Are buy-to-let properties still worth it?

The reliance on the rental market in the United Kingdom has grown significantly since the beginning of the 21st century.

Indeed, between the year 2000 and 2022 the number of privately rented homes has doubled to 4.6million.

But the cost-of-living crisis is beginning to severely hit private landlords in the pockets and affect profits.

Inflation rates in the United Kingdom in June 2023 were still at 8.7 per cent, with interest rates at 4.5 per cent and grimly predicted to be at 6 per cent by early 2024.

With extra money paid on interest eating deeply into profits, the question remains are buy-to-let properties still worth it?

What has changed about buy-to-let?

First and foremost, property price growth has slowed down in recent years meaning there is more risk involved when purchasing to rent.

The government has also made moves to slow down the buy-to-let market via tweaks to the tax system. In 2016, a 3 per cent surcharge to stamp duty on additional properties such as buy-to-let homes was introduced, while in 2017 there was a reduction in mortgage interest relief, as previously landlords could deduct any interest they pay on their mortgage before paying tax.

What are the advantages?

When it comes to asking if buy-to-let is still worth the risk, it really comes down to what sort of investment you are looking to make.

You will still earn rental income and depending on the area you purchase in this could still be quite lucrative (even if it will be lower than in previous years).

In some popular areas of the UK, such as Liverpool and Glasgow, rental yield is at about 8 per cent for instance, while some areas hover around the 3 per cent mark.

Simultaneously, you may be building capital growth as your money will grow in line with the value of your property increasing.

And if you need a little extra peace of mind, you can take out insurance cover against loss of rental income, damage and legal costs.

If you still need more advice, it might be advisable to speak to a trusted and reputable estate agents.

What are the disadvantages?

With the current state of the economy and the rule changes, you will be hit with a higher tax bill and this in turn is sure to affect your profits.

Additionally, it is vital to have the correct insurance. If you don’t have the right insurance then there is a chance you will be unable to generate income at times your property is not occupied.

Moreover, you capital reduces if property prices fall, while if you have an interest-only mortgage, the shortfall from a property being sold for less than you bought it will have to be made up by you.

You have to think about the cost of stamp duty and insurance, as well as any required renovations and repairs.