Real Estate Ongoing Costs Can Be Pricey
Alongside the higher prices for purchasing buy to let property, there are also many monthly expenses to deal with that aren’t present in alternative strategies like stock investing.
To afford the money involved with buying an investment property in the UK housing market, you’ll likely opt for a buy to let mortgage.
These work differently than traditional mortgages, as you’ll need to pay a 25% deposit. They’re also interest-only, which means you will only pay the interest each month without touching the overall debt.
Stamp duty tax is another high entry cost, with buy to let investors paying a 3% surcharge on top of standard rates (check out our stamp duty guide to learn more).
You may also need to set aside a cash buffer, roughly around £2000 is recommended, to help deal with any unexpected costs that may occur.
All the costs you can expect to pay include:
- Stamp Duty tax
- Mortgage interest payments
- Tax bill including property taxes like income tax or capital gains tax
- Maintenance costs
- Legal fees
- Land Registry fees
- Homeowners insurance
- Estate agent fees
- Ground rent
- Property management fees
You shouldn’t be put off by all these costs as you can earn some serious returns, but it’s important to note that you will need money for investment real estate.
Overall, if you’re asking, “how much money do you need to invest in property?“, our research suggests you’ll need around £30k to cover the entry costs of buy to let property.
If you don’t have this sort of cash available, you won’t be able to afford buy to let property. You should instead resort to alternatives like stock market investing or real estate investment trusts.
Mortgage Tax Relief is Lower Than It Ever Has Been
A factor that has impacted buy to let as a worthwhile investment is the tax bill.
Buy to let profits have changed due to a host of changes to tax incentives and tax relief.
One big factor is the reduction in mortgage interest relief since 2017, with basic rate taxpayers and higher rate taxpayers no longer able to reduce their tax bill and deduct mortgage expenses from rental income.
Instead, landlords now get a tax credit fixed at 20%. While this won’t impact basic rate taxpayers, it has significantly impacted higher rate taxpayers who previously saw a 40% tax relief.