Investing in UK Buy-to-Let Property 2020
As an investor myself, as well as leading the global distribution channel at SevenCapital, I’m often asked questions about the hows, whens and whys of investing in Buy-to-Let in the UK, so here are a few key points to consider whether you’re investing for the first time, or the tenth time.
Should you invest in UK Buy-to-Let Property 2020?
This is a particularly relevant question as we head into the final quarter of the year and many of us start thinking about 2020 and beyond.
Buy-to-Let (BTL) property will remain a popular addition to many investment portfolios across the globe. Buy-to-Let property performs best as part of a medium to long-term investment strategy, where rental income has time to grow. As UK property prices rise and rental yields grow in key areas, so it’s no surprise that savvy investors are continuing to put their money in an asset as secure as brick and mortar.
Buy-to-Let will always remain appealing because of its ability to deliver two income streams – passive rental income and capital growth. Passive income is a key goal for many investors due to the ways it can be adapted. Whether it’s supplementing a pension pot in later life or contributing to an inheritance fund, passive income is easy-to-understand and opens up a number of opportunities for investors.
Capital appreciation, on the other hand, demonstrates natural market growth and affects the overall value of the property. Many investors that aim to achieve capital appreciation invest in Off-Plan developments as they allow for capital growth and appreciation during build and after completion. These investors will typically aim to achieve a significant increase in value during the period of construction before enjoying incremental growth following on from completion.
How is the Buy-to-Let Property Market Performing in the UK?
There’s no doubt that it’s an interesting time for property investment. Tax changes and uncertainty surrounding Brexit over recent years have caused a little hesitation amongst some of the landlord community. However, and many an experienced investor will agree, the market has remained resilient as a relatively stable, strong investment opportunity, with much of it still boiling down to the old adage ‘location, location, location’; An investment largely succeeds or fails based on its surroundings and there are some incredible locations emerging for 2020. You can read more about some of these locations in our ‘Best Places For UK Property Investment 2020‘ article.
While the outlook for the wider UK market is positive for investors, some areas are performing better than others – particularly in some of the larger regional cities and towns up and down the country. Whether it’s down to media coverage, inward investment or large developments, there are key locations such as Birmingham and on the London Commuter Belt that are experiencing incredible growth – making them ideal Buy-to-Let investment destinations.
It’s the tenant demand in these areas that is playing such a huge role in driving higher returns on investment. With rental yields regularly hitting above 4 and 5%, property price growth has followed suit, increasing at unprecedented rates since 2016. The UK market has already seen an increase in the average price of UK flats, which has risen by £1,250 a month since 2013. These price increases equate to nearly £75,000 over the last five years and look set to continue as apartments grow in popularity – especially in city-centres.
Growth of the UK Rental Sector (PRS)
While traditionally, London was the most popular destination to invest, we’re seeing regional cities such as Birmingham seize the spotlight. The level of demand in these locations is growing at an increased rate, driving property price growth up and down the country. This is mostly down to the so-called ‘Generation Rent’ – a demographic that is happy to rent indefinitely following trends from mainland Europe and the USA. .
From young adults to older tenants, Generation Rent is helping push the UK’s private rental sector to the forefront. It’s estimated that by 2039 renters will outnumber homeowners in the market, demonstrating just how big an audience a Buy-to-Let investment could cater to. With the UK’s private rented sector making up a staggering £1.5 trillion of the overall property market, it’s firmly the fastest growing property sector in the country.
Now imagine that you have a quality investment in an up-and-coming market located in the fastest-growing sector in the country? This is why Buy-to-Let remains a popular investment strategy and a key addition to any portfolio.
Rising UK Tenant Demand
With the population expected to swell to around 74 million in the next 20 years, the potential demand for housing is vast. Many of the major ‘first’ cities are falling behind on delivering housing quotas, increasing the impact of the ongoing residential undersupply.
