The story of buy-to-let over the past 25 years is like the tide surging in, then ebbing out, yet with more and more boats on the water.
From the mid-1990s the Labour government of Tony Blair promoted buy-to-let to boost investment in the private rented sector. Rented accommodation at the time was too often of poor quality, and demand outstripped supply. The Association of Residential Lettings Agents (ARLA) launched the buy-to-let concept in September 1996 and it soon took off, thanks to generous tax breaks and helpful banks.
Today, there are more than 2 million buy-to-let mortgages active in the UK, and more than £540 billion was loaned by banks between 2000 and 2020.
After the global financial crisis of 2008-9, banks became wary of lending to buy-to-let customers, partly because they themselves were in trouble – some banks had to be rescued. By 2016, the government decided to prioritise home ownership and help first-time buyers, so it switched the focus of fiscal policy, abolished some of the tax benefits and made life more difficult for buy-to-let investors. A special Stamp Duty Land Tax levy of 3 per cent over standard rates came in for buy-to-let properties and you could no longer write off as much mortgage interest against tax.
Nevertheless, the culture of buy-to-let had become so engrained in British commercial and social life, with TV shows devoted to renovating old properties to let out, and millions of people getting involved, that it has outlasted government support. Consistently rising property prices have compensated for the diminishing tax benefits, while rental income in many locations has increased dramatically.
You will need to do a series of sums to work out whether buy-to-let is a viable option.
Banks have quite strict criteria regarding buy-to-let mortgages, so you can see in advance whether you meet these points.
Banks typically require that:
- You earn at least £25,000 per year
- Your prospective monthly letting income will be at least 125 per cent (and sometimes 145 per cent) above your monthly mortgage payments.
- You provide a deposit of at least 20 per cent of the property purchase price
- You take out buildings insurance
- You pay a higher interest rate than for residential mortgages
- You have no more than a set number of properties in your portfolio – ten is a. common limit
- The overall loan-to-value across your portfolio is lower than, say, 65 per cent
The government also demands:
- That you put tenants’ deposits into an authorised deposit protection scheme
- That you have a gas safety certificate for your property
- That you have at least one working smoke alarm per floor and carbon monoxide detectors in rooms with solid fuel-burning stoves
- You provide your tenants with the correct paperwork
- You pay Insurance Premium Tax on general insurance policies
- There's also a few upcoming legislative changes such as the minimum Energy Performance Certificate (EPC) standards for landlords that you might want to get ahead of
If you’re happy to comply with all of these regulations, and the sums add up, then it’s time to seek out a suitable property for buy-to-let.
Popular locations include towns and cities with colleges and universities, because they have a steady supply of students needing accommodation. Elsewhere, locations that attract young single professionals and young families are also good, since many of them will want to rent. In these cases, look for properties that are close to transport facilities and in urban areas with strong employment demand.
Beware falling for the lure of ultra-cheap locations. If a property costs far below the national average, there’s probably a good reason for this, including lack of demand from prospective tenants. It may also be much harder to sell than elsewhere.
Buy-to-let experts advise that new build homes are preferable to older properties, because there will be less maintenance work to do and they will likely have a higher Energy Performance Certificate rating, which is attractive to tenants eager to minimise energy bills.
If you acquire a buy-to-let property near to your own home, it may be worth managing it yourself. You’ll be responsible for collecting rent, finding new tenants when people leave, sorting out maintenance problems such as leaking pipes or broken fridges, handling awkward tenants who make a lot of noise, for example. You’ll have to withhold some or all of their deposit if they’ve caused any damage, which can be a source of dispute. Plus you’ll have to satisfy you bank and the government’s list of demands.
As long as you’re happy doing all these things, and have the time to spend on them, you’ll save yourself many hundreds if not thousands of pounds. However, if you’re already busy and find them onerous, there’s no shortage of letting agents willing to do the work for you.
They routinely charge 10 per cent of your letting income, sometimes as much as 20 per cent in areas with higher demand. Agents are particularly good at finding new tenants, which an individual can struggle to do on their own.
The dampening effects of successive governments’ approach to buy-to-let has caused many former investors to sell up and look for other types of investment, but that’s not necessarily a bad thing, if you want to get involved. Less competition is usually good news.
You only need to look at the hectic scenes in London, where apartments have literally hundreds of people competing to rent them, to see how supply is still far below demand. The margins are certainly tighter and banks are more cautious, but it’s their job to lend money, so don’t be afraid to ask.
And if you look at property values, they consistently rise faster and further than wages, so – even if you only make a small profit from letting – you’re likely to benefit from capital appreciation in the medium and long term.