The total return of the average buy-to-let property has reduced by 6% over the last two years, driven by a sharp increase in mortgage costs and agency fees and a reduction in capital appreciation.
This comes despite rental income climbing by 19% on average over the same period.
Octane Capital analysed the cost of being a landlord, looking at the initial investment required when investing in a buy-to-let, as well as the ongoing costs associated with such an investment versus the total return expected in the current market.
Octane then compared this current cost (2023/24) to the same data from two years ago (2021-22) to see how the sector has changed when it comes to buy-to-let profitability.
Initial start-up costs down 17%
The research shows that the initial start-up costs associated with a buy-to-let investment have fallen by 17%, down from a total of £12,037 in 2021-22, to £9,952 today. While tenant finding fees have increased by an estimated 19%m this decline has largely been driven by a reduction in stamp duty and the cost of tenancy deposit registration fees.
Ongoing costs up 18%
However, the analysis shows that the ongoing costs associated with maintaining a buy-to-let investment have increased, climbing by 18% over the last two years to a total of £15,592 per year. This increase has predictably been driven by higher mortgage rates, with annual mortgage interest up 25% to £10,210 per year on average. Agency management fees are also up 19% annually, while the cost incurred as a result of void periods has climbed by 7%.
Buy-to-let rents up 19%
Despite an increase in costs, landlords have still enjoyed a boost to the total returns generated from their buy-to-let investment. In fact, the average rental income has increased by 19% over the last two years, now totalling £15,144 per year. As a result, the average yield of a buy-to-let property investment also climbed from 4.9% to 5.8%.
Capital appreciation down 6%
It’s important to note that this has also been influenced by an uncharacteristically underperforming property market, with the capital appreciation seen on the average buy-to-let property falling by 6% per year to £15,728.
Total Returns down 6% year on year
The effect of all of the above is that the net return of a buy-to-let property investment sits at £15,280 on a yearly basis when weighing up the ongoing cost vs rental income and capital appreciation. This sits 6% below the net return seen two years ago when the average landlord saw £16,285 per year in capital appreciation and rental income after accounting for the ongoing costs associated with a buy-to-let investment.
Octane chief executive Jonathan Samuels, stated “the average landlord has benefited from a very healthy level of rental income growth in recent years and so while the level of capital appreciation seen on their property may have cooled, both aspects of their investment are still bringing healthy returns despite the instability of the current market landscape. Of course, higher running costs, most notably as a result of higher mortgage rates, have dampened the overall net return they’ve seen. But it’s fair to say that this reduction in net profits has been fairly marginal considering the current economic landscape and the storm of property market uncertainty that we’ve weathered in recent months.
There are still a great deal of opportunities available that will allow buy-to-let investors to reduce their borrowing costs in the current market and utilising a specialist lender is the best way to secure these. It's important to note that the government’s insistence on making tax digital will add a further cost to consider, although with an initial start up cost of £350 and an ongoing cost of around £110, it’s unlikely to reduce the appetite for investment. While the government is also looking to tempt more landlords away from the sector with their reduction in capital gains tax, our research shows that it remains a profitable endeavour, albeit slightly less so today versus a few years ago.”
Good time for landlords to buy, insists investment expert
The latest Halifax house price index results, which show mixed fortunes for the housing market, should be seen as a spur for landlords to expand their portfolios.
The Halifax says that average UK house prices grew in March on a quarterly basis, by 2.0%, with annual growth slowing to 0.3%, from 1.6% in February. But compared to a month ago, the price of a UK property fell 1.0% or £2,908 in cash terms, with the average property now costing £288,430.
That presents an opportunity for landlords, claims Yasin Patel, co-founder of investment specialists Autarky Sukuk. “House price growth experienced a slight cooling in March, but annual prices are still at healthy levels considering the turbulence of last year. Inflation is proving a tricky beast to fight and this is prompting fears that the Bank of England will be much slower to lower interest rates, which keeps the cost of borrowing at more punitive levels.
Landlords should be assured that now is a good time to buy. Slowing house price growth brings more opportunities to grab a bargain. With rent rates at record highs, the potential yield that investors can get on returns is still attractive. The next few months will be crucial for the industry, as the warmer months are typically some of the busiest in the calendar year. If we see this slowdown continue, we may need to be more realistic about how big the great property bounce-back will be.”
