If you’re just stepping into the landlord world or are a seasoned investor looking to get your feet back on the ground after facing financial strain, this advice, from property and finance expert Paul Mahoney, explains all you need to know about buy-to-let fundamentals, mistakes and changes.
Mahoney, the Managing Director of Nova Financial, recently spoke to property investors in Manchester at the Landlord Investment Show.
Firstly, he explained how buy-to-let works and what the drivers are for property investment:
Property for the purpose of renting to a tenant
With the current housing shortage and a growing population, tenant demand is going through the roof. With so many households looking to live in the private rental sector (either through choice or because they cannot afford their own home), landlords are facing record demand levels, which is great news for those looking to escape void periods and achieve high rental yields.
Through renting out property, landlords can achieve strong returns in the form of both rental income and capital gains when they come to sell the property.
Property for the purpose of achieving wealth
If landlords purchase correctly, the performance of the property and the ability for leverage are a great combination to create a lucrative investment. As one of the most stable and reliable forms of investment, buying property can result in long-term wealth creation, assuming the investor takes the right advice and doesn’t overstretch their budget. With many different types of property to invest in, you should be careful to select the right investment that suits your circumstances.
Mahoney looked into the numbers, giving a quick example of just how profitable buy-to-let can be over a ten-year timeframe:
However, he went on to warn landlords of the biggest mistakes facing investors:
Biggest mistakes with buy-to-let
If you have or are considering any of the following, Mahoney warns against it:
- Simply chasing cash flow
- Buying cheap
- Not understanding your target market
- Buying on emotion in a restricted area
- Fearing debt
- Fearing leasehold
- Under-accounting for costs
So if you know you’re in it for the right reasons and are prepared for your duties as a landlord, what do you need to know?
Summer Budget changes to buy-to-let
In 2015’s summer Budget, the former chancellor, George Osborne, announced several measures to crack down on buy-to-let:
- Mortgage interest tax relief: The amount of mortgage interest that landlords can offset against tax will be reduced to the basic rate from April 2017 onwards. The gradual limitation will drop to the basic rate of tax, 20%, in 2020-21. Basic rate taxpayers and those investing through a limited company will not be affected by the change.
- Taxed on revenue rather than profit: Due to the changes to mortgage interest tax relief, landlords will be taxed on their revenue rather than profit, which means that tax will be payable on non-existent income. As a result, some landlords may find that they make losses.
- Wear and Tear Allowance: The replacement of the automatic 10% annual Wear and Tear Allowance with a scheme for actual expenditure came into force on 1st April 2016. All landlords, including companies, are affected by the change.
Autumn Budget changes to buy-to-let
In last year’s autumn Budget, Osborne delivered a further blow to buy-to-let:
- 3% Stamp Duty surcharge: As of 1st April 2016, buy-to-let landlords and second homebuyers are charged an additional 3% in Stamp Duty on purchases of £40,000 or more. With a flood of landlords rushing to buy before the change was introduced, many feared that this measure spelled the end of buy-to-let.
But don’t be put off, Mahoney insists, for sound investments can still be made by avoiding mistakes, being aware of changes and investing for the right reasons.