Rental income vs capital growth
Unlike some other investments, landlords can reap returns from two income streams; regular rental income and on the sale of the property or when it’s remortgaged. The average landlord in England and Wales sold their buy-tolet last year for £91,270 more than they paid for it, having owned the property for just under 10 years. Over that period, the average investor earnt around £112,000 in rental income, equating to a total gross income of £203,000 before taxes and costs.
Don’t forget taxes & costs
Now, more than ever, it’s important to consider the many additional costs and taxes associated with buying and owning a rental home as they will all eat into profits.
Throughout this report, we have assumed that buy-to-let investors borrow as much money as they can to fund a purchase, which typically means taking out a 75% loan-to-value interest-only mortgage. Once we’ve allowed 10% of gross rental income for other costs and deducted mortgage payments, it means the average higher-rate taxpaying landlord in Great Britain made around £41,000 in profit from rental income on one property over the last 10 years. Meanwhile the average lowerrate taxpayer made a £66,460 profit.
House price growth usually means investors end up paying capital gains tax when they sell. Once capital growth is added, and any stamp duty and capital gains tax deducted, the average higher-rate taxpaying landlord made a total net return of £105,500, or 56%, over 10 years. This represents a 225% return on the initial investment - 39% of this total gain came from rental income, with 61% from capital growth.
However, if property is a landlord’s only source of income, paying an income tax rate of 20% can make a big impact on profit. The average lower-rate taxpaying landlord made a total net return of £130,660 over 10 years, with rental income accounting for 51% of their total return.
The North–South divide
The amount of profit investors have made from buy-to-lets and the way they have earnt their money has varied across the country.
London landlords have seen the biggest returns, both in absolute and percentage terms. The average landlord in the capital who sold up last year made a total profit of £245,900, or a 244% return on their initial investment over a 10-year period, after costs and taxes, which equates to 24% each year. However, because yields are weaker in the capital, most of this gain came from house price growth, with only 23% earnt from rental income.
Meanwhile landlords in the North East made the second biggest returns on a percentage basis, but they earnt their money in a very diff erent way. The average landlord who sold up in the North East last year made a total net return of £44,200, or 226% on their initial investment, equating to an average annual net return of 23% over 10 years. However, as the region has seen weaker house price growth than London over the last decade, 68% of this profit came from rental income, with just 32% from capital growth.
When deciding where to invest, landlords should consider what’s important to them: regular rental income or longer term capital growth.
Timing the house price cycle
It’s also worth considering the house price cycle when planning on buying a property. House prices have grown by different amounts in different regions at different times and so timing can have a big impact on profitability.
In the past, London has typically seen the strongest price growth at the beginning of a house price cycle, but then values tend to stagnate while the rest of the country catches up. According to the latest data, we’re now in a period where house prices in the North West are rising twice as fast as those in London, where price growth peaked in 2014. We think 2024 will mark the beginning of a new cycle when price growth in London is poised to overtake the rest of the country once again.
The chart on the left illustrates what the house price cycle has meant for the amount of capital growth landlords have seen over diff erent periods. For example, the average London landlord who bought near the peak of the market in 2016 sold their home in 2021 for 16% more than they paid for it. Over the same period, an investor in the North made a 27% gain.
Longer-term, however, London investors have benefited most. The average landlord who bought 20 years ago and sold in 2021 made a 219% capital gain in London, versus 184% in the North. However, this gap has closed steadily over recent years.