5 top tips for navigating responsibilities
Landlords play a crucial role in providing safe and comfortable housing for tenants while also managing rental properties effectively. Staying informed about legislation and understanding obligations is essential for success. Read on to understand our 5 top tips for navigating landlord responsibilities.
1. Keep up to date with legal requirements
It’s important to stay up to date on landlord-tenant laws and regulations to ensure compliance. This includes understanding responsibilities regarding rent and deposits, Gas Safety, Energy Performance Certificates, property maintenance, smoke and carbon monoxide alarms and eviction procedures. Failure to comply with legal requirements can result in costly legal action and penalties.
At The Mortgage Works we understand that landlords are facing intro greater and more complex regulation, which can become overwhelming. Our Help centre provides relevant information and helps simplify complex regulation.
2. The importance of tenant screening
Screening potential tenants thoroughly is vital for protecting the property and ensuring a positive rental experience. Landlords must firstly ensure the immigration status of any prospective adult tenant before a property is rented out. This is a legal obligation and is to check the prospective tenant has a right to live in the UK and to rent, also known as a Right to Rent check. This can be done by asking for an original passport or residency status document and by making copies to keep for your records. The following will need to be checked on these documents:
- That the documents are originals and belong to the tenant
- Ensure the photos on the documents are of the tenant
- Confirm the dates of birth are the same in all documents
- There is no damage to the documents or that they don’t look like they’ve been changed
- If there are any differences in names, supporting documents are provided to show why, such as a marriage certificate
It would also be beneficial to carry out checks that can include:
- Verifying employment and income
- Evidence of previous rental history
- Contacting previous landlords or an employer for references
- A credit check which can be carried out with permission from the prospective tenants
Choosing reliable and responsible tenants can reduce the risk of late payments, property damage, and eviction disputes.
3. Ensure the property is well maintained
Ensuring that the rental property is in good condition is crucial for attracting and retaining tenants. Regular inspections, prompt repairs, and preventive maintenance are essential tasks for landlords. It’s recommended that the property is inspected no less than every 3 months. It’s also important to check your landlord insurance before deciding on the appropriate frequency as not doing them regularly enough might invalidate any future insurance claims made.
To organise an inspection, written notice must be given at least 24 hours before. If repairs need to be carried out, then the tenants should be given reasonable notice. Reasonable notice should be at least 24 hours' notice, however in the case of emergency repairs, shorter notice can be given.
Addressing maintenance issues promptly not only keeps tenants happy but also helps preserve the property’s condition and value.
4. Establish effective communication
Clear and open communication with tenants is key to successful landlord-tenant relationships. It’s recommended that an agreed channel of communication is established from the start.
It’s important to also be responsive to enquiries, address concerns promptly, and provide important information such as how to pay rent, maintenance and repairs, and emergency contacts in an easy to access manner. This information can be provided within the tenancy agreement alongside how rent will be reviewed, the deposit scheme and bills the tenant is responsible for.
Establishing good communication from the beginning can help prevent misunderstandings and conflicts later on.
5. Manage finances
Managing the financial aspects of any rental property requires careful planning and organisation. From setting up costs, to managing the tenancy and cost-effective ways to boost your finances here are some things to consider:
Understanding allowable expenses – which is any expense related to the letting of a property – can help provide a clearer picture of costs and profit. Allowable expenses might include landlord insurance, Gas Safety Certificates, utilities if any and others.
Letting agent or DIY? Landlords can opt to take care of all aspects of property management from advertising the property to finding and screening tenants and the costs can add up. There is also the option of having a letting agent manage the property. Options can vary, from simple tenant find or let only, to full property management, the costs associated will depend on what the requirements or needs are.
Creating a budget as well as keeping track of invoices and receipts will help landlords make sure they are making good financial decisions. It might be worth considering good accounting software to help keep on top of finances.
It’s important to keep accurate records of income and expenses, budget for maintenance and repairs, and set aside funds for unexpected costs. It can be complicated but with good strategies in place, it’s possible to effectively manage finances and ensure a profitable rental business.
The private rental sector continues to play a significant role in the UK housing market. While affordability concerns, regulatory changes and market volatility all contribute to the challenges within the sector, there is room for success through being a proactive and well-informed landlord.