Is Buy-to-Let Still Profitable Today?

The rising popularity of serviced apartments attracts guests seeking hotel-like comforts while maintaining their privacy. To stand out among the competition and increase profitability, it’s crucial to enhance your marketing strategies for your multiple properties in town.

In recent years, tax rules, stamp duty adjustments, and government actions have affected small landlords, especially concerning buy-to-let (BtL) properties. With rising interest rates and talk of a BtL decline, we’ll examine the financial viability in this article.

Should I invest in buy-to-let?

Should I invest in buy-to-let

The question of “Should I invest in buy-to-let?” comes up frequently. Many aspire to own a property, rent it out, and generate income. While it might seem straightforward, we believe in providing accurate information. With 3% stamp duty surcharges and ever-increasing regulations, some landlords are uncertain.

In 2023, buy-to-let faces higher tax burdens, and saving a substantial 25% deposit is challenging. It’s natural to feel unsure about where to begin and if buy-to-let suits your circumstances. Let’s examine whether buy-to-let remains a viable investment in 2023.

How has buy-to-let changed?

How has buy-to-let changed

Property price growth has recently slowed, making buy-to-let riskier. The government has also imposed changes in the tax system. In 2016, they introduced a 3% surcharge in stamp duty on additional properties like second homes and buy-to-let properties.

Since 2017, they’ve reduced mortgage interest relief. Previously, landlords could deduct mortgage interest before paying tax, benefiting higher-rate taxpayers with 40% tax relief. Now, landlords receive a 20% tax credit on mortgage interest, impacting higher and top-rate taxpayers.

A potential issue is that landlords must declare the income used to pay the mortgage on their tax return. This change might push some into higher tax brackets, resulting in a larger tax bill.

Is buy-to-let still a worthwhile investment?

The answer extends beyond tax implications and hinges on your investment goals and financial needs.

Pros of buy-to-let:

Rental income potential, varying by location.
Potential for property value appreciation, offering capital growth.
Insurance options to protect against rental loss, damage, and legal expenses.

Cons of buy-to-let:

Increased tax liability affecting profits.
Risk of income loss without proper insurance during property vacancy.
Capital reduction if property values decline, especially with interest-only mortgages.
Considerable additional costs: stamp duty, insurance, and maintenance.
Landlord responsibilities are substantial and require careful consideration.
Some use buy-to-let for retirement income, drawing from their pensions for investment.

How do I get started with buy-to-let?

Becoming a landlord typically involves these five steps:

Step 1 – Sort Your Finances: Consult a financial advisor to determine your investment amount and expected returns. Talk to a mortgage broker for the best deal or a mortgage in principle to be ready for property offers.

Step 2 – Find and Secure a Property: This can vary in speed but allow several months for the process, even if the property is already for rent.

Step 3 – Get Insurance: Aside from building coverage, consider protection for tenant injuries, damage, and lost rent.

Step 4 – Attract Tenants: Choose between using an agency or finding tenants privately, depending on your involvement preference. Regardless, always create a legally binding contract.

Step 5 – Manage Your Investment: Stay on top of your mortgage, handle property maintenance, and ensure tax efficiency with your rental income. An accountant can assist with the latter.

What tax do you pay as a landlord?

Since 2016, purchasing a second property incurs an extra 3% stamp duty tax. For instance, on a £300,000 property, an investor pays £9,000 more compared to a homebuyer. In Scotland, second property buyers, including buy-to-let landlords, face an additional 4% stamp duty.