer very different investment prospects to the regional average, so it’s always worth checking with local agents to see what yields are like in any area you’re considering, before making an investment.
In the buy-to-let market, long void periods can seriously impact your profits, so it’s vital to choose an area with consistent demand from potential tenants. Even though big cities have a larger supply of homes to rent, the large populations mean they are a much safer choice when trying to minimise voids. Nottingham, Bristol and Birmingham are all good options by this measure.
Be one step ahead
One investment strategy is to buy in an up-and-coming area.
One of the easiest ways to spot places where there could be significant growth is to look for major infrastructure projects, so for example with the expansion of Crossrail, London’s commuter towns could be a good bet. Luton and Reading have already seen double-digit house price growth in 2015, as London’s high prices are encouraging people to travel to work from further away. The enhanced transport links in these towns suggest that demand for rental homes here could grow rapidly. With the Government’s ‘Northern Powerhouse’ strategy, including HS2, there should also be increasing demand for properties in major northern cities like Manchester and Leeds.
On a smaller scale, new shopping centres, business parks or leisure facilities can also help boost the demand for nearby properties. If a major company announces it’s moving to a new area, this can lead to an influx of young professionals. Gentrification will also lead to a surge in rents, as seen in parts of East London like Shoreditch. It’s been seen that gentrification can occur in areas which have a high proportion of artists and musicians, as the cultural ‘boost’ they give to their area creates interest and momentum.
You should also consider how close you want to be to your rental property. You may decide that you like the comfort of being able to see your investment with your own eyes. It’s also useful to be close by if any problems arise. When you have personal local knowledge of the market, you’ll make much better decisions because you’ll hear about new opportunities much earlier. This should help you to get the best deal possible when planning your investment. However, other parts of the country may provide better returns and a decent letting agent will be able to manage your property for you.
Choosing your portfolio wisely
To optimise your rental yields, you have to pick the property which best suits your target market. So before buying, you’ll have to decide on the type of tenant you’d prefer. Older renters tend to be more lucrative as they can afford higher rents. Over thirty-fives now make up half the rental market according to the ONS, so as the average age of tenants gets older it may be worth choosing a property to appeal to them. However, these people will expect much more for their higher rents, which means you’d have to buy a more expensive property.
If you ensure the property you buy is a good match for your target tenant, you’ll have fewer void periods which will boost your income. In terms of property type, new-build city centre flats will attract young professionals, while country cottages are more likely to appeal to older renters. Families generally prefer to have a garden with their home and a garage or off-street parking. Buying near a university will ensure a healthy supply of student tenants.
When you choose the size of your property, it’s important to find the optimal amount of bedrooms for buy-to-let. Unless you’re buying in a city centre, demand for studios and one bedroom flats is fairly limited, so it’s worth spending extra for a property with more than one bedroom. Two and three bedroom properties are by far the most popular with renters and these are also the most common.
The risk with having more than three bedrooms is that there will be less regular demand for these homes, so you may face longer void periods. You should also remember that the new stamp duty changes will hit you harder if you’re buying a more expensive property. Only 2% of properties currently being rented have more than five bedrooms; the rental gains on further rooms are fairly limited reflecting a lack of demand for the largest rental properties.
Period properties will often require more maintenance work, but they can also be more sought after by older tenants. If you buy a character home in need of renovation, you could make a significant profit, as long as you’re willing to put in the time or money to make it ready for tenants. But before buying any property, you should always get a survey. This will ensure there are no nasty surprises waiting for you down the line which could potentially ruin your finances.
You should also consider which amenities your target tenants will prefer. Young professionals will often want to live in a vibrant area with plenty of pubs and restaurants, making locations close to the town or city centre popular. Families may prefer a quieter area which is close to good schools and parks. They will often look for an area in the suburbs or countryside where there’s space to let children play.
With new regulation and tax hikes, this year will have some fresh challenges for landlords, but if you buy the right property in the right place, there are still solid returns to be made from buy-to-let.
Article Courtesy of: Richard Sexton, business development director of e.surv chartered surveyors.