Is the Buy-to-Let Market Still Viable for Investors?

Landlords are queuing up to sell buy-to-let homes as the private rental market descends into financial chaos - but is the buy-to-let market viable for investors?

Property experts Savills reckon landlords are earning their lowest profits since 2007 thanks to more than a dozen mortgage interest rate rises in a row and changes in income tax and capital gains tax reliefs.

The firm says between 2014 and 2021, landlords were pocketing profits adding up to at least 23 per cent of rents collected each year.

That’s plunged to less than four per cent this year.

In monetary terms, a landlord collecting £60,000 a year in rents in 2021 could expect to make a profit of £15,000, but now that’s nosedived to £2,400.

In the red

The research reveals three in four mortgaged buy-to-let properties have a loan-to-value (LTV) of less than 60 per cent, while one in three has an LTV of less than 50 per cent.

In Q1 2023, those with an LTV of 60 per cent generated an average profit of 10.2 per cent and those with an LTV of 50 per cent generated 16.5 cent. While landlords leveraged at 80 per cent, they saw profits move into the red (-2.4 per cent).

“Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements. Even landlords with modest gearing are now more likely to enter the sector or expand existing portfolios in areas furthest from London, with a greater focus on smaller properties which offer bigger returns.”

Other factors besides interest rates have exacerbated the problem.

The government expects landlords to append an average of £9,000 a property to bring energy efficiency up to scratch.

Retiring landlords

Add to that changes to how profits are calculated for rental property businesses, the loss of mortgage interest relief for higher rate taxpayers and reductions in capital gains tax reliefs and the financial reality of running a buy-to-let business becomes apparent.

And there’s more.

The much-unloved Renters Reform Bill is stuck in Parliament and will probably stay there until later in the year as other business takes precedence. The provisions, like a national landlord database, longer eviction times and the promise of a new property court, need funding, and as with most things buy-to-let, the cash is likely to come from landlords.

Buy-to-let has also come to age, with many landlords ready to retire after two or three decades in the business.

Debt and interest rates

Savills estimate 1.9 million buy-to-let homes are owned by 620,000 landlords who have reached state pension age - currently 66 years old. A similar number of properties are owned by landlords aged between 55 and 64 who are approaching retirement.

Whether buy-to-let remains a good investment depends on exposure to debt and interest rates.

Cash-poor landlords trying to build a business on other people’s money (OTM) will feel the squeeze.

“Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector. Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post-pandemic,” says the Savills report.

“There is a very real risk that landlords will exit the sector, particularly those with high levels of borrowing, putting increased pressure on a sector where demand significantly outweighs supply in many locations,” comments Lucian Cook, head of residential research at Savills.

“While existing tenants will benefit from greater security, a combination of factors means there is a risk that new tenants will have less choice. With fewer properties available, stock is more likely to be let out to tenants who are better paid and in more secure employment, inadvertently hitting less affluent households unless measures are taken to increase rental supply.”

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Investing in a Property

Investing in a private rented property can be achieved in a variety of ways. Sometimes landlords inherit a property that they then turn over to renting. Sometimes owners of properties become unintentional landlords because they are unable or unwilling to sell a property at the value the market currently dictates.