Is Buy-to-Let Still Worth It?
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Buy-to-let investments have thrived in the last 18 months thanks to rapid house price growth, high rental prices and massive demand all over the country for rental properties.
This has seen investors make substantial returns from their investments, and many have turned to buy-to-let property investment as a way of making consistent high returns.
However, between the cost of living crisis and the Bank of England’s consistent increase of interest rates which is pricing many out of affording a mortgage, the question is starting to be asked of whether or not buy-to-let is still worth it is being asked by potential investors.
This blog will answer that question. We’ll spell out the benefits of investing in buy-to-let property, as well as some of the challenges it is facing right now. By the time you’ve read this, the question of ‘Is buy-to-let still worth it?’ is one that you will have had answered in detail.
Why Is Buy-to-Let Still Worth it in 2023?
Buy-to-let property investment is still worth it in 2023 for several reasons. It is one of the most popular investment classes in the UK for a reason, as there are vital factors which make it appealing to a wide range of investors.
For those asking is buy-to-let still worth it, here are some of the main reasons why we believe it still is.
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1. Consistent Returns
Buy-to-let property investment is unique among investment strategies as investors earn returns in two distinct ways.
Rental income gives you a monthly cash flow from the rent your tenants pay each month. This creates a passive income straight to your pocket.
Rents have risen steadily across the UK for many months now. Land Registry data taken from their Index of Private Housing Rental Properties shows that on average, rents in the UK have risen by 5.1% since June 2022.
This means investors are making more money on average from their rental income.
As well as this, capital appreciation means that buy-to-let landlords get long-term returns from their investment properties.
As a physical asset, property rises in value over time, so by the time investors choose to sell their buy-to-let investments, they will be in line to make a serious profit.
In recent years, this has skyrocketed to record-breaking levels, as house prices grew exponentially in the wake of the COVID-19 pandemic.
Over the last five years, property prices across the UK have risen by an average of 26%, per data from the UK House Price Index.
This means that holding onto an investment property for as little as five years could have seen investors make nearly £60,000 in profit, outside of the rental income they would have collected.
This combination of return methods helps property investment stand out from the crowd as the best thing to invest in right now, and for many, is a reason why buy-to-let is still worth it in 2023.
2. Unmatched Stability
As a physical asset, property benefits from an unmatched level of security and stability. Combined with the high potential for returns, few investment classes can match.
In times of financial uncertainty such as Brexit or the COVID-19 pandemic, property has proven it has the ability to not only endure tough circumstances but thrive, recovering far faster than other investment strategies.
Property does not rise or fall in value rapidly, meaning it is far easier for the market to course correct to avoid crashes, saving buy-to-let investments from being failures.
Given that the UK is still recovering from the cost of living crisis and the spiralling energy bills caused by the war in Ukraine, this stability is important to investors who want to put their money into safe investments.
So while it is expected that property prices will temporarily fall due to house price growth outpacing income growth, making property unaffordable for many, this is likely only a market reset that will lead to further price growth in the future.
3. High Demand
Due to a lack of new homes being constructed, there has been a massive supply and demand imbalance that benefits the rental property market immensely.
This has helped to drive rental growth, as tenants are snatching up rental properties far faster than in the past.
Especially in major city centres such as Liverpool, Manchester or London, there is a massive gap between the number of available rental properties and the number of potential tenants.
The Evening Standard has reported that landlords are being forced to organise mass viewings to meet demand, and it is not uncommon for tenants to enter bidding wars over rental properties.
In addition to this, the rising mortgage interest rates caused by the level of inflation the UK is currently seeing has many who would otherwise afford to buy their own home choosing to rent instead as a way of saving money.
All of this benefits buy-to-let landlords, who don’t have to deal with prolonged void periods or low demand from tenants, and is causing the rental market as a whole to thrive.
The high demand for quality rental properties means that oftentimes, buy-to-let landlords can afford to regularly raise their rents in line with inflation and that there will be tenants willing to rent out the property.
The potential for high demand from rental properties in the UK highlights the importance of choosing the right property to let out to generate as much interest as possible, as discussed in our helpful guide.
4. Major Regeneration in Large Cities
Regeneration schemes are essential for the buy-to-let market as they raise the value of the areas they are taking place in.
This means investors can buy for cheap in affordable areas that will rise in value dramatically over time thanks to capital growth, as regeneration schemes transform the area around the investment properties.
Regeneration areas are also popular with young professionals, an essential tenant class that are ideal targets for buy-to-let investors. Thanks to the trendy cultural spots that open up as well as the ample career opportunities that follow.
It is good to know then that billions are being spent on regeneration projects across the UK. This includes the Baltic Triangle and Knowledge Quarter in Liverpool, as well as MediaCity UK in Manchester.
Investing in regeneration areas offers affordable prices and high rental yields, helping to show why buy-to-let is still worth it in 2023.
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Why Is Buy-to-Let Not Still Worth it in 2023?
While we’ve covered some of the key reasons why buy-to-let is still worth it in 2023, we must cover the other side.
We fully believe that buy-to-let is still worth it, but it wouldn’t be fair if we don’t discuss some of the counter-arguments so you have a clearer picture.
1. High Entry Costs
There are no two ways about it – buy-to-let is expensive to get into. House prices hit an all-time peak in September 2022, and while they have fallen since then, buying property is still a large purchase.
On top of purchasing a buy-to-let property, you will have to deal with the various taxes you pay. Stamp duty is paid alongside the purchasing of any property while income tax will be charged on your rental income.
Capital gains tax will also be taken away from the sale of any property that has made a profit. This means you won’t be taking home the full amount of your returns. For higher-rate taxpayers, this can be a large chunk of your returns.
