F H Manning Buy to Let

3 good reasons why you should invest in the Buy to Let market NOW and 3 reasons you shouldn’t

Pros & Cons of Investing in the Buy to Let Market Now

Rental properties can provide a relatively steady income. As such, it’s easy to perceive the venture as a win-win investment. And more so, when house prices are on the rise and thus consolidating the capital gains of the buy-to-let assets. Equally, properties grant you a familiar feeling, especially when investors notice the rewarding shifts in property value.

Based on the above reasons, the rental market has been an enticing prospect for many investors aiming to capitalise on its growth. But, amid concerns regarding escalating property prices for first time buyers, the government introduced taxation measures to control the buy-to-let industry.

Let’s take a closer look at how the new tax regime affects the buy-to-let lustre.

Disruptive Taxation & Requirements on Rental Income

In the past, buy-to-let investors could shave up to 10% off the income tax dues on rental income for “wear and tear.” Moreover, you could charge the expense despite not spending a single pound on maintenance for a particular year. However, with the current setup, a landlord is only allowed to deduct costs associated with furniture replacement or building work.

Besides catering to a 3% stamp duty surcharge, an investor also has to remit tax based on the property revenue instead of profit after deducting mortgage costs. For many landlords, this change presents a significant drawback on their financing—with a substantial number of investors cutting back on their property portfolios.

Moreover, bureaucracy involving onerous health-and-safety standards coupled with relatively costly licensing requirements may serve to deter potential investors.

In a nutshell, the incoming stringent tax rules have significantly hit rental profit margins. Conversely, with the government clamping down on property owner’s tax perks, how much longer will the buy to let appeal continue to hold?

Will There Be a Reversal of the Buy to Let Tax Changes?

As it stands, the government is intent on dispensing with mortgage interest tax relief by 2020/2021 (slashing it by 25% for each preceding year). In retrospect, a new 20% mortgage interest tax credit will gradually come into operation to provide some respite.

Nevertheless, this won’t significantly shield high-earning buy-to-let investors from the punitive tax charges. As such, if your earnings (including rental income) are in the £46,351 and £150,000 range, you’ll pay 40% income tax. Subsequently, you will only be allowed to deduct 20% of interest payments from your eventual rental income tax bill.

What’s more, with taxation based on revenue, a significant number of buy-to-let landlords (that make up the basic-rate taxpayers’) risk elevation into a higher tax bracket.

How Do the Changes Affect New Landlords?

In the current climate, prospective investors have to grapple with prequalification for a buy-to-let mortgage. And besides proving that you can earn enough rent to secure the mortgage repayment, you will also have to show a 25-45% surplus in rental income over and above the cost of the mortgage.

For an investor to pass the stricter lending guidelines, industry leaders recommend bringing the costs of loans down by raising a significantly larger deposit.

Regardless, it’s not all doom and gloom in the buy-to-let sector—more so with mortgage interest rates plummeting, culminating in significantly lower costs of borrowing.

Is Buy to Let Still Worth It?

As a rental property investor, you must be aware that like any other investment, a buy-to-let portfolio comes with a degree of risk. Consequently, the assets have the potential to either appreciate or drop in value. Furthermore, it’s relatively challenging to get your money out on short notice.

For prudent investors willing to commit to the market, the buy-to-let market offers an opportunity to earn long-term dividends. Subsequently, amid the exit from the sector of casual owners, professionalism is taking precedence—with individuals and companies adopting a more rigorous discourse in identifying the right properties in ideal areas.

Although the boom days may be over, the income derived from buy-to-let assets can still prove to be profitable. However, you will have to match the appropriate financial backing with an aptness for picking low priced properties that present a strong rental demand.

Are you considering investing in the buy-to-let market? Set up a meeting with Claire at clm@fhmanning.co.uk to discuss whether it’s the right move for you or not.