We use cookies to allow us and selected partners to improve your experience and our advertising. By continuing to browse you consent to our use of cookies as per our policy which also explains how to change your preferences.

Thousands of landlords are ditching buy-to-let: can you still make a profit?

4,000 rental homes are being sold off by landlords each month

New tax burden for landlords

Landlords are selling off thousands of homes each month as tax and financing reforms continue to affect their profits.

Recent data from the Ministry of Housing, Communities and Local Government (MHCLG) shows that this sell-off resulted in the biggest drop in rental homes in England since 1988.

Here, we take a look at the factors affecting landlord returns and offer advice on how you can still make a profit out of buy-to-let.

  • If you’re a landlord and need advice on financing your buy-to-let portfolio, call Which? Mortgage Advisers on 0800 197 8461 for impartial, expert advice.

Landlords selling up buy-to-let properties

Data from MHCLG shows that almost 4,000 buy-to-let homes have been sold off by landlords each month.

This means that the number of properties in England’s private rented sector dropped by 46,000 last year, the largest reduction in 20 years. The overall stock of rental properties last year was 4.79m.

There are also signs that would-be landlords aren’t willing to jump into the market.

Stats from UK Finance show that only 5,500 buy-to-let mortgages were granted in May – a drop of nearly 10% year-on-year.

 


Why are landlords leaving the market?

A raft of taxation and regulatory changes brought in over the last few years have eaten into the profit margins that landlords could expect.

Mortgage interest tax relief changes

The amount of mortgage interest landlords can deduct from their income when filing their tax bill has been tapering off since 2017. In the 2017-18 tax year, you’ll only be able to offset 75% of your interest, and this figure will drop by 25% each tax year.

This will continue until 2020, when the tax relief is replaced by a flat 20% tax credit.

Stamp duty surcharge

The 3% stamp duty surcharge for buy-to-let investors has had a major effect on property investment since its introduction in April 2016.

The extra charge means landlords buying a £250,000 buy-to-let will now face a stamp duty bill of £7,500, compared with £1,500 before the rules were brought in.

Lending rules being tightened

Almost a year ago, tougher lending restrictions came in for landlords with four or more properties.

These rules require investors to show full financial information for each property in their portfolio when borrowing extra funds, rather than just their overall profits.

For heavily mortgaged landlords, this can mean greater difficulty in obtaining cash to expand portfolios.

Can you still make a profit as a landlord?

This might all sound like bad news, but don’t worry; there are still things you can do to give yourself a better chance of turning a profit.

Take your time and choose the right property

Think beyond the cheapest and most-expensive areas when doing your research, and consider the balance between rental yields and capital growth before rushing in.

While a cheap home might have potential to grow significantly in value in the future, remember that lenders will want to see projected rents that cover at least 145% of your monthly mortgage payments.

Make the right decision on property management

If you’re not a professional landlord and you’re thinking of buying a property 300 miles away, you’ll probably need to employ an agent to look after it for you, and that’s going to cost you money.

While this doesn’t mean you should only look at homes around the corner, it’s important to think hard about how much time and effort maintaining a let will cost you, and to weigh up the pros and cons of using a property-management company.

Find the right tenant

Think about who might want to live in your property, and focus on making it as attractive as possible to that ideal tenant.

While millennial flatsharers might want a furnished, modern property, a young family may prefer an unfurnished home they can think of as a blank canvas.

Void periods are your biggest enemy as a landlord, so do everything you can to find a tenant who’ll be there for the long run.

If you’re a portfolio landlord, think about incorporating

Landlords are setting up limited companies to hold their portfolios, but this only really makes sense if you’re a professional landlord.

For other investors, breaks on mortgage interest tax relief will be counteracted by capital gains tax, stamp duty costs when transferring homes to the company and higher mortgage rates.

How does the landscape look for landlords in 2019?

There are a couple of major reforms on the horizon for property investors.

  • Letting fees ban: The government plans to bring in a ban on letting agents charging fees to tenants. While it’s still unclear how the policy will work, these changes could add to the upfront costs of letting a property. The ban is likely to come into force at some point in 2019.
  • Minimum tenancies: A government consultation into minimum tenancy periods – which could result in default three-year tenancies with six-month break clauses for tenants – closed last week.

How to get advice on financing your buy-to-let properties

If you need some impartial, expert advice on financing your property portfolio, you can fill out the form below for a free call back from a mortgage adviser.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

Back to top
Back to top