For a long time, investing in buy-to-let was seen as a sure-fire way to make money. But, over the last five years or so, regulatory and taxation changes have dented its appeal.

However, with inflation hitting a new 30-year high in January, mortgage rates still at historic lows and rental yields increasing, many investors are considering buy-to-let once again. Here are some past lessons that could help shape an investment strategy for the future.

Methodology: This tracks the performance of a buy-to-let portfolio which began with a £50k investment into a limited company made in 1996 (adjusted for inflation). We assume that all rental income after mortgage interest (75% LTV), maintenance costs and tax is reinvested back into the portfolio. Similarly, equity derived from rising prices has been extracted, taxed and reinvested.

Timing the house price cycle

Britain has seen unprecedented house price growth over the past 25 years. An investor who timed the house price cycle perfectly and always invested in the fastest growing regions would have seen double the average returns of someone investing in the slowest growing regions.

Between 1996 and today, a buy-to-let investment in the North East would have made the biggest returns, with high rental yields compensating for lower house price growth compared to southern areas. London, the region that’s seen the strongest capital growth, came third.

Crucially, we are not expected to witness the same magnitude of house price inflation over the next 25 years as we have seen over the past 25. Nevertheless, northern areas are forecast to see higher price growth until 2024, when a new housing cycle begins. From then, price growth across the South, especially London, is set to start outpacing the North once again.

Taking a long-term view is key, says Catherine Westerling, Head of Lettings at Hamptons. “Property has always performed strongly as an asset class on a minimum 10-year view, but a 20- to 25-year strategy is likely to be far more rewarding.”

Manage costs

The price an investor pays for a property makes the single biggest difference to returns. As Westerling explains. “It’s the old adage: you make your money when you buy, not when you sell.”

Recent tax changes have pushed up costs for individual landlords, particularly if they are higher-rate taxpayers, so many have put their properties into a limited company structure. There are now a record 270,000 buy-to-let companies in operation, with around two-thirds of these set up since 2016, when it was announced that mortgage interest would soon no longer be tax-deductible for landlords holding investment property in their personal name.

Leverage is crucial

The gains investors can make from house price growth are amplified significantly if they borrow as much money as they can to fund a purchase. When prices rise 10%, an investor with a £50,000 deposit and 75% loan to value mortgage will see a return of 40% on their initial investment, before the costs of servicing the loan.

In addition, reinvesting rental income back into a portfolio increases returns significantly. Nationally, the average portfolio built-up over the last 25 years on the back of rising house prices and reinvested rental income would be 55% smaller if rental income was withdrawn each month rather than reinvested.

Balance is best

The most successful landlords have a balance of geographies so they can benefit from the current high yields in northern areas as well as the longer-term capital growth from southern locations, Westerling explains.

She adds that landlords also seek to hold a mix of property and tenure types and include properties that can have value added by a refurbishment or extension. “At the end of a refurbishment an investor has increased the property’s rental value and capital value, while also improving a mortgaged property’s loan to value”.

For further analysis and expert advice, access Hamptons’ new Buy-to-Let report and accompanying webinar.

DISCLAIMER

@ Hamptons 2022 purpose of general information and Hamptons accept no responsibility for any loss or damage that results from the use of content contained therein, including any errors or negligence from third party information providers. It is your sole responsibility to independently check and verify the facts contained within this report. All opinions and forecasts within this report do not in any way represent investment or other advice. Reproduction of this report in whole or in part is not allowed without the prior written consent of Hamptons.

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