You can hardly look at a newspaper without seeing articles heralding the death of buy-to-let, mostly thanks to some recently announced changes to the English tax system. Here at Brokers Direct we started wondering about whether or not the death of buy-to-let has been overstated.
The Bad News
True, tax changes set out in 2015 mean that the profitability of buy-to-let does stand to take a knock – figures from an article in The Guardian suggest that someone with a £150,000 buy-to-let mortgage and a rental income of £9,600 will stand to see their net profit more than halve from £2,160 to just under £1,000.
On the face of it, this is a brutal blow to the buy-to-let industry. But it’s perhaps worth bearing in mind that, for many, a big part of the profit comes from the sale of the property when selling up after many years of letting it out.
Still, doing that successfully can require some very smart buying and/or having a bit of luck on your side, so it’s still worth asking if there’s any way to avoid the upcoming tax changes.
Is Buy To Let Dead?
Unfortunately, barring selling up – which many buy-to-let barons are now doing – or tax evasion (we don’t recommend this unless you fancy a stint in prison), the short answer is no.
But there are a couple of things you can do, or find out more about, to help prepare yourself for how buy-to-let is set to change in the future.
Raise Your Rents
Yes, not a particularly big or clever one this, but upping how much rent you charge is one way to navigate the lower rates of tax relief that will soon affect buy-to-let landlords.
Of course, the flipside is that tenants may be put off by higher rents and look elsewhere… though it remains to be seen whether or not virtually all private landlords will end up putting up their rents as a result of these changes.
Converting Properties Into Student/Shared Accommodation
Odds are that, no matter how well appointed it may be, you can never match the rent you get from a two-bedroom house with that of a five-bedroom property. Students, young professionals or whoever else they may be, there are folks out there who are willing to share.
More rent inevitably means more profit, even when there’s more tax to be paid. But, be aware that converting in a way that prohibits single occupancy down the line may well affect the potential future sales value.
Bigger Deposits Or Repayment Mortgages
A broker in the know, Mark Harris with SPF Private Clients, suggests that we’re “moving towards a situation where only those with a 50% deposit are likely to qualify” for buy-to-let mortgages.
Banks may also increasingly be looking to offer repayment mortgages, rather than interest only, which ups monthly payments for the borrowers.
Buy-to let is rapidly becoming something with a prohibitively high entry point but, because of changes to tax relief, now has a lower ceiling in terms of potential earnings unless you expand your empire. And even then, many people already in that situation are selling up.
The dream may not be dead (yet), but expect it to be much more of a slow burn investment in 2016 and beyond.