Buy to let – is it worth it in 2023-24?
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Many people are attracted to the idea of building a property portfolio. A popular dream is to collect a set of buy to lets (BTLs), using the rents from tenants to cover the mortgages and provide a “passive income”. Yet is this a realistic vision? Is buy to let still worth it in 2023?
Below, we explain why most investors will likely do best by focusing their investments into assets such as equities and bonds (e.g. in a pension). Some investors can benefit from buy to let investments in specific circumstances, but it takes more careful planning to turn a profit in 2023-24 due to tighter regulations and shrinking tax advantages in the sector.
If you want to discuss your investment strategy with us, please get in touch to arrange a meeting with a financial adviser:
01603 789966
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What is buy to let?
Buy to let is a type of UK property which is bought with the primary purpose of renting out to tenants, not to live there. Since most people cannot afford to buy a property outright (in cash) and then offer it to tenants, they typically turn to a special mortgage type – buy to let mortgages – to build an additional property portfolio.
Buy to let (BTL) mortgages typically require a larger up-front deposit compared to residential mortgages. Lenders can offer loan-to-value (LTV) deals of 90-95% for the latter, whilst for the former type the maximum is typically 75-80%. For a £300,000 BTL mortgage, therefore, a borrower might need to put down a deposit of £75,000.
The pros and cons of buy to let
Already, you might notice a potential issue with BTL. A 25% deposit can be quite a big ask for many people. This presents a barrier to entry which many other investment types (e.g. a Stocks & Shares ISA) do not. However, what if you are able to raise the necessary BTL deposit – perhaps from a business sale or an inheritance windfall?
In theory, a BTL property could provide a nice “passive income”. Suppose you can realistically expect to collect a monthly rent of £1,000 from tenants. Your BTL mortgage will be £800. This means that you could generate a profit of £200 per month assuming no taxes, fees or unexpected costs (e.g. for maintenance).
The latter point, however, shows the rub. Various expenses can eat into a BTL investor’s returns. It is important to be aware of these and plan for them before committing to a property portfolio. For instance, will you need to pay for any ongoing storage costs? What about fees for using a letting agent or an accountant?
Investors also need to plan for the possibility of periods when the property may be unoccupied (e.g. due to tenants moving). Even one or two months of absent tenants could eat significantly into your returns, since you will need to cover the BTL mortgage yourself rather than using the normal rental income.
One way to address these issues is to keep your ongoing BTL costs to a minimum. For instance, putting down a larger deposit can result in lower monthly repayments. Managing the tenants yourself can also reduce/eliminate letting agent fees. However, the latter adds a time commitment cost and the former raises the barrier to entry for a BTL investment.
BTL investing and taxes
In recent years, BTL investments have lost some helpful tax benefits – stinging many landlords. For instance, landlords used to enjoy claiming tax relief on BTL mortgage interest. Since April 2020, however, this system has ended. Now, additional and higher rate taxpayers can no longer claim relief at 45% or 40%, respectively, but a flat rate of 20%. This has been particularly painful for many landlords since UK interest rates started rising in late 2021.
Longer term, a large buy to let portfolio can be difficult to shield from inheritance tax (IHT), although there are some options you can explore with a financial adviser – e.g. incorporating. Also, bear in mind that regulations are getting tougher for landlords, especially regarding energy efficiency. To comply, expensive improvements may be required.
All of this is not to say that BTL is never worth it. However, it is arguably a tougher sell to investors in 2023 compared to, say, investing in a pension. The latter option offers a range of tax benefits such as no inheritance tax (IHT) on funds upon the owner’s death and tax relief on contributions during his/her lifetime – equivalent to the highest marginal rate of income tax paid. There is also a much lower barrier to entry compared to raising a BTL deposit and lower diversification risk and liquidity risk if a sensible portfolio is constructed with a financial adviser.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a meeting with a financial adviser:
01603 789966
[email protected]
