During the 15-month stamp duty holiday, 12 per cent of homes sold in Britain were purchased by investors rather than owner occupiers, according to figures shared by estate agent Hamptons (October 2021).
That number has remained remarkably constant over the past five years, despite the introduction in 2016 of a 3 per cent stamp duty surcharge on purchases of homes by investors – which did knock confidence. Investors remain attracted to buy-to-let, with the stamp duty holiday on many purchases (up to September 2021) boosting
the market, says Hamptons.
“The buy-to-let mortgage market has remained very active,” confirms Lloyd Cochrane, head of mortgages at NatWest Group. “Existing landlords are looking to remortgage to find better deals but the last couple of years have also seen an increase in new entrants.”
The appeal of investing in a property to let it out, rather than to live
in it, is twofold. First, there is the potential for long-term capital gains from rising property prices. House prices are up 402 per cent since 1983, when the then Halifax Building Society began tracking the market with its monthly Halifax House Price Index – £100,000 invested in property then could be worth just over £500,000 today.
Second, of course, there is the earning potential. The rental income from landlords’ properties should at least cover mortgage repayments on their own homes, along with other costs, and often provides additional return. And rents have a good record of rising more quickly than general inflation: average rents across the UK rose 8.7 per cent over the year to October, according to the HomeLet Rental Index.
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“We continue to see high demand for properties, and rent increases,” explains Nathan Emerson, CEO of Propertymark, the national association of property agents. Three quarters of landlords have felt able to increase rents in recent months, he points out.
Not that all buy-to-let investors manage their properties to this traditional long-term model. One trend in recent years has been rapid growth in short-term lets, where landlords hire out their properties through services such as Airbnb rather than arranging conventional tenancies. “Short-term lets typically can provide higher income, though they also come with greater costs and risks of void periods,” says NatWest’s Lloyd Cochrane.
Propertymark’s research from January 2020 suggests around 16 per cent of UK landlords now focus exclusively on the short-term lettings market. That has some worrying implications for people looking to rent property to live in, but from the landlord’s perspective, short-term lets on Airbnb and similar services have several advantages: the returns, by average rent per night, tend to be much higher, regulation is less burdensome, and the short-term approach is a more flexible way to manage property.
There are downsides, of course. It can be hard work managing the constant flow of people renting your property, and there is a risk
of empty periods when no one books. But the short-term lettings market looks set for further growth.
The short-term market tends to be busier in certain locations, particularly tourist hotspots. London dominates the market, though other popular destinations, including the southwest and Scotland, are also in demand.
As for the broader buy-to-let market, this year the most popular area
of the country with investors buying properties has been the northeast, according to Hamptons: almost 30 per cent of property purchases in
the region in recent months have been made by landlords.
This reflects the balance that investors look for between the cost of property and the rent it will command. While London is by far the most expensive place in the UK to rent a property, it is also the most costly place to buy. As a result, in some parts of the capital, rental yields (annual rental income divided by a property’s value, multiplied by 100) are below 3 per cent. This is according to the Buy-to-Let Rental Yield Map updated daily by London estate agent Portico. (Yield Map reference made for this article December 2021.)
Across the whole of the UK, however, yields currently average 4.3 per cent, according to Sequre Property Investment, and in rental hotspots in the northeast, they rise to 4.8 per cent. Other desirable areas, based on this measure, include parts of Scotland and towns in Yorkshire and the northwest.
Such yields could be attractive compared to other types of investment. Cash in the bank or building society, for example, earns less than 1 per cent in most accounts, so is losing value once you factor in the current inflation rate of 4.2 per cent.
And the stock market, where company dividends have fallen over the past year thanks to the impact of the Covid crisis, offers an average yield of just 3.7 per cent, according to stockbroker AJ Bell.
The effort you put into buy-to-let can pay off. “Managing a buy-to-let property can be a lot of work, but it could be a very rewarding way to bring in additional income,” says Cochrane. The key is to do your homework, he advises: “Investors should consider their knowledge
and experience, and seek advice where they are unsure, because mistakes can be costly.”
Indeed, buy-to-let investors must do their sums carefully and think well ahead. The returns you will earn on property investment reflect a range of factors, including the upfront costs of purchasing property and the ongoing overheads of managing it.
As for expenditure upfront, the stamp duty surcharge can prove expensive. Anyone buying a home in the UK that they don’t plan to live in must pay a 3 per cent surcharge on top of the tax that would normally be payable. You will also need to consider all the other costs of property purchases, from legal fees to paying for any refurbishment required.
The most significant ongoing cost is likely to be the mortgage finance. Lenders offer a broad range of buy-to-let mortgage deals, so it is important to get sound independent advice ahead of going to your bank to look into a morgage. But remember that even during times when your property stands empty, you will still need to pay the mortgage. It makes sense to factor the risk of these void periods into your calculations.
The good news on mortgages is that the market is increasingly competitive. “The number of mortgage deals in the market has returned to levels seen before the pandemic,” says Cochrane.
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If buy-to-let is an option you’re considering as part of
your long-term financial plans, NatWest could help. Visit natwest.com/mortgages/buy-to-let for tips, information and a useful mortgage calculator to help you start planning your future.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
All information within this article is produced by The Times. Please note, other than the comments
directly from members of NatWest, the views and information have not been endorsed, issued
or approved by NatWest.
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