Is now a good time to invest in buy-to-let?

5 min Read Published: 21 May 2014

is now a good time to invest in buy-to-letLast week the Sunday Express asked for my opinion on whether now is now a good time to invest in buy-to-let? The full article can be found here - 'A guide to the ins and outs of the buy-to-let housing market'. But below I take a more in-depth look at whether buy-to-let is a good investment as well as the potential returns and costs involved. So is now a good time to invest in buy-to-let?

What annual income can I expect from buy-to-let?

With average gross rental yields in the UK currently around 5% this equates to around £7,500 p.a. on a £150,000 property, which is much higher than leaving your cash on deposit

What capital return can I expect from a buy-to-let investment?

House prices are on the way up again, after a few years in the doldrums, and across the UK property prices have increased by around 7% in the last 12 months, this would equate to £10,500 on a £150,000 property. However, buy-to-let should always be viewed as a long term investment and a prospective investor must understand the risks involved.

What are the current rates on buy-to-let mortgages & what size deposit do you need?

Broadly there are some lenders offering products with a 20% and (from time to time) 15% deposit on buy-to-lets, but rates are high and rental income criteria tight. To get a decent product you need 25% deposit, expect some sub 3% two year rates but these have fees that can amount to 3 or even 4% of the loan (so expensive), better options with lower fees (typically below £1500) are quoting rates around 3.3 - 3.8% over two years and around 4.5 - 4.8% on the five year fixed rate options.

What are the costs involved with a buy-to-let investment

  • Initial costs - as with the purchase of any property there are costs involved at the outset such as stamp duty and legal fees and other costs in making the property suitable for rental
  • Ongoing costs - obviously a major cost would be the payments on a mortgage if finance is used, other costs such as insurance, maintenance, letting agent fees and loss of rent due to void periods add to the total ongoing costs
  • Taxation - any income from a buy-to-let investment is taxable and any profit made when the property is sold is also taxable, there are a number of allowances available as discussed in this articles - Guide to tax on a rental property

What are the drawbacks to investing in a buy-to-let

  • Risk - there are risks in most investments and buy-to-let is no exception, there is no guarantee that your income will be regular (due to void periods) and no guarantee of growth in the property value
  • Narrow investment choice - investing in just one asset class (i.e. property) leaves an investor exposed totally to the performance of that asset class, investors should always look to create a balanced portfolio across a number of asset classes
  • Long term - investing in property is a long term strategy with no guarantees whereas leaving your investment in cash will provide instant growth on your savings
  • Void periods and rent arrears - income can at times be irregular due to periods without a paying tenant, in addition tenants tend to not treat a rental property as they would their own resulting in ongoing repair costs
  • Illiquid investment - realising your investment in a property can take months so you should never invest in a buy-to-let if you could need access to your cash quickly

So is a buy-to-let property a good investment?

If you have done your homework and are comfortable with the risks for the potential reward then buy-to-let can play an important role in your investment portfolio.

A buy-to-let investment can also be very hard work with maintenance and tenancy issues taking up both time and money. It comes as no surprise, therefore, that in my experience most buy-to-let investors never progress beyond their first property.

(image: Salvatore Vuono)

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