It’s not easy being a landlord in Britain these days. In 2016, higher rates of stamp duty were introduced for those buying second properties or buy-to-lets and the following year saw the phasing in of new rules restricting the tax relief that landlords get for finance costs to the basic rate of income tax.
As a result, private landlords have been selling more homes than those purchasing new investment properties. Between January and August this year, for instance, investors sold 87,670 properties, 18,170 more than were bought. In total, we estimate there’s been a net loss of around 309,000 private rental homes across Great Britain since 2016. And, with further tax and regulatory pressures on the horizon, this trend is unlikely to reverse anytime soon.
Higher mortgage costs and landlords’ inability to fully offset these payments when owning a property in their personal name have squeezed profits. While these stresses have eased a little over this year as mortgage rates have fallen, loans remain expensive. Indeed, a record 46,449 buy-to-let limited companies were set up between January and September this year as investors sought shelter from the taxes imposed on personal landlords.
Looking ahead, the requirement for rental properties to achieve higher energy efficiency standards by 2030 looms large. While this is a positive step for sustainability and tenant comfort, it presents a significant cost burden for some landlords, particularly those with older properties in regions where rents are lower.
Despite these challenges, there are some potential bright spots on the horizon. The gradual easing of mortgage rates could provide some relief to landlords, potentially slowing the pace of rent increases. Also, changes to pension taxation and falling savings rates might make property investment comparatively more attractive, potentially bringing new supply into the market.
Gross yields are already at a record high of 7.1% in England and Wales, and with rental growth expected to continue outpacing house price growth for the foreseeable future, these figures should continue ticking upwards.
So, if you’re looking to invest in property, where should you do it? We’ve looked at the local authorities in which an investor could purchase a buy-to-let property depending on their budget, what home type would be affordable at said price and how much profit they could make on average.
To make these calculations, we have used the average prices for each kind of property from the latest Office for National Statistics house price index; assumed the cost of a 25% deposit (the minimum for buy-to-let); and the cost of stamp duty with the new 5% surcharge for additional residences which was announced in the Budget in October.
We have also used the latest average mortgage rate from the Bank of England of 4.41% for a two-year fix at 75% loan to value and the average rent of a home, based on the average gross yield investors achieved in each local authority this year. We have factored in the amount of tax each property would incur annually when held in a limited company (no other income is assumed) and, finally, looked at the annual net profit each home type would make, after mortgage costs, tax, and an assumed 31% of gross income as maintenance and service costs.
With £25,000
Unsurprisingly, there are few local authorities in which it would be profitable to invest this amount but it is possible – if investors bought a flat in 10 local authorities in northern England and two in Wales.
All the English local authorities are in the North East, North West or Yorkshire and the Humber. The highest returns can be made in County Durham, where a flat costs £79,750 and achieves a gross yield of 10.4%. After upfront deposit and stamp duty costs of £23,928, an investor could make an annual net profit of £2,484.
The two Welsh local authorities are Blaenau Gwent and Merthyr Tydfil. In Blaenau Gwent, a flat costs £72,780 and yields 11.1%. After upfront costs of £21,839, a landlord would make an annual post-tax profit of £2,551.
With £50,000
A doubling in budget opens up a significantly higher number of local authorities to investors. As well as increasing the numbers of areas in the North East, North West, Yorkshire and the Humber and Wales where landlords could buy flats and also terraced houses, landlords could buy in several parts of more expensive southern England. These include the East of England, the East and West Midlands and the South West.
In a total of 19 local authorities, investors could even buy a semi-detached house with a budget of £50,000. There are seven in the North East; five in both the North West and Yorkshire and Humber; Blaenau Gwent in Wales and Stoke-on-Trent in the West Midlands.
In Southeast England, there are five local authorities where an investor could buy a flat with £50,000 – Dover, Hastings, Havant, Swale and the Isle of Wight.
The biggest annual returns are to be found in the North East, North West and Wales, where property prices are lower and yields higher; in certain local authorities, investors could make a net profit of over £3,000 a year.
In Torridge in northwest Devon, however, where the average flat costs £146,890 and has a gross yield of 5.2%, an investor would make only £307 in annual post-tax profits.
With £100,000
This budget makes it possible for an investor to buy flats and terraced houses in more expensive parts of East England. In affluent St Albans, for instance, the average flat costs £314,480 and upfront costs come in at £97,568; an investor would be left with £832 in annual net profits.
With £100,000, a landlord could afford the upfront costs (depost and stamp duty) for a semi-detached house in many areas of East England, the East Midlands, nine in the South West (including Cornwall and Mid Devon and West Devon) and five local authorities in the South East: Southampton, Gosport, Dover, Swale and the Isle of Wight.
An investor could even afford a flat in nine local authorities in London: Redbridge, Bromley, Enfield, Hillingdon, Sutton, Croydon, Bexley, Havering and Barking and Dagenham.
With £200,000
Much of the country and many property types are possibilities for investors with this budget. An investor could buy an average semi-detached house in a high-value market such as Cambridge (where these homes cost £584,290), although they would be left with only £297 in annual profits after tax.
An investor could buy a detached home in many locations, boosting their potential profits. In Gosport, Hampshire, for instance, where a detached house costs an average of £461,750 a landlord could make an annual net profit of over £10,000.
Four of the most expensive local authorities in London would require an upfront cost of over £200k. Those being: Kensington & Chelsea, Westminister, Hammersmith & Fulham and Camden.
