Thursday 14 November 2019

How profitable is buy-to-let in Chichester?

I was recently running through some rough figures with a couple who were contemplating buying a rental property for the first time, having first considered it shortly after the credit crunch. A lot has changed in the world of buy-to-let over the decade since then, but as many people ultimately invest to make money, I thought it might be interesting to see how things have fared in that regard.

The biggest impact upon rental profits has been the collapse in interest rates. Consider that mortgage rates a decade ago were around 6% based on a 75% loan-to-value five-year fix. That meant that every £100,000 of mortgage cost £500 per month (interest only). Today, that same loan can be had for around 2.1%, which lowers the cost for every £100,000 borrowed to just £175 per month. At the same time rents have increased, so it’s been a double whammy of income increasing alongside the cost of finance decreasing.

Of course, house prices have gone up a lot in the past ten years, so you now need to borrow more to buy the same property. But they haven’t increased as much as interest rates have gone down, which means the profits on offer from buy-to-let today have actually increased for landlords. That of course assumes you’re utilising mortgage finance for your buy-to-lets. If not, then the returns on offer from buy-to-let now are lower than they were a decade ago as rents haven’t increased as much as house prices have.

On the negative side though, there have been serious tax changes that are starting to have an impact on landlords’ bottom line. You see, whereas finance costs used to be offset against income before calculating your profit (the same as in any other business), tax changes mean this is no longer the case. Instead, by the 2020/2021 tax year you’ll only be given a ‘tax reducer’ of 20% of the total finance costs. Whilst many have said this won’t affect basic tax-rate payers (technically correct) it will push a huge number of landlords into higher rate tax brackets as their gross rent now counts towards their income.

Many people buying rental properties now are side-stepping these negative changes by purchasing through a company. The mortgage rates to do so can be slightly higher, but overall it is a more profitable way to buy (unless they change the rules again…). Whatever way you buy though there’s no avoiding the 3% stamp duty surcharge that now applies to landlords!

Back to those rough figures though and here in Chichester a typical two-bedroom rental property might cost £250,000. With buying costs, stamp duty and a 25% deposit you’ll need around £75,000 to buy that property. The £187,500 mortgage will cost you around £330pcm on an interest-only basis, whereas such a property should rent for around £875pcm. So, a potential £545pcm could be yours, which is a pretty decent 9% return on the £75,000 you’ve invested. Of course, that completely ignores management and maintenance costs and assumes everything runs perfectly….as well as ignoring the fact the taxman will be waiting come the end of the year too.

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