Property Investment

Does it Still Pay to Be a Landlord in the UK?

A recent article published in The Times suggests that being a landlord is no longer profitable, with government regulations and higher interest rates eating into profits. However, not everyone shares this pessimistic view. A new discussion piece offers a different perspective, arguing that despite regulatory challenges, being a landlord remains a lucrative endeavour.

The impact of rising costs 

Using data provided by Savills, The Times article highlights how landlord costs have soared since 2014. For instance, the cost of investing in a buy-to-let property rose from £161,404 in Q1 2014 to £236,311 in Q1 of 2024. Also, Stamp Duty Land Tax has increased significantly, from 1 per cent (£1,614) in Q1 2014 to 3 per cent (£7,089) in Q1 2024. This is all while rental yields have hardly changed. According to the data, the average buy-to-let property secured a gross yield of 6.5 per cent in both 2014 and 2024, however thanks to tax changes, the article in The Times suggests what would have generated a profit a decade ago will be leaving landlord profits in the red in 2024.

Reasons for optimism 

However, not all is doom and gloom for today’s landlords, according to Marc von Grundherr, director of London lettings and estate agency Benham and Reeves. He acknowledges that UK landlords have faced numerous challenges over the last decade. These include the removal of tax relief, increased capital gains tax, additional stamp duty costs and a court system clogged with repossession cases. Moreover, attempts to prevent landlords from reclaiming their properties through the failed Renter Reform Act have added to the strain.

Despite these challenges, von Grundherr argues there are compelling reasons to remain optimistic about the buy-to-let sector, including:

Many landlords are mortgage-free 

More than a third (38%) of landlords do not have mortgages, so they are unaffected by rising interest rates.

Interest rates are ‘normal’ 

At 5.25 per cent, the Bank of England base rate is not particularly high by historical standards. The average rate over the last century has been 5.25 per cent, which experienced landlords will recognise as normal.

Property value appreciation 

House prices have increased by 54 per cent in the past decade and by 152 per cent since 2000, equating to a 6 per cent annual return. This far outstrips the average inflation rate of 4.4 per cent over the past five years.

Rising rents and high demand 

Rents have increased by 31 per cent since 2014, with an annual rise of 3 per cent. Tenant demand is also at an all-time high.

Housing supply shortage 

The number of new homes being built falls significantly short of demand, with an annual deficit of around 100,000. This scarcity drives up both property values and rental income.

The true value of rental yields

Furthermore, rental yields are often higher than reported. According to von Grundherr, traditional analysis compares annual rent to the current property value, but many landlords have owned their properties for years. Thus, today’s higher rents as a percentage of the original purchase price yield much higher returns. Most landlords have held their properties for over a decade, turning a 5 per cent yield today into a 7 per cent yield if the property was acquired in 2014.

Despite the negative narrative surrounding the sector, in light of these factors, it would seem there are plenty of reasons for landlords to remain optimistic that the fundamentals of property investment continue to offer significant opportunities for profit.

What are your thoughts on the two opposing sides of the argument?

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Alex Wright, Editor