While there are ways of getting some tax relief on your investments, these can be hard to come by and won’t fully relieve your taxable funds. Read more about the different taxes you can expect to pay with our buy to let tax guide.
In times past, borrowing a buy-to-let mortgage was often the go-to method of spreading out the cost of investing over time. However, with the Bank of England continuously raising interest rates, mortgages are becoming increasingly unaffordable for many would-be investors.
Lenders are raising their rates to match the base interest rate, which in real-money terms is costing homeowners hundreds, or even thousands, each year.
While off-plan properties offer payment plans which help to spread out the cost, this is only a fraction of the buy-to-let investment properties available on the market.
With mortgage rates expected to remain high for the foreseeable future, property will likely continue to be an expensive investment for at least the next year or two.
2. Falling House Prices
Given that capital appreciation is one of the two main ways that property investors earn returns, it might be alarming for some to see that house prices have steadily been falling for several months.
Since hitting an all-time record high peak in September 2022, the average house price in the UK has slowly but surely fallen as the cost of living crisis made buying property unaffordable for many.
High numbers of people have been leaving London for cheaper areas, as reported by The Evening Standard, due to an inability to afford to buy inner-city property.
Because property is so expensive in 2023, demand is beginning to fall. Zoopla is reporting that transactions are down 6% from pre-pandemic levels. This is causing prices to drop as people are simply not buying property as much as they used to.
This means that, at least for the next year or so, buy-to-let investors should be cautious about selling their investment properties as they will not net as much of a return.
Given the downward trend that the housing market is seeing right now, this is acting as a sign for many that buy-to-let is not worth it in 2023.
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Should You Consider If Buy-to-Let is Still Worth It for You?
These factors for and against are all well and good, but they are generalised statements that might not reflect your personal circumstances.
No two investors are the same, and if you are asking ‘Is buy-to-let still worth it’, you should take your situation into account to make sure that it is the right investment strategy for you.
Here are some factors you should consider when asking is buy-to-let still worth it:
1. What Is Your Budget?
As mentioned earlier, buy-to-let property can come with a hefty price tag.
With buy-to-let mortgages having sky-high interest rates and property prices themselves being less than a year removed from an all-time peak, you will need to have a substantial budget to invest in property.
There are ways of getting around the expense, as well as spreading it out over time.
Firstly, where you invest will play a big part in how much you spend. Cities with more affordable property prices that are below the national average will mean investors can buy investment properties with a lower budget.
This includes locations like Liverpool and Manchester, where rental yields are also high, making them ideal cities for buy-to-let investors. Read our Liverpool investment guide for more insight on buying property in this area.
You can also find properties with payment plans available to be set up, as these allow you to spread out the cost of investing while avoiding the expense of a buy-to-let mortgage.
Even basic-rate taxpayers could potentially be paying a large amount of tax, so it is also important to understand how much tax you are likely to pay, as this will affect your budget.
2. What Is Your Risk Tolerance?
No investment is risk-free, so you need to be aware of what level of risk you are accepting when you choose to make any kind of investment.
This is what your risk tolerance refers to.
Buy-to-let property investment is considered far less risky than other investment classes such as stocks or cryptocurrency, but there are still some dangers to property investment you should be aware of.
There may be hidden costs you don’t expect, such as your mortgage broker raising your interest rates or damages to your property which you have to pay to fix.
You may also have to deal with void periods waiting for renters, which means having to cover the costs of owning a property without any rental income coming in, such as mortgage payments.
Be sure you understand the risks, as this will help you know if buy-to-let is still worth it for you.
3. How Long Do You Want to Invest For?
Property is a long-term investment strategy, which means you’ll be holding onto your investment property for a long time to make a strong return on your investment.
This means that if you are looking for a get-rich-quick scheme, property investment is not the strategy for you.
Buying property takes time, even more so with second homes sometimes. Estate agents will want their cut and have to perform paperwork for you, while you will need to ensure your finances are in order and have to find tenants to fill your properties.
However, if you are fine with being patient and letting your returns develop over time, then property investment can be a seriously rewarding investment strategy.
Many buy-to-let investors choose to hold onto their properties for years or even decades, so they can collect lots of rental income while benefiting immensely from capital appreciation.
4. What Do You Want to Invest In?
Buy-to-let property investment is a wide-ranging investment class, with multiple options.
Do you want to invest in:
- Purpose-built buy-to-let properties, which are constructed to be rented out. Often, these are new-build developments in city centres, built using modern techniques. This helps them have high EPC ratings and are often good investments for first-time buyers.
- Student buy-to-let properties, that are used solely to house university students during their studies. Often, these are cheaper to buy, run and rent, but have higher demand and lower running costs as well.
- Houses of Multiple Occupancy (HMOs for short) are converted or purpose-built residential properties designed to house multiple tenants while they share communal areas.
- Residential buy-to-let properties are often converted or already built properties that are rented out to tenants rather than being sold on the property market.
There are other kinds of buy-to-let investments, such as commercial properties, but the majority of investors choose between these four.
Experienced investors often spread out their money across a portfolio of properties, which can include any of the categories listed above.
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Is Buy-to-Let Still Worth It?
We wholeheartedly believe that buy-to-let is still worth it in 2023.
The combination of security and long-term returns is unmatched, and it can be more affordable than you think if you are savvy with how you invest.
By working with a property investment company, you set yourself up to make serious returns with far less stress than if you were to do it alone.
Major cities like Liverpool and Manchester are still showing strong rental growth despite less-than-ideal conditions.
For these reasons, we believe that the good far outweighs the bad and that buy-to-let is still worth it in 2023.
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Reece Pape
Reece Pape is a property writer at RWinvest. Reece is passionate about keeping property investors updated on must-have information and housing market news, utilising the latest property market statistics and data.
