Should I invest in BUY-TO-LET?

Although tenant demand recently reached the highest level since 2011*, changes in the taxation of property income – plus new regulatory requirements – have made it more arduous to be a buy-to-let landlord. You are likely to pay more tax on your income, and potentially your capital gain, from a buy-to-let investment than you used to, for example. You will also usually have to pay an extra 3% Stamp Duty if you already own another residential property. ‘Anyone considering buying a property to let out should seek professional tax advice,’ says Andy Morrison, an expert at specialist mortgage advisers Mortgage Experience.

The good news for landlords is that increase in demand has pushed rents up by 11% annually, according to Rightmove, and that the current market is the most competitive ever reported. The average rental price for a new tenancy in the UK is £1,103 per calendar month, figures from the Homelet Rental Index show.

One way to assess whether a rental property offers a good return on your investment is to work out the rental yield. To do this, calculate the total annual rent you can charge in relation to the value of the property. For example, if you can earn £5,000 a year renting out a property that cost you £100,000 to buy, your rental yield is a healthy 5%.

The rental yield you can achieve will vary

You can get a higher rental yield for flats than houses

according to the type of property you buy and where it is located: data from property investment company Track Capital suggests that while the current average rental yield nationwide is 3.63%, in some parts of Nottingham, Bradford, Manchester, Newcastle upon Tyne and Yorkshire, rental yields are around 10% or higher. Landlords with property in the capital tend to achieve the lowest rental yield. This is because the price of purchasing property in London is usually higher in relation to the rent you will receive than it is elsewhere in the country.

‘You can generally get a higher rental yield for flats than you can for houses,

but you’ll often also get a lower turnover of tenants in a house rather than a flat,’ says Lucian Cook. ‘And generally, you have better price growth prospects for houses, rather than flats.’

Bear in mind that buy-to-let lenders will expect you to put down a much bigger deposit than residential lenders: typically at least 25%, says David. The rate you will be expected to pay may seem on the surface quite similar to the rate you’d pay for a mortgage on your home. However, David says it’s important to look at the overall package, as the fees on buy-to-let mortgages may be much higher. ‘You will either have to pay a big flat fee, such as £2,000, or a percentage of the mortgage amount, such as 2% of the amount you are borrowing.’