How to be a property investor: Tips for prospective buy-to-let landlords
There are tough times ahead for landlords. Those investors who want to expand their property portfolios now pay a 3% surcharge on stamp duty rates, while April 2017 will see a reduction in the tax relief available to landlords.
The tax hikes mean some landlords may be questioning whether expanding their portfolios is a good idea. The answer very much depends on where you buy.
The LendInvest Buy-To-Let Index examined how the stamp duty surcharge will affect landlords around the country.
It found landlords in London and the south east will need the longest to recoup the extra stamp duty. This is due to high house prices in these areas.
Elsewhere the average house price in 14 out of 105 postcode areas is below £125,000, the threshold at which owner occupiers start to pay stamp duty. But landlords now pay stamp duty on properties bought for less than £125,000. This means many, mostly in the northeast or northwest, will be hit with stamp duty bills of up to £3,750 for the first time.
Christian Faes, co-founder and CEO of LendInvest, says the various measures implemented by the Government are aimed at professionalising the buy-to-let market.
“Professional landlords with large portfolios will simply treat the additional stamp duty costs and the reduction in mortgage interest tax relief as business costs. They will factor them into their business plans and adapt those plans in order to minimise their impact,” he says, “But for the amateur landlord, perhaps with only one investment property, buy-to-let is now a much less alluring prospect. As a result they may look to alternative ways to make money from property, outside of actually buying one to let out."
It’s not just stamp duty landlords need to take into account when expanding their portfolios, but the other costs of buying a property. Surveys cost from about £250 for a basic report to £600 for a full structural survey, while legal fees are usually between £500 and £1,500 depending on the property.
Those landlords buying with a mortgage will also need to factor in mortgage arrangement fees. Arrangement fees on buy-to-let mortgages can be up to £2,000, and are generally higher than on residential loans.
Landlords thinking of adding to their portfolio must take these costs into account and work out whether the rental yields and potential capital gain make a purchase worthwhile.
The LendInvest BTL Index uses “price paid” data from the Land Registry and measures rental yields and capital gains around the country.
Looking at the time period 2010 to 2016, the index found the areas with the highest rental yields were East London with 7.4%, Manchester with 6.8%, and South East London with 6.7%. The average rental yield across the UK for this period was 5%.
London landlords also saw the biggest capital gains with an average of 13.8% a year in south west London. However, 20 postcodes, mostly in the north of England, saw a decline in the average house price of up to -3.7%.
Total months of rent needed for landlords to recoup the higher stamp duty cost
|10 areas wheres stamp duty recouped most slowly||Total months' rent to repay higher stamp duty|
|Western Central London||23.1|
|South West London||22.6|
|East Central London||22.1|
|North West London||20.9|
|Kingston Upon Thames||19.4|
|10 areas where stamp duty recouped most quickly||Total months' rent to repay higher stamp duty|
|Newcastle upon Tyne||6.8|
Source: LendInvest. Calculations made using median prices. Data collected from Zoopla (time period 1 January 2016 to 17 February 2016).
Expanding or potential landlords should remember that past performance is no guarantee of future gains. With some property experts now calling the top of the market, investors should think carefully before buying further properties.
- Don’t miss the first articles in this series, Our national love affair with property, A history of property prices and Property versus pensions.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.