For the past few years, there has been a succession of reports in the media about landlords selling up and quitting the industry.
It’s true that as legislation has been tightened and renters’ rights have been prioritised, it now takes more time, effort and knowledge to succeed as a landlord than it did in the past.
But for those who run their portfolio as a professional business and take the time to understand the ever-evolving market needs, or work with a qualified agent who takes care of these things for you, buy-to-let can still deliver great returns.
Rather than being a sector going through a slump, as many headlines seem to suggest, we think it could actually be a great time to be a landlord.
Two-thirds of the UK’s landlords are still planning to invest in the PRS this year, even as uncertainty over tax and costs weighs on confidence, according to a recent survey revealed from Landlord.
Here are four good reasons why:
1. Demand is continuing to outstrip supply for many properties
For many years now, the private rented sector (PRS) has not been able to provide enough homes to meet demand – and that’s across all tenant types, from young adults wanting to rent a room to families looking for an unfurnished long-term let. The population is growing, and the private rented sector (PRS) isn’t.
In England and Wales (ONS data), the size of the PRS peaked in 2016/17 at 20.3% of all housing, with around 4.8 million dwellings. The latest figures (for 2023) reveal that the PRS now accounts for 18.8% of housing, and that the number of homes has barely changed over seven years.
During that time, 2016-2023, the population increased by almost 2.5 million or 4.25%, and a large proportion of those additional people require rented accommodation. In England alone, there are currently 1.3 million households on the waiting list for social housing – the highest figure since 2014 – and 139,000 people in Wales.
And while the social housing sector is failing to provide sufficient homes, the PRS is stepping in to fill the gap. Around a third of households renting from a private landlord receive Universal Credit, which includes housing cost support.
The imbalance between supply and demand is good news for landlords as:
- Void periods between lets are likely to be minimal.
- Rents are likely to continue to increase well.
- Landlords also benefit from having a choice of which tenants to accept.
2. Rents are rising faster than the historic average
Every month for the past three years, average UK private rents have consistently risen at an annual rate of more than 5%, with an overall average of 7.4% annual growth (ONS) – far in excess of the historic average of around 2%. Although growth has slowed this year, in the 12 months to August, average UK rents still increased by 5.7%, up by 5.8% in England and 7.8% in Wales.
Zoopla’s latest rental market report, which tracks new lets, shows that rents have increased by 36% since 2020, while average house prices have risen by around 20%. That means yields and income returns should have improved for many landlords. Average yields across the UK are now around 6%, and higher in more affordable areas, including the North East and Scotland.
3. Mortgage rates are falling
After high inflation caused a spike in interest rates in 2023 and many landlords coming off fixed deals found their repayments increasing significantly, the market has thankfully settled, and rates are now much closer to the long-term average of 4%-5%.
Capital Economics has forecast that it will reach 3% by the end of 2026.
So, if you’re buying in the next few months and can make the figures work with today’s rates, when you next come to refinance, you should be able to move to a better deal and see your monthly repayments go down.
4. For most, capital growth is at least keeping up with the rate of inflation
As a landlord, inflation is one of the most important metrics to track – both for rental income and capital growth – to ensure the value of your investment profits doesn’t drop.
And the good news is that, although average house prices have been relatively stagnant over the past three years – rising only 1.5% according to Land Registry data – the increases we saw in the previous few years more than compensate for that slowdown.
In the five years from August 2018 to August 2022:
- The average UK house price rose by £51,506 / 24% / 4.8% per annum
- Terraced houses rose on average by £47,292 / 27% / 5.4% per annum
- Inflation rose by an average of 3.5% per annum
And over the last decade:
- The average UK house price rose by £83,682 / 45% / 4.5% per annum
- Terraced houses rose on average by £75,137 / 49.5% / 4.95% per annum
- Inflation rose by an average of 3.9% per annum
With the value of the average property rising consistently at or above the rate of inflation in most areas, landlords’ investments are increasing in real terms, providing equity gains.
Although that’s just an average, and not every property will be rising in value, it does mean that if you have bought in an area of high growth, your equity growth should be beating the figures above.
To get the best capital returns, it’s important to carefully research an area before buying to ensure the economic and demographic fundamentals for growth are in place.
What funds are required?
- Deposit - If buying off plan, this is required too take the property off the market
- Exchange - Following the deposit payment, you will then enter the exchange period. This is where you exchange contracts on your property, and when you will need to make the next payment. In most cases, the exchange payment will be between 10% and 20% of the value of the property.
This is due immediately and must be paid in funds you have available from savings for example. There is no option to use a mortgage at this stage, so make sure you have the funds available for the exchange fee before you put the deposit down. If you cannot pay the exchange fee, the deposit is non-refundable, and your purchase will be voided.
- Completion - Eventually, you will need to pay the rest of the balance. Normally, this will be on practical completion of the property as part of the final handover process.
At this time, there are two options available to you:
- Pay the whole amount in cash
- Use a buy-to-let mortgage
- For investors who choose to use a mortgage, a far smaller sum of cash is required to invest in UK buy-to-let property. In the majority of cases, lenders will offer a maximum of 75% Loan-to-Value, which means you will need to supply just 25% of the total value of the property to invest in UK property.
Additional up-front costs when investing in buy-to-let property
As well as the funds required for the reservation and purchase, you will need to pay up front for a range of other expenses, including:
- Conveyancing – The legal process that goes with buying a property in the UK.
- Survey – The cost of a property survey if one is required.
- Mortgage product fees – If you are using a mortgage, it may come with a one-off product fee.
- Stamp Duty Land Tax (SDLT) – If the property qualifies for SDLT, you will need to have money available to pay this tax.
In addition, it is worth considering the costs of operating a buy-to-let property after your purchase. You should set aside funds to cover any maintenance and repairs that need doing, along with a reserve fund to cover any potential void periods.