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Is buy-to-let still a good investment?

Posted on 2018-05-30

As a landlord, it’s highly likely that from time to time you’ll ask yourself the question ‘is buy-to-let still a good investment?’.

Whether you’re considering your existing investments or thinking about expanding your portfolio further, it’s important to analyse the viability of your financial commitment to the property market and determine the long-term potential impact of your decisions.

Property versus other asset classes

It can be useful to compare property to other investment asset classes such as gold, cash or stocks and shares. And interestingly, according to analysis by Property Partner, over the last two decades property comes out on top.

The property investment platform calculates that if you invested £100 in London property in June 1995, by the end of June 2016 this investment would have been worth £1,195. If you had invested £100 in property in South East England or across the rest of England and Wales, your investment would have been worth £728 or £608 respectively by 2016.

Meanwhile, the same investment would have been worth £473 if you invested in the FTSE All-Share Index, £299 if you invested in gold or £224 if you put your cash into savings.

 graph1

Source: Property Partner

These are positive figures for past and current property investors, showing that over a long period of time, the property market remains likely to deliver the best return on investment (ROI).

The ever-present need for homes means that property investment should hopefully always benefit from steady demand. However, the nature of house prices and market forces means landlords are likely to have to put up with some fluctuations over the course of their investment.

Yields, capital growth and rising rents

There are three factors which indicate property’s credentials as an impressive long-term investment option.

Capital growth provides you with an idea of the growth of the value of your investment, the rent you receive each month