Not long ago, many landlords were selling up due to changes in tax law, but the buy-to-let sector is currently enjoying a revival.
Are you are considering investing in buy-to-let? Here we talk about whether buy-to-let is a sensible investment in the unpredictable climate of 2022 and what is involved in becoming a landlord.
Is buy-to-let worth the investment in 2022?
Between July 2020 and July 2021, the rent paid by tenants in the UK increased by 1.2%, with the highest annual growth (2.5%) in the East Midlands and the South West.[1] Rightmove predicts a rise in rental prices in 2022 of 5% due to an increased demand for rental accommodation across the UK.[2]
As well as rental yields, capital growth is a key consideration for landlords. Buying property is a long-term investment and house prices today are £27,000 more than this time last year, with the greatest increase in Wales and the lowest in London.
Nobody knows what the future holds for the housing market. Experts have conflicting opinions about whether the housing market will cool in light of the cost of living crisis.[3] However, house prices tend to increase over time, punctuated by slumps and recoveries. In areas of the country where there is a strong demand for housing, recovery during times of recession tends to be faster.
What should you consider before becoming a landlord?
Here is what to consider before you invest in buy-to-let.
What are your investment objectives?
Do you want to invest in buy-to-let so you have a regular income through rent, or are long-term capital gains more important to you?
Your investment objectives will affect where in the country you buy property, the type of tenant you need (family, student, young working professional, housing benefit tenant etc.), and the kind of property you buy (semi-detached house, flat, house of multiple occupation (HMO), purpose-built student property etc.).
If you are planning to build a portfolio of properties, it is advisable to invest in a range of different kinds of properties, tenants and locations. This is so you spread the financial risk in case one type of investment suffers a downturn.
What kind of property would you like to invest in?
This question needs to be considered in conjunction with the types of tenants you would like to attract (see below). All types of properties have pros and cons, and it is important to research this so you can make the right choice for you.
A house of multiple occupation (HMO), for example, has the advantage that you can let out individual rooms to different tenants. This means if one tenant leaves you still have rental income from the others. However, this type of property may require a licence from the local authority. Plus, you may find your property is not as well maintained by the tenants as you would like as no one person has overall responsibility.
What tenants would you like to attract?
Do you want reliable tenants who are more likely to look after your property and stay in it for a long time? In this case, you might wish to attract young working professionals. However, these tenants may have higher expectations of you as a landlord with regard to decoration and facilities.
As with the type of property you choose, it is very important to research the different types of tenants and the advantages and disadvantages of each.
You can use tools like Property Detective[4] and Dataloft[5] to discover which areas attract which types of tenants.
Where are you going to buy property?
Find out whether there is demand for the type of rental property and tenant you wish to attract in a certain area. Local estate agents, property portals like Rightmove and Zoopla, and tools like Property Detective and Dataloft can help you.
Visit the local area to find out whether the facilities are likely to appeal to the kind of tenant you wish to attract. Families may look for good schools, parks and shops. Students need to be near their university, and they may also want nightlife and decent public transport links. Young professionals will want to be able to commute easily to work and perhaps be near to decent restaurants and cafes.
If long-term capital growth is your investment goal, then you could research historical property values for the type of property you have chosen to discover how prices typically perform over time. Also, look carefully at the location itself. Are businesses investing in the local area? Are there plenty of job opportunities? Has there been recent investment in local facilities? You will want to make sure the area is up and coming and not in decline.
You might be planning to manage the day-to-day maintenance of the property yourself or instruct a letting agent to manage it on your behalf. If it is the former, then you may decide to buy a property near to where you live. If you would like a letting agent to manage your property, it will be more expensive, but it can also save you time and mean you have access to a greater pool of investment opportunities further from home.
How will you finance your investment?
Unless you are a cash buyer you will need to purchase a property with a buy-to-let mortgage. Although these mortgages incur higher interest rates, you cannot purchase an investment property with an ordinary mortgage.
With a buy-to-let mortgage, you usually pay off the interest each month rather than the capital amount, which is payable when the loan term is up.
There are currently some good buy-to-let mortgage deals available. You might consider talking to an independent financial adviser who can help you to find the deal that is best for you.
What are the costs of being a landlord?
There are expenses to take into account when buying an investment property including stamp duty, legal fees and renovation costs. On top of this, there are costs when you set up as a landlord. For example, you will need landlords’ insurance, a gas safety certificate and more. It is also a good idea to set aside a contingency fund for unexpected repairs and property maintenance.
For more about landlords’ expenses please read our Guide for first-time landlords.
Recent changes in tax law have had financial implications for landlords. Changes to Capital Gains Tax (CGT) mean landlords now pay more CGT when they come to sell their buy-to-let property. In addition to this, since 2020 landlords have not been able to offset their mortgage interest payments against tax. They now pay a 20% tax credit instead which is costlier.
As a result of tax changes, many landlords have set themselves up as limited companies so mortgage interest will be considered a business expense. If you are planning for your family to inherit property in your Will setting up as a limited company can also reduce your family’s Inheritance Tax bill.
There are advantages and disadvantages to setting up a limited company. It is advisable to seek independent financial advice so you can make the decisions that are right for you.
Why choose Insight Law buy-to-let solicitors?
Our dedicated buy-to-let solicitors offer both new and experienced property investors strategic advice from the beginning. We get to know your business, tailoring our advice accordingly and helping you to plan for long-term success.
Insight Law buy-to-let solicitors specialise in the purchase, refinance and sale of buy-to-let properties. We are on many specialist lender panels and advise both lenders and portfolio investors on transactions from instruction to completion and beyond.
For advice about any aspect of buy-to-let, including becoming a landlord, please call us today on 02920 093600.
[1] Office for National Statistics, Index of Private Housing Rental Prices, UK: July 2021, https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/july2021
[2] Rightmove Hub, Rental Price Tracker Q4 2021, https://hub.rightmove.co.uk/rental-trends-tracker-q4-2021/
[3] Homebuilding & Renovating, House prices are £27,000 higher than a year ago, ONS says, https://www.homebuilding.co.uk/news/house-prices
[4] Property Detective, https://www.propertydetective.com/
[5] Dataloft, https://www.dataloft.co.uk/