Buy-to-let property investment has been a popular way for people to generate income and build wealth in the UK for many years, as it has been seen as a reliable and safe investment. However, the cost-of-living crisis, increasing inflation and changes to the tax and regulatory environment have led some investors to reconsider. So, is buy-to-let property investment still a viable and safe investment in 2023 and 2024? In this guide, we’re going to explore it further.
What are the key changes that have made buy-to-let less attractive?
Higher stamp duty
Since 2016, anyone buying a second property has to pay an additional 3% of stamp duty tax. This means that on a £300,000 buy-to-let purchase, an investor would pay £9,000 more than someone buying their own home.
Restrictions on tax relief for mortgage interest
Since 2017, landlords have been losing the ability to offset mortgage interest payments against rental income for tax purposes. Currently, landlords can only deduct 20% of their mortgage interest payments from their rental income.
Increased regulation
The government has introduced a number of new regulations in recent years that landlords have to comply with. These include new energy efficiency standards, new requirements for smoke and carbon monoxide alarms, and new rules on tenancy agreements, such as the Renters Reform Bill. Although this legislation is unlikely to be passed in 2023, it is still a possibility that needs consideration.
What is the Renters Reform Bill?
The Renters Reform Bill aims to give tenants in the private rental sector more protection, security and a better standard of living. Some of the main points include:
Ending Section 21 ‘no-fault’ evictions
Landlords will not be able to serve a Section 21 at the end of or during a tenancy without cause unless the contract is over.
Limits on rent increases
Landlords will be unable to increase the rent of a property more than once in a 12-month period. It will also put limits on the amount a landlord can ask for at the start of a tenancy, and mandate a 2-month notice period for any rent increases.
Decent Homes Standard
Aimed at ensuring minimum standards of rental homes, landlords will have to ensure their properties have adequate facilities and meet standards regarding quality of living.
EPC Standards
With high energy prices and the cost-of-living crisis biting tenants, landlords will have to ensure their properties meet minimum EPC standards. By 2025, all rental properties must have a minimum of EPC grade C – currently, it is Grade E.
Pets
Landlords will no longer be able to ban tenants from having pets at the property, unless under very specific circumstances like allergies. However, landlords may be able to mandate tenants to buy insurance to cover any damages caused by pets.
What are the pros and cons of buy-to-let investment in 2023 and 2024?
Pros:
Potential for capital growth
Over the long term, property prices in the UK continue to grow. Landlords therefore have the potential for capital appreciation of their property, as well as from rental income.
Regular income
Rental income can provide a regular and reliable stream of revenue. This can be particularly attractive to investors who are retired or desire a supplementary income.
Asset building
Many buy-to-let landlords have multiple properties in their portfolios. As they increase in number and value over time, so will your asset net worth.
Cons:
High upfront costs
The upfront costs of buy-to-let investment can be high. These include the purchase price of the property, stamp duty, legal fees, and any refurbishment costs. As property prices continue to rise, this only becomes more pronounced and will require higher rental incomes to cover your investment.
Ongoing costs
There are a number of ongoing costs associated with buy-to-let investment, such as mortgage repayments, insurance, maintenance, and repairs.
Risk of void periods
There is always the risk that your property will be empty for a period of time, meaning that you will not be receiving any rental income.
Regulatory burden
Landlords have to comply with a number of regulations, which can be time-consuming and expensive. Many landlords decide to employ a property management company to reduce this workload.
Is buy-to-let still viable for developers and investors in 2023?
Despite the challenges, buy-to-let can still be a viable investment for developers and investors, both individuals and companies. However, it is important to do your research carefully and to understand the risks involved. With an incredibly volatile economy and high levels of inflation, there is no guarantee that your investment will grow or even maintain its value.
What are the key factors to consider when making a buy-to-let investment decision?
Location
The location of your property is one of the most important factors to consider. You need to choose a location where there is a strong demand for rental properties. Generally, London and the South East is considered a solid location for rental properties. You should also consider the potential for capital growth in the area.
Type of property
You need to choose the right type of property for your target tenants. For example, if you are targeting young professionals, you may want to consider buying a one or two-bedroom apartment in a city centre location. If you are targeting families, then a three or four-bedroom house in a suburb may be a better option.
Affordability
You need to make sure that you can afford the monthly mortgage repayments, as well as the other ongoing costs associated with buy-to-let investment.
Your financial situation
You need to make sure that you are in a good financial position to make a buy-to-let investment. This includes having a good credit score and a healthy deposit. Investments can always decrease as well as increase in value, and with an unpredictable economy, you need to have the financial resilience to weather any storms.
Whether or not buy-to-let is still a good investment in the UK in 2023 and 2024 depends on a number of factors, including your individual financial situation, your investment goals, and the property market in the area where you are looking to invest.
There are opportunities still in buy-to-let properties but the heydays of simply buying another house to let out for some additional income are now behind us. Thorough research and a full grasp of all the legislation combined with purchasing at a good price in a great location are now essential to make a decent return.
Buy-to-Let Property Development
One option instead of buying an existing property is to develop your own. This has many advantages such as being able to choose the type and style of property you’d like, ensuring it’s of high quality and can therefore command a bigger rent, and you’re also able to meet demand in the local area.
However, it is of course a big investment in time and money. At Hunter Finance, we’re the experts in Property Development Finance and have helped fund projects of all sizes across London and the South East. Contact us today for more information about financing your next buy-to-let development project.
