The buy-to-let (BTL) market in the United Kingdom is a significant driver of investment in real estate. This part of the real estate market has been consistently rising as the need for renters continues to climb, giving investors seeking medium- to long-term investments additional momentum. The number of landlords in the United Kingdom now exceeds 2.65 million, and since demand for rental homes continues to climb, the industry is an excellent investment opportunity. However, what are buy-to-let properties? We are examining the definition and sorts of buy-to-let properties, as well as property investment considerations.
What is a buy-to-let property?
Buy-to-let refers to the act of an individual or business purchasing a property with the goal of renting it out to renters.
Price entrance barriers and high deposits make it difficult for first-time buyers to purchase a home and climb the property ladder. Half of millennials are projected to continue renting into their forties, indicating that our society is dominated by “generation rent” .Numerous people wait until they begin receiving pension payments before they look into purchasing real estate.
Is BTL a residential property?
BTL properties are usually apartments or home shares and are typically located in city centres. In this area, real estate prices are often quite expensive, but renting becomes an accessible choice for people who wish to live within walking distance of their place of employment.
According to Rightmove’s May House Price Index, the average asking price in the United Kingdom is currently £367,501 this month. This constituted the fourth increase in a row, placing prices £55,000 more than they were before the pandemic.
In 2020, Statista found that the largest group of renters in the United Kingdom were those aged 25 to 34. The range reached 1.4 million private renters, despite the rise in homeownership across all age groups. According to additional Statista research, private renters aged 65 and over constituted the largest household tenure group in England in 2021, including 6.9 million families.
What are the benefits of buying rental property?
Potential investors may wonder, “What does buy-to-let entail for me?” In any case, the industry provides ample opportunities. There are numerous reasons why individuals rent. Similarly, there are numerous reasons why individuals become landlords. Those seeking to invest in real estate should evaluate a number of factors. It is crucial to consider whether being a landlord is right for you:
- Can you provide the type of rental property that tenants desire?
- Are you searching for a rental property closer to home or from abroad?
- If you will need someone to manage the property and tenants on your behalf, such as a real estate agent, have you accounted for the associated costs?
- What precise implications does buy-to-let have for your finances? Consider some of the benefits of buy-to-lease properties. There are two major benefits for buy-to-let property owners.
1) Monthly Income: What is the monthly value of a BTL investment property?
Typically, landlords receive rental payments weekly. This enables them to pay off any outstanding obligation on the residential property, such as a mortgage.
The rental payments could also assist support any necessary renovations or refurbishments, such as wear and tear repairs. In addition, landlords typically figure in a profit to make the venture feasible.
2) Capital appreciation: What is the long-term value of buy-to-let property?
The asset value of a landlord who owns a buy-to-let property may improve over time in tandem with national home price increases. If the landlord decides to sell the house, its current market worth could be far higher than when it was purchased. Consequently resulting in increased capital growth.
In the previous decade or so, the average house price in the United Kingdom has increased from £169,866 to £278,000 (July 2011 vs March 2022). That is a capital growth of over 50 percent, which is remarkable. In addition to rental income, a landlord who purchased a buy-to-let property in 2011 and sold it in 2022 would have generated a profit on the sale of the asset. This can provide the opportunity for landlords to pay off any outstanding debt on the property.
However, any appreciation is subject to Capital Gains Tax. This tax will differ between individuals. To learn more about the various Capital Gains Tax fees, please review the government’s instructions.
Considerations for buy-to-let property investing
1. Rising rates of interest
Changing interest rates are one of the most significant developments to watch out for this year. The Bank of England announced on June 16 that it had hiked the base rate from 1% to 1.25 %. This will affect all homeowners, especially those with variable and tracker mortgages.
A change in the base rate may have financial repercussions for investors in buy-to-let properties. Numerous mortgages and loans “track” the rate set by the Bank of England. Consequently, if the interest rate increases, so does the amount of interest the borrower must pay. If an investor has many loans secured by a variety of buy-to-let properties, the higher interest on their repayments may accumulate. As the cost of borrowing rises, this could affect their future buy-to-let mortgage and how much debt they can take on.
2. Consideration of shifting priorities
Investors in real estate must also evaluate how people’s priorities towards their homes are shifting. According to reports, the pandemic triggered a ‘race for space.’ In reality, this is an oversimplification of the problem. The transition to remote work during the pandemic and the likelihood of hybrid work arrangements in the future will alter how and where people live. As a result of no longer having to commute to a job every day, purchasers and renters have greater flexibility in selecting the location of their homes.
In addition, there is likely to be a greater emphasis on residences that provide space for a home office and outdoor area. However, infrastructure and surrounding area will also play a role. In 2019, we asked homebuyers to name the property features that were most important to them. 82 percent of respondents ranked reliable, high-speed broadband as important. We repeated the question in 2021; by then, high-speed broadband had risen to third place, with 88% of respondents indicating its importance.
It may seem like a little adjustment, but buy-to-let investors must pay note of:
- The tenants they wish to attract
- Potential purchasers if they sell later
As investors consider their next purchase in 2022, it will be crucial to keep current of these shifting preferences.
3. Extra Works
Another factor to consider when investing in buy-to-let properties is the opportunity for ongoing refurbishment or renovation. Landlords are less likely to receive a significant rental revenue on properties in need of renovation. By renovating your investment home, you could improve its general condition. Consequently, you are permitted to charge a premium for the improvement in living standards. Ensure, however, that your speculative and rental income reflect the renters you wish to attract.
We hope we were able to clarify for you what a buy-to-let property is, what it could offer for you as an investor, and the factors to consider when investing in real estate.