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BTL landlords remain optimistic but profitability falls

The government’s decision to temporarily increase the stamp duty threshold to £500,000 for property sales in England and Northern Ireland, until 31 March 2021, has triggered fresh optimism among buy-to-let landlords, despite tax and regulatory changes hitting their pocket over the past three years. 

Buy-to-let properties in the UK are currently in high demand and there appears to be plenty of room for further growth, as more investors look to invest in the private rented sector. 

According to the Paragon Bank’s latest Financial Adviser Confidence Tracker Index, more than two-thirds of mortgage brokers expect UK buy-to-let business to be either stable or growing over the next 12 months. 

But while the recently announced stamp duty holiday has reduced the average tax paid on a buy-to-let property by 26%, landlords have seen the profitability of their buy-to-let investment fall by 17% over the past 12 months, according to new research. 

The study by letting management platform Howsy found that the actual cost of being a landlord still requires 65% of the average buy-to-let income when accounting for void periods, mortgage interest, management fees and maintenance.

Initial Investment Costs: -23%

The initial cost of stamp duty has dropped by 26% as a result of the recently announced stamp duty holiday. This reduced cost of £4,957, coupled with the average tenant finding fee of £827, means the initial price of investing in a buy-to-let has fallen by 23% year-on-year to £5,784.

Ongoing buy-to-let costs: -10%

There has also been a 10% reduction in the ongoing costs of running a buy-to-let property.

The average landlord experiences 23.75 days of void periods a year, reducing their rental income by £538 on an annual basis. This is a marginal jump on the £535 it cost them a year ago. Agency management fees have also increased by 2% since last year, now costing an average of £992 a year.

But favourable mortgage rates have seen the interest paid on money borrowed drop by 10% in the last year, and the 73% of landlords that buy with a mortgage are now paying out £6,232 in annual interest, compared to £6,921 a year ago.

The average annual maintenance and repair bill for a buy-to-let has also dropped 20% year-on-year, currently £1,652.

All in all, the ongoing running costs of a buy-to-let averages £9,414 per year, but that has reduced by as much as 10% when compared to last year.

In a worst-case scenario, UK landlords may also find themselves forced to stump up for additional unforeseen costs, such as the legal process to evict a tenant. While this doesn’t happen to everyone, there is a one in 500 chance that you will have to pay for bailiffs to evict a tenant from your property.

Buy-to-let income: -13%

While initial and ongoing costs have dropped, so too has the profitability of a buy-to-let investment.

The average rental yield is now 5%, and landlords have enjoyed a 2% increase in annual rental income. 

However, there has also been a decrease in the average rate of bricks and mortar capital appreciation over the last ten years, down from 4.7% the previous year to 3.81% a year currently. This means the value of a buy-to-let property has only increased by an average of £6,296 this year compared to £8,614 last year.

With both capital appreciation and annual rental income considered, the average buy-to-let is bringing an overall return of £14,564, a 13% decrease on the £16,726 seen last year.

What’s Left

Taking start-up costs and unforeseen events out of the equation, once the average UK landlord has paid the ongoing costs associated with a buy-to-let property on an annual basis, they’re left with a profit of £5,150. These ongoings costs account for 65% of their buy-to-let income, and as a result, overall B2L profitability has fallen by 17% in the last year.

Calum Brannan, founder and CEO of Howsy, said: “It’s great to see that the government has finally provided landlords with a momentary financial reprieve in the form of a stamp duty reduction.

“However, our research shows that overall, buy-to-let profitability is still down year on year, and more must be done to help stimulate the backbone of the rental market.

“Of course, bricks and mortar remain a very sound investment, and in many pockets of the market, the return is far higher than that of the average landlord. But we need to do more to encourage landlords to return to the market at all tiers and in all areas to meet the massive demand from tenants for rental homes.

“Luckily today, the integration of technology into the lettings space means there are ways to increase profit margins. Online lettings platforms allow for a much more affordable management fee with greater accessibility. While additional products such as Howsy Protect not only provide a guaranteed source of rental income, but they also protect against unforeseen damages to your investment, as well as providing additional peace of mind with appliance cover, home emergency and boiler cover, plus much more.”

Initial start-up costs

2019

2020

Change

SDLT (with holiday until March 2021)

£6,663

£4,957

-26%

Agency fees (to find a tenant)

£811

£827

2%

Total

£7,474

£5,784

-23%

Ongoing-costs

2019

2020

Change

Void periods

£535

£538

1%

Mortgage interest per annum

£6,921

£6,232

-10%

Agency management fees per annum

£973

£992

2%

Average annual maintenance and repairs

£2,077

£1,652

-20%

Total

£10,506

£9,414

-10%

Buy-to-Let Income

2019

2020

Change

Average annual rental income

£8,112

£8,268

2%

The average B2L property cost

£183,278

£165,247

-10%

Average rental yield (%)

4.4%

5.0%

0.6%

Capital appreciation - the average per year for the last ten years

4.70%

3.81%

-0.89%

Capital appreciation - in £ terms

£8,614

£6,296

-27%

Total Buy-to-Let Income

£16,726

£14,564

-13%

What's Left

2019

2020

Change

Total Buy-to-Let Income - Total Ongoing Costs

£6,220

£5,150

-17%

  • icon

    Not good times for highly leveraged LL who can no longer claim their tax relief, but optimistic times for the rest of us

  • Paul Barrett

    Indeed the BTL sector remains extremely risky.
    The inability to readily remove rent defaulting tenants is the death knell for LL.

    It certainly makes business sense to convert to unencumbered status as quickly as possibly.

    Doing so massively de-risks a LL business.

    With the ever increasing difficulties and expenses involved in getting rid of rent defaulting tenants LL really are up against it.

    With such risks it really makes no business sense being a leveraged LL.

    Ideally the whole PRS should deleverage to leave only unencumbered properties.

    In my case I could do this leaving just one unencumbered property.
    If I did this I would be financially secure.
    Being leveraged at about 75% is far too high for the new paradigm the PRS faces.


    It is time for LL to get out of BTL.
    You can still be a profitable LL with fewer but unencumbered properties.
    It will also bring relative security to your business if you don't need to fear repossession anymore which unfortunately many LL will be suffering from in the coming months.

    Ridiculous Govt policies have made being a BTL LL a very risky business

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