Is a Buy-to-Let Investment worth your time in 2022?

Modifications to mortgage interest deduction and a surcharge on stamp duty for second houses have caused many landlords-to-be to reconsider the viability of buy-to-let. In addition, due to changes in tax legislation, the earnings of many landlords have plummeted. Should you thus abandon real estate, or is it still a sustainable source of income?

How has Buy-to-Let Changed?

Although property prices have been increasing steadily over the last 100 years, there are other things to consider. This increase in property price has been an offset against the increased cost of owning a property. In addition, the government has tightened its grip over the buy-to-let sector in recent years by modifying the tax structure. First, in 2016, a 3 percent stamp duty surcharge was applied to other properties, such as second houses and buy-to-let investment properties.

The government has reduced mortgage interest relief since 2017. The prior system allowed landlords to deduct the mortgage interest before paying tax. This effectively provided a 40% tax break on mortgage payments for higher-rate taxpayers. Now, landlords will receive a tax credit equivalent to 20% of their mortgage interest.

This won’t have a negative impact on the majority of landlords who were previously paying the standard tax rate, but it will primarily affect higher or maximum-rate taxpayers. However, landlords will be required to report their mortgage payment income on their tax returns (under the old system, they could declare rental income after deducting mortgage repayments). This apparent income increase may push specific individuals from the basic to the higher rate, resulting in a larger tax liability.

Since mortgage interest benefits are no longer available, many landlords’ profits, particularly those who pay taxes at the highest rate, have decreased dramatically. They are no longer eligible for the complete 40% tax relief on their mortgage payments, so their tax relief is essentially halved.

The new regulations are strict for landlords with interest-only mortgages (most of them are) paying higher tax rates. A landlord who pays £500 per month in mortgage interest and earns £1,000 per month in rent is an example of how their taxes have changed.

The response to this question extends beyond the tax problem. It relies much on the sort of investment you seek and the purpose of your investing activities (i.e., why do you need the money?). Here are some advantages and disadvantages of buy-to-let as an investment strategy.

Benefits of Buy-to-Let

• You’ll generate rental revenue with buy-to-let property investment. In some areas of the United Kingdom, such as Birmingham, Bradford, and Liverpool, the rental yield is as high as 8%, whilst in other regions, it hovers around 3% in London.
• Generally, for Buy-to-Let landlords, they can earn more than 10% return on capital invested.
• On average, investors can increase their rental income by 3-5 % annually. 
• Your property’s value rises, you’ll be able to reap the benefits of capital growth. Since 1980, the average house price has increased by 1,096 %.

Downsides of buy-to-let

• Your tax burden will be more than it was in the past, reducing your earnings. However, there are other property investment strategies to minimize your tax on rental properties. 
• If you do not have the proper insurance, you may not earn a profit if the property is vacant. You may get insurance to cover rental revenue loss, property damage, and legal fees.
• If property values decrease, your capital will decrease. And if you have an interest-only mortgage, you will be responsible for any deficit if the home sells for less than what you paid for it.
• You must consider the price of insurance, stamp duty and wear and tear.
• Being a landlord is a major commitment.

Numerous individuals prefer buy-to-let as their retirement income, sometimes withdrawing tens of thousands of pounds from their pension fund. Before exploring this possibility, you must consult with a financial advisor. Accessing your retirement savings might have significant repercussions and potential tax fines.

There usually are five phases involved in becoming a landlord:

Step 1 – Organise your finances. Now is the moment to see a financial advisor to determine the amount of money you should invest and the rate of return you should target. Also, consult with a mortgage broker to obtain the finest deal (or mortgage in principle) so that you are prepared to make offers when you locate the ideal house.

Step 2 – Find the property you desire and get your offer accepted. This might be faster than purchasing a house if the property is already available to rent – but it might not be. The procedure can be time-consuming, so be patient! It might take 8-20 weeks to complete the process.

Step 3 – Obtain insurance. In addition to building insurance, you should safeguard against unforeseen expenditures such as tenant injuries, property damage, and rent loss.

Step 4 – Find tenants. You can discover tenants through an agency or independently. How involved you choose to be will determine which choice best suits you. However, even if you hand-select your renters and know them well, you should create a legally enforceable contract.

Step 5 – Buy-to-let is a substantial investment. When your current mortgage agreement expires, you must continue to review your mortgage and do any necessary repairs on the property. Again, an accountant can assist you in ensuring that your income from buy-to-let is managed in the most tax-efficient manner.

What are Some Viable Alternatives for Buy-to-Let?

As an investment, buy-to-let has much to offer: a regular source of income and the possibility for a long-term return from the property’s growth. In contrast, it is a high-maintenance investment, and your asset is locked up for an extended period and difficult to access (i.e., it is illiquid).

Depending on your investment objectives, you should assess whether any alternatives are more suitable.

Real-estate investment funds

If you want to engage in the real estate market without having to replace the boiler every other winter, real estate investment funds may be a possibility for you. You can combine your finances with those of others and invest in commercial properties through investment firms that trade on public marketplaces. In recent years, the average return has been 10 percent, but these are long-term investments that typically require locking away funds for several years. However, it is a more liquid investment than outright property ownership.

Government & Corporate Bonds

Bonds are a relatively steady and low-risk investment option, but some are riskier than others. Bonds are loans made by an investor to a borrower (typically a government or big organisation) and repaid over a certain period at a fixed interest rate.

In addition to government bonds (gilts), significant firms around the United Kingdom offer these investments with yields typically around 5 percent. Moreover, you can invest your money for as little as one year or as long as ten years.

Peer-to-peer lending / Crowdfunding

Multiple platforms provide direct lending to small enterprises and individuals. Peer-to-peer (P2P) lending typically generates more significant returns than cash savings or bonds since it eliminates the intermediary. The Financial Services Compensation Scheme does not protect your funds, and the risks are larger than with either option. However, this is a wonderful platform for investors willing to take on a bit more risk for more enormous potential profits. Moreover, you may invest lesser amounts than you would in real estate.

Stock & Shares

Considered to be high-risk investments, shares are volatile and susceptible to value declines and increases at different times. The average return on stocks over the long term is between 8 and 10 percent so that they can benefit patient investors. Your money is not tied down for a really long time. However, be prepared for a difficult journey and avoid investing money you may need in the coming years.