- Understand your tax position
- Find the right buy to let mortgage advice
- Understand stamp duty
- Calculate the rental income
- Location, location, location
- Choose the property carefully
- How to own your buy to let property
- Wondering whether buy to let is still worth it in 2020
If you are thinking about property investment and asking, ‘Is buy to let worth it in 2020?’ then answer is ‘Yes’, but there are caveats.
Firstly, demand from tenants wanting to live in a rental home continues to grow and one-in-five households in the UK live in a rented property.
However, the government has imposed several tax changes that have dented landlord profits in recent years which leads many investors to reconsider whether it’s still worth the effort of having a rental home.
This article is really a guide as to what potential investors need to understand before making an investment to ensure its success.
Understand your tax position
The tax situation for landlords has changed in recent years, but you’ll still need to declare rental income earned during a financial tax year. You will need to fill in a self-assessment tax return, though there are expenses that you can offset against this income to reduce your tax bill. From April 2020, landlords will only be able to claim a basic rate tax relief on their mortgage interest at 20%. Previously landlords could play at a higher or an additional rate.
Find the right buy to let mortgage advice
With buy to let mortgages at very low rates of interest means property investment is very attractive. You’ll need to use an experienced buy to let mortgage broker because they will have the experience to find a product that is right for you. Most brokers will charge a fee but some do offer a service for free.
Understand stamp duty
The government introduced a 3% additional rate of stamp duty, which must be paid on all additional properties, including buy to lets.
Calculate the rental income
Among the considerations for buy to let investment in 2020, is for you to make a profit, so you’ll need to calculate the rental income carefully. This will help you decide whether an investment is worthwhile. You need to calculate the stamp duty, mortgage payments as well as solicitor’s fees and, if you use one, the letting agent’s fee. There’s also an element for maintenance and a void period when the property is empty and no rent is being paid. Once all costs have been deducted from the rental income, this is the net yield which will illustrate whether you should buy a particular property.
Location, location, location
The old adage of where you buy your property investment is still a very important issue. Your property needs to be in a desirable area because this means tenants will want to live there and you will have a consistent rental income. Don’t buy an investment property because you live nearby, or because you like the look of it. You are creating a business, so the numbers need to add up. To help, the top investment cities in the UK for buy to let in 2020 are: Birmingham, Manchester and Liverpool. You should also take a close look at Nottingham, Leeds, Sheffield and Leicester. London still offers opportunities despite high property prices.
Choose the property carefully
You also need to consider what type of buy to let property you want to buy. While flats are popular, you may decide to target your efforts at families wanting to rent a semi-detached or terraced home, for example. Most tenants like space and gardens are becoming increasingly popular. It’s also a good idea to have decent storage areas so there’s less clutter, which encourages tenants to remain longer. For those who are renting to students or several adults, then having bedrooms of an equal size will help boost its attractiveness.
How to own your buy to let property
Most potential landlords need to consider whether they are going to run the business as a sole trader or whether they should create a limited company. There’s been a growing trend of landlords moving their property portfolio into a limited company since tax relief on mortgage interest was cut. Since the property will be owned by a company, all of the costs, including the mortgage interest payments can be deducted against tax as a business expense. A limited company may, for example, be a more attractive route for higher rate taxpayers because the profits they enjoy will incur corporation tax at 19%. If this appeals, then you should seek professional advice and some lenders may only restrict their offers to landlords with a limited company.
Choose your strategy
As part of your research into owning a buy to let property, you will probably find experts referring to your ‘strategy’. It’s important to consider what your exit strategy will be because the best way to earn profits is to keep the rental property for at least five years or more. Buy to let is usually considered to be a long-term commitment and there are few investors entering the market with a view to selling quickly. However, your circumstances may change and you may need to access your capital, though there is no guarantee that you will sell your property quickly since market conditions will prevail.
What do you need to understand about buy to let ?
We mentioned that you should research carefully what you need to understand about buy to let investments and you will probably read news stories about landlords wanting to sell up.
That’s because of the mortgage interest tax relief changes that were introduced in April 2017. This essentially saw a decline in profits, which made some investments harder to make a profit from.
There’s no doubt that the move was controversial, though investors are still heading towards buy to let as an effective way to generate a second income or to help prepare for a more financially secure retirement.
Letting fees ban
Landlords have also had to deal with the letting fees ban which was introduced in 2019. This meant that in England and Wales, letting agents have been prevented from charging fees to tenants.
The move also saw a tenant’s deposit being capped at five weeks of their rent and six weeks for those tenancies where an annual rent is more than £50,000.
The aim was to crack down on those agents who were overcharging, but this meant that landlords were faced with paying for referencing and inventory checks.
However, letting agent fees have already been banned in Scotland, while tenants in Northern Ireland can complain if they are made to pay fees that will benefit the landlord.
Section 21 notices
Another controversy in the world of landlords is Section 21 notices.
That’s because the government began a consultation in 2019 about repealing Section 21 of the Housing Act.
It’s this that enables a landlord to end a ‘rolling tenancy’ by giving their tenant two months’ notice without giving any reason for doing so.
The government says that tenants will enjoy greater security if they repeal Section 21 but landlords say the changes mean they will need to use the court process to evict troublesome tenants from their home.
Various landlord organisations say the proposals have not been thought through properly and that unless there is an alternative way to evict problem tenants, then Section 21 should remain.
Local landlord licensing
If you are thinking of buying or operating houses in multiple occupation (HMO), then you need a licence for doing so.
However, local councils can also operate a licensing system for all private landlords in their area. These are known as selective or additional schemes.
Currently, there are more than 60 councils who operate the schemes in England, which lay down criteria for landlords to deliver safe homes for tenants.
Minimum Energy Efficiency Standard regulations
Another big change for landlords came in April 2020 when all rental properties had to meet the new Minimum Energy Efficiency Standard regulations.
Essentially, this means that all rental homes needed to have a minimum rating of ‘E’ for their energy performance certificate.
For those properties that do not meet these regulations, then the landlord must carry out energy efficiency measures worth up to £3,500 for each property.
This is a new cap to help landlords improve energy efficiencies and if they still don’t reach a minimum rating of ‘E’ then they need to apply to the local council for an exemption. There’s no guarantee that exemption will be agreed.
Another change that could occur in 2020 is for the mandatory electrical checks to be carried out on rental homes every five years.
The official start date has not been revealed but agents and landlords will be given six months’ notice before the rules are implemented.
Right to Rent
Finally, for landlords in England there’s an initiative that they need to be aware of called Right to Rent.
This was introduced by the government in 2016, and it requires landlords to carry out a check as to whether the potential tenant has a right to live in the country.
Failing to carry out the check could lead to a fine and a criminal sanction.
Wondering whether buy to let is still worth it in 2020
Essentially, for those landlords wondering whether buy to let is still worth it in 2020, then the answer is probably ‘Yes’ – especially for those who are aware of the rules and regulations and appreciate the need to keep up with changes to ensure that their investment is a success.