Is it worth investing in Buy-To-Lets now?
Area of analysis: London
A property that is purchased with the intention of being rented out to individuals or companies is referred to as a buy-to-let. The aim is to earn a profit by doing so. It is a very popular method of investment, considering that in England over 4.8 million homes are privately rented. [1] Receiving an extra monthly income sounds enticing, but is it worth it in today’s market? Are there better investments to make? Let’s run through a few points and try to answer these questions applicably. We can first consider the effort involved. Property investing can be considered a passive income source. Passive income refers to the money generated by doing little to no work. Enough of these and you might consider yourself financially free. The ‘little to no work’ part is achieved by letting someone else do the work for you. However, this comes at a cost. For example, you may pay an estate agency around 10% of the rental income for letting out your property for you and managing the tenants. Plus, there is work to be done upfront. You’ve got to find a property, have a buy-to-let mortgage in place, have at least a 25% deposit, find a reliable solicitor, use an accountant, find a company to manage your property, arrange insurance, potentially spend money renovating and more. That seems like a lot to do! It would be worth it with a high payout, right? Hold that thought. To buy a property for the intention of letting out, you will need a minimum 25% deposit. So, you’ve got £100,000 in the bank. You have enough to buy a property at £400,000. Ignoring solicitor costs and other fees, in today’s market a lender will happily lend you the £300,000 at a 5.14% fixed rate for 5 years with no additional fee (HSBC’s 75% LTV no fee 5-year fixed rate as of 9th December 2023). [2] This means that you will need to fork out a measly £15,420 a year in interest payments alone! Of course, paying cash for the property means you won’t have this interest payment to worry about. Though, if you want to make money work for the most for you, you’ve got to consider leveraging. Why buy one property, when you could buy four, right? So, how much would your property rent out for? You’ve got to pay interest payments to your lender, and you want to make some profit too. A local estate agent would assist in giving you a rough estimate. Though, sources such as Rightmove can give a good indication. Using Savills London lettings index [3] the highest average yields reach 4.9% for flats in North & East London with the lowest average yield reaching 3% for houses in prime central London. Therefore, using the highest average yield (4.9%), a £400,000 flat in North & East London should expect to rent out for £19,600. One big factor that is considered when buying property is capital appreciation. The Office for National Statistics revealed that since 2017, London house prices have increase by 1.6% on average year by year. [4] So, you’ve bought a house for £400,000 in 2023. By 2033, the house should be worth approximately £470,000 if growth rates stay the same. Now let’s put these things together. You have £100,000, and you would like to invest in a buy-to-let property in London. You have enough to buy a flat for £400,000 that rents out for a 4.9% yield. You will earn £19,600 annually in rental income, but 10% or £1,960 is to be paid to a local estate agent for managing the tenancy. So, you’ve got £17,640 in rental earnings, but your buy-to-let mortgage costs you £15,420 in interest fees (at the going 5.14% rate). Your earnings amount to a whopping £2,220. But, wait a minute, what about repairs? The average landlord yearly maintenance costs in London were £1,149 in 2022.[5] This leaves you at a £1,071 profit annually. Not so good, you put all that work in to make just over £1,000? Not quite so. Capital appreciation will make it worthwhile… that’s if it continues growing at the average 1.6% a year growth rate. So, your £400,000 property should be worth £406,400 in one year’s time. That’s a £6,400 increase. Add the £1,071 gain from rent, that’s a fair £7,471 profit in one year from a £100,000 investment. This considers that the property is rented out as soon as it is purchased. However, It can take up to 3 months to let out a property, and high interest payments could almost wipe out the capital appreciation. Is a £7,471 profit for one year worth it on a £100,000 investment when you’ve had to pay your solicitor to purchase the property, and you would have spent countless hours sending emails, viewing properties and time researching the area? Plus, if you wanted to cash-out, property takes some time to sell. Also, your mortgage provider may have an exit fee of up to 2%! On a £300,000 mortgage, this will cost you £6,000. Let’s compare the outcome over a 5-year period of investing £100,000 in a buy-to-let property versus investing £100,000 in Dorian Developments for our lowest recorded offering of a 10% fixed annual return. 
This graph considers:· £100,000 investment· 1.6% year-on-year capital appreciation [4]· 5.14% borrowing rate [2]· 4.9% rental yield [3] – agency fee (10%) – maintenance costs (£1,149) [5]· 1.4% year-on-year rental growth [4]· No void/vacant periods while renting out the property· You keep the rental earnings in a savings account and do not spend it· Tax implications not included
Investing in a buy-to-let property using today’s data, would give you a return of £135,381.38 or 35.38% over 5-years. Whereas, investing with Dorian Developments for a fixed 10% return a year would give you a return of £161,051 or 61.05%. Therefore, you would be £25,669.62 better off investing your money into property development via Dorian Developments. A 35.38% return is still decent, though if you want to make your money work harder for you, a different investing route may work out better. You are, in essence, still putting money into property with Dorian Developments. One big factor to consider is the tax implications of owning a property. Section 24 introduced by George Osborne, means that landlords will not get the same tax reliefs as before regarding mortgage interest costs. [6] Such legislation makes owning property under your personal name very costly, especially if you are a higher rate or additional rate taxpayer. Considering finance costs are the largest cost for landlords, not being able to claim this back could wipe out any profits completely. Though, the reasoning behind this does make sense. Why should a landlord get this tax relief, but not an owner-occupier? However, there is a way around this. Setting up a company and purchasing property with it means you’ll be exempt from Section 24. Though, you will have to pay corporation tax on any profits made and then dividend taxes when you take your profits. If you have made no profit at all, then no tax will be paid. Though, with keeping a buy-to-let property in your personal name, you can essentially lose money solely because the tax relief is no longer there (or at least heavily diminished). On the other hand, the returns made by Dorian Developments will only be taxed depending on your income tax band. Taxes will always need to be considered. Though because of the different income tax bands, what is owed to the taxman will be different for every person. Our graph has not included tax implications for this reason. It is advisable to seek guidance from an accountant regarding your position. Overall, it can be a tricky decision to make. This is due to the fact that property has always been a reliable source of extra income for many, and it can be challenging to accept that there are better alternatives. Especially, with Section 24, high interest rates and low property growth, is it really worth it? It depends on your strategy. Property investing isn’t exactly something you can quickly take your cash-out from, so you’ve got to think in terms of years and not months. The example given shows our lowest return offering of a 10% fixed return over a 5-year period, and this beats a buy-to-let investment by far. It is also more hands-off. There is a lot of effort involved in becoming a landlord. It might feel good to tell others ‘I own this property’, but ego won’t create wealth. Smart investments will help you get there. References
[1] ONS. Dwelling stock by tenure, UK. https://www.ons.gov.uk/peoplepopulationandcommunity/housing/datasets/dwellingstockbytenureuk.
[2] HSBC. Buy-to-let rates. https://www.hsbc.co.uk/mortgages/buy-to-let/rates/. [Visited on 11th December 2023].
[3] Savills. Prime residential rents – Q1 2023. https://www.savills.co.uk/research_articles/229130/345924-0.
[4] ONS. UK House Price Index: June 2023. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/june2023.
[5] Tower Gate Insurance. The Cost of Being a UK Landlord 2022. https://www.towergateinsurance.co.uk/landlords-insurance/the-cost-of-being-a-UK-landlord-2022.
[6] Gov UK. Section 24. https://www.legislation.gov.uk/ukpga/2015/33/section/24/enacted.