Is buy-to-let still a good investment?

Advice  |   7 April 2016

With recent changes to stamp duty and tax relief, Magus, Chartered Financial Planners, look at whether buy-to-let is still a good investment.

The Chancellor appears to have it in for buy-to-let investors and buy-to-let landlords are now wary about what the future might hold. The extra 3% stamp duty effective in April 2016 and the removal of tax relief on interest borrowings from April 2017, have really shaken up the sector.

It begs the question – is buy-to-let still a good investment? Or what is the better bet now, investing in bricks and mortar or a managed investment portfolio?

On paper, investing in property still looks like an attractive option, despite the Government’s best efforts to curb tax breaks:

  • The trends driving the sector’s explosive growth look set to continue;
  • Low interest rates for savers and the increased freedom over the use of pension savings are also expanding the buy-to-let sector;
  • Increased immigration and a generation of younger workers priced out of home ownership are also driving up demand for privately rented accommodation;
  • And lenders are enthusiastically backing the sector with attractive mortgage deals - some two million people now own a buy-to-let property.

Who wouldn’t still want a piece of the property action?

But of course, it’s not all plain sailing. If you are thinking about investing in buy-to-let property, here are some points you need to consider:

Focus on your returns – Investing in buy-to-let means tying up capital in a property that could potentially fall as well as rise in value. You need to strike the right balance between long-term growth in capital and rental income.

Invest for income – In the short term, it makes sense to invest for income and maximise your rental yield. With standard buy-to-let mortgage rates currently around the 4% mark, securing a yield of 6% would create an effective buffer between the cost of finance and the actual yield on the property. However, bear in mind the many costs that eat into your yield such as letting agency fees, ongoing repair and maintenance costs, insurance, etc.

Making the numbers work – Successful buy-to-let landlords only buy if the numbers stack up. They have little or no interaction with tenants and run it like a business. Ensure you factor ‘bad news’ into your calculations, e.g. the possibility of rental voids, late rental payments, repair costs - and most importantly, the changing tax regime. Red tape is also tightening in the buy-to-let sector with new requirements from local authority licensing, actions relating to energy supply and efficiency or immigration status checks, the regulatory burden is growing.

Consider limited company status – Mortgage brokers have seen a surge in applications for buy-to-let loans from limited companies since April’s tax increase was announced. Currently, limited companies can still get mortgage interest relief and only pay tax on their rental profits. However, there are a number of significant disadvantages with this strategy. There is no Capital Gains Tax relief for companies selling properties (however indexation still applies), there is increased reporting to Companies House, accountancy fees and don’t forget, there are increased taxes on dividends for limited companies in April. Also if a property is sold you then have the headache of getting the money out of the company, having already suffered corporation tax.

Think about liquidity - Always bear in mind liquidity and how easy it is to convert your assets into cash. Properties are illiquid assets and need a good market to realise their value. Plus you need to work with, and pay, third parties to realise a quick sale.

The ‘hassle factor’ vs reward - It’s clear that there is still money to be made from the sector but you have to go in with your eyes open. You need to invest time and effort to make it work. Being a landlord involves a certain amount of hassle due to the practicalities of running a property and being responsible for tenants. Are you prepared for the additional work?

Property vs Shares - So, should you invest in bricks and mortar or shares? It’s not a straightforward question to answer. The risk and reward of any investment is an intangible quality, with nothing ever guaranteed. Becoming a buy-to-let landlord will mean extra hassle, additional regulatory and administrative burdens and the prospect of additional tax hikes. However, like any investment strategy, you may well reap the reward over the longer term.

Budget News on Capital Gains Tax - The onslaught and isolation of buy-to-let property owners continues as they will not benefit in the reduction in capital gains tax (CGT) announced in March’s Budget.

They will miss out on the cut of the higher rate of CGT from 28% to 20% and the basic rate of CGT from 18% rate to 10% at the start of the new tax year on 6 April.

Our Opinion - From an investment strategy perspective, diversification is the name of the game. By all means invest in buy-to-let wisely, but consider having a managed investment portfolio too. The markets, despite current uncertainty, work pretty well and have enjoyed strong growth over the years.

We would advise diversifying your investment approach in line with your risk profile. A well-diversified balance between lower cost investments, high quality bonds and equities will reduce the effect of any equity market falls on your portfolio.

Liquidity and dealing costs are also important factors when assessing where to invest your money. Working with an expert financial planner can help you minimise the costs of investing and reduce the impact of taxes to achieve long-term investment success.

When it comes to what is the better bet, property or shares, perhaps the age-old answer still applies: you should never put all your eggs in one basket.

Risk warnings:

This article does not constitute advice

Prices can fall as well as rise and you may not get back the full amount invested

Past performance is not necessarily a guide to future performance

All statements concerning tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice

Your property may be repossessed if you do not keep up repayments on your mortgage