Whilst house prices continue to fluctuate in the last few years, it is still definitely the case that overall property is a safe investment in the long-term, providing you have the income available so that you can invest in buying a home. Here at Secured Loans, we take a look at advantages and disadvantages when it comes to buy-to-let properties so that you can make an informed decision as to whether or not becoming a landlord and renting out a property is right for you.
Pros of investing in a buy-to-let property
It is possible to offset costs against tax
When it comes to buy-to-let properties, it is possible to offset tax costs each year. In order to be able to do this, you will need to complete and send back a Self-Assessment Tax Return and pay a tax bill, but you can also offset costs for renovations.
Generation rent is set to grow
According to statistics provided by PwC, they estimate that less than half of all 20 to 39-year-olds in London (40%) will be able to afford to buy their own property by 2025. This number has gone down dramatically since 2000, where it was estimated that 60% of people within this category would be able to afford a home. Furthermore, according to Hometrack even the average tenancies across the UK are getting far longer, rising from 3.5 years in 2014 to 4.3 years today. Whilst these aren’t great statistics for those hoping to get on the property ladder, known as Generation Rent, it does mean that the buy-to-let sector is growing exponentially, meaning that the demand for rented properties is higher than ever, so you can be sure that you will find tenants for your house willing to pay a good price.
It is a great long-term investment
As we previously mentioned, house prices do fluctuate over time. Nevertheless, in the long term according to Zoopla data, it has revealed that whilst the average value of a property has decreased by 0.66% in the last year, prices do still remain over 17% higher than they were over a decade ago and whats more it is 256% higher than 20 years ago.
Affordable locations are tipped to grow
There are a number of opportunities to invest in buy-to-let properties across the country in affordable locations, not just London. In Hometrack’s latest Cities House Price Index it revealed that the city that had experienced the biggest house price growth was not the capital but in fact, Edinburgh, with statistics showing that there has been a 6.7% rise in the last year, followed by Birmingham and Manchester. Furthermore, house prices are much less expensive than in London, with the average costs in the cities being £219,000, £156,8000 and £153,200 according to statistics provided by Zoopla.
Cons of investing in buy-to-let properties
Political uncertainty impacting on the housing market
With Brexit looming and with rising interest rates in the UK, this could have a detrimental effect on the housing sector as a healthy housing market needs to have stability both politically and economically
Buy-to-let getting tougher
When it comes to mortgage lenders, the Government and HMRC, the landlord’s ability to maximise its borrowing and profit potential is getting increasingly difficult. This is in part due to new regulations implemented by the Bank of England’s Prudential Regulation Authority (PRA) last October means that before deciding whether to approve a buy-to-let mortgage to an applicant, they will need to take a look at the landlord’s entire property portfolio.
This means that existing landlords who have four or more properties (that already have mortgages) will need to give financial details of each property to the lender. That includes things like rental income, as well as outstanding borrowing that you have before it is possible to be considered for a brand new mortgage or in order to refinance an existing property
Furthermore, lending rules have become far stricter due to the PRA requiring lenders to raise rental coverage requirements (this is the percentage of rental income lenders would like to see against the price of a monthly mortgage interest) to between 140% and 145%. This essentially means that landlords need to be able to show rent of a whopping £1,450 compared to the same £1,000 mortgage interest payment.
In addition, the Insurance Premium Tax (IPT) rate increased from June 2017, which means that landlords face an increase from 10% to 12%. IPT is payable for all general insurance policies (this also includes building insurance) which are something that landlords are legally responsible for.
Paying extra stamp duty
When it comes to buy-to-let properties it is now the case that you will have to pay more stamp duty. This legislation came into place at the beginning of April 2016, and means that you will face paying an extra 3% loading on your stamp duty bill as stamp duty has increased on properties that are not replacing your main home.
This is different to the regular stamp duty that is paid on properties, as this extra 3% is charged as a flat rate on the entirety of the property. This means that if you had a property worth £300,000, you would need to pay an additional £9,000 meaning that the total amount you pay on stamp duty is £14,000.
Rents are decreasing
Whilst Generation Rent is expected to continue to grow larger in numbers, which is an advantage for landlords, the downside is that the average rent price is falling. In 2017 rents for may were 0.3% lower than they were in the previous year, according to the tenant referencing service, Homelet. This means that it was the first recorded drop in rent prices for nearly eight years, which could signal a trend for the future.