For investors, residential undersupply has the potential to deliver opportunity. With the right investment property in the right location, investors are realising both rental income and capital growth, taking advantage of a competitive market to deliver returns. One finding from the SevenCapital Brexit Survey demonstrates that nearly 85% of investors are currently investing in the UK market, highlighting just how popular UK property remains both an attractive and stable investment for high-net-worth-individuals.
This also shows that the UK Buy-to-Let sector remains a viable opportunity for an investment. Investors would be wise to consider a Buy-to-Let market that is fueled by growing demand, consistent rental yields and low-interest rates that are creating a ‘perfect storm’.
Is Buy-to-Let a Good Investment?
Ultimately, the answer to this question depends on your personal strategy. If you’re looking for access and liquidity – Buy-to-Let probably isn’t for you. If you want stable yields, long-term growth and an asset you can leverage, Buy-to-Let can be an excellent investment.
While a tightening of regulations has affected many people’s perceptions of the Buy-to-Let sector, government changes can always be navigated and even though the process may have changed, there’s enough evidence to show that Buy-to-Let can still provide tangible and consistent returns over a long-term strategy.
“Buy-to-Let properties still remain as popular as investors look at the relatively high-rental yields that can be achieved when compared to interest rates and annuity rates.
“It is relatively easy and people understand it… They are not exposed to investments they do not understand and you can do it yourself without too much technical knowledge. From that point of view, buying a Buy-to-Let is quite an obvious thing to do but you do need to understand the pros and cons.”
Gary Smith, Financial Planner at Tilney
Despite the UK housing market facing uncertainty with recent political events, the Buy-to-Let sector still remains a £1 trillion industry. Unprecedented demand and residential undersupply is creating new opportunities for the smart investor – both domestic and international – and it’s truer now, more than ever, that the right investment in the right location can deliver incredible returns. For investors, a Buy-to-Let property within a wider portfolio can be an easy way of building consistent, adaptable passive income.
What are the Risks of UK Buy-to-Let in 2020?
Trust in developers and construction contractors
As with any investment, there is always an element of risk that needs to be considered. This is why, with property especially, it’s vital to have trusted partners throughout the process. Firstly, take the developer in an Off-Plan investment for example. During this process, it’s vital to know the developer working on the project, the standards they maintain and their performance in the past.
With any Buy-to-Let investment, there’s always a risk of void periods. One of the pitfalls that can affect any investment, void periods occur when the property is empty and no rental income is being generated. Void periods can be particularly damaging when they’re multiplied over a portfolio, especially if the investor is using the income to pay off a mortgage. With no returns, investors may have to use their own money to make repayments which can quickly result in a net loss.
The best way to counter this is to ensure that your investment is in a location with consistent tenant demand. If you can provide accommodation near career opportunities or popular amenities, you’ll find it easier to let. Working with letting agents can help with this, as they typically have a good understanding of the market and local demographics. Seasoned investors will also maintain a ‘rainy-day’ fund that can be accessed in the event of an unexpected void period.
Downturns in the market
Of course, downturns in the market can also negatively affect a Buy-to-Let investment. While investors in a long-term strategy should expect peaks and troughs, UK property has historically shown growth over extended periods provided the investment is in the right location. Maintaining due diligence on the side of the investor, as well as performing the necessary research, can often mitigate any major growth issues further down the line.
As always, make sure that you speak to a financial advisor in advance and during the process – trusted partners are vital and can be a huge difference between success and failure,
Pro Tip: Buying a Buy-to-Let Property Through a Limited Company
Incorporation, a term used to describe the process of buying and managing property through a limited company, is now a main consideration for a huge number of landlords. According to the National Landlords Association (NLA), 42% of landlords with four or more properties are looking to operate through a limited company. With only 31% of landlords with three properties or less considering the same move, it suggests that switching to a limited company is often undertaken when an investment portfolio reaches a tipping point.
So what are the benefits of buying Buy-to-Let property through a limited company?
Better Tax Rates on Profit
If you own the property in your own name, any rental income you make will be taxed under regular Income Tax. If you own the property as a limited company however, you’ll pay using Corporation Tax instead, which in many cases is much less than Income Tax and is set to drop even more by April 2020.
