Buy-to-let investments have long been favored in the UK due to steady house-price growth, high rents, and low borrowing costs. However, recent changes in taxes and falling house prices have diminished the appeal of this investment option.
Landlords are facing additional challenges, including new requirements to improve the energy efficiency of rental properties. From April 2025, new rental homes must have a minimum energy performance certificate (EPC) rating of C, and this will extend to existing tenancies from April 2028. Many landlords are now selling their properties ahead of these government net-zero rules, resulting in a significant increase in the number of rental properties available for sale.
While there is still potential to make money in popular cities with high demand, such as those attracting workers and students, buy-to-let investments may not be suitable for everyone.
Let's explore the pros and cons of buy-to-let investments:
1. Pro: Regular and Rising Rental Income
Renting out a property can provide a steady source of income that can contribute to savings or serve as part of a retirement plan. The demand for rental properties has led to significant rent hikes in recent years, particularly in cities like London, Manchester, and Glasgow.
2. Con: Higher Mortgage Costs from interest rates and Extra Taxes via section 24
Building a buy-to-let portfolio has become more expensive due to higher stamp duty charges and restricted tax benefits. Landlords can no longer deduct the full interest on their mortgages from their tax bills, resulting in reduced profits, particularly for higher-rate taxpayers. Buy-to-let mortgage rates have also increased, making financing more costly.
3. Pro: Good Capital Growth Prospects over a long period of time
Traditionally, buy-to-let investments have benefited from rising house prices, increasing the property's capital value over time. This can provide a relatively safe long-term investment and the potential for profit upon selling the property.
4. Con: Slowing House Price Growth in the short term
Current market predictions suggest a potential dip in house prices, which can impact landlord returns. Analysts forecast price falls ranging from 5% to 9% over the next couple of years. If property prices decline, landlords may experience reduced capital value, potentially leading to shortfalls if the property sells for less than the purchase price.
5. Pro: Very Strong Demand
The demand for rental properties is expected to increase due to lower levels of new investment by landlords, a strong labor market, and higher borrowing costs for home buyers. Despite a higher supply of rental properties compared to previous years, demand remains significant, providing opportunities for landlords to find tenants.
6. Con: Hands-On Investment that needs a gnetle touch with tenants
Owning a rental property involves more than just collecting rent. Landlords have responsibilities such as property maintenance, meeting energy standards, and addressing tenant issues. Hiring a letting agent can help, but it comes with additional costs. Managing the property independently can be time-consuming, especially for those with little experience in rental property management.
In conclusion, while buy-to-let investments have historically been popular, it is important to carefully consider the current challenges and market conditions. The potential for regular rental income and capital growth must be weighed against higher costs, additional taxes, and hands-on management responsibilities.