Mortgage Interest Changes
Changes to mortgage relief are coming into effect in April 2020, with some investors looking to limited company status as a way to reduce tax bills. While individuals will have to adhere to how much of their mortgage interest payments can be claimed as an expense (eventually hitting 0% in 2020), it will continue to be an option for companies that hold property. After 2020, mortgage interest tax relief for individuals will be limited to the basic rate of tax, currently 20% and given as a reduction in tax liability instead of a reduction to taxable rental income.
Flexible Company Structure
Having a proper company structure can generally provide much more flexibility for the investor – helping mitigate risk while making it easier to transfer ownership of shares. If you want to move wealth around your family, for example, it’s much easier for limited companies over individuals. When you incorporate, Buy-to-Let income isn’t considered a pension contribution while wages or a salary from a company is, even if its a rental company.
Taxes you need to consider on Buy-to-Let Properties
- Tax On Purchase – Stamp Duty Land Tax
- Tax During Ownership – Income Tax
- Tax On Sale – Capital Gains Tax
- Tax on Death – Inheritance Tax (IHT)
Tax is a vital aspect of any investment in the UK property market. Whether you’re a domestic buyer or investing from overseas, understanding the tax implications can mitigate issues further down the line. Here we run through UK property tax considerations, though every investor’s situation is different and specialist advice should always be sought.
What’s a Good Yield on a Rental Property?
Rental income can be viewed as the ‘lifeblood’ of any property investment. Achieving a good rental yield is vital for any long-term investment, especially if you’re looking for consistent returns to build a wider portfolio or generate a nest egg for later life. This is why sustainability is a huge plus for investors targeting a strategy of generating rental income.
A good rental yield on a buy-to-let property should ensure that there is a positive cash-flow in the property to cover running costs and mortgage payments while also delivering extra income for you as an investor. The average rental yield in the UK property market sits at 3.54%. Ensuring you’re in positive cash flow by picking the right property, in the right location, at the right price is essential to making your buy-to-let work as an investment. If you’re breaking even, you’re not making money and an out-of-the-blue repair could put your investment firmly in the red.
Ideally, you’ll want to be creating small returns in the short-term that can become big returns once the mortgage is paid off. As long as the rental income is covering any mortgage payments, your property is essentially self-sufficient, a strategy that can be applied across a wider portfolio to great success in the long-term. As we move towards 2020 this hasn’t changed. There are still emerging locations in the UK market that are delivering above-average rental yields and demand for regional cities continues to grow.
Want to understand the actual working out? The simplest way to work out your rental yield is with the following equation:
- Take your yearly rental income and divide that by the purchase price and associated costs.
- Take that figure and multiply it by 100 to get the percentage.
When choosing an area based on rental yields, you’ll want to identify a market that is forecasting fantastic tenant demand. This allows you to attract consistent, quality tenants that will deliver consistent, quality rental income. Don’t always choose affordability over quality either. While a property below market value will always be a tempting prospect, if it’s only delivering small yields or unlikely to attract quality tenants then it’s probably not the excellent deal it initially appeared.
Conclusion: Investing in the UK Buy-to-Let Market 2020 and beyond
Ultimately, property shouldn’t be seen as a quick purchase or investment. If you’re looking to buy a home – chances are you wouldn’t be thinking about selling up again in less than five to 10 years. The same thing applies to property investment. It’s likely that you’ll be looking for long-term gains and while no investment is 100 per cent safe, property should be seen as a marathon not a sprint.
This is especially true for those that want to use property to secure their financial future. The new state pension of £168 per week is simply not enough to live off, this is why we encourage investors to look at retirement planning more broadly, especially in terms of investment. Buy-to-Let property can be a useful way to save for a happy and worry-free retirement. For those that are looking to the future, investing in property should rightly be the top consideration when planning a portfolio.
As with any investment, ensuring proper due diligence throughout your journey can stop issues further down the line and working with trusted partners can make the whole process much easier so it’s generally a good idea to speak with specialists wherever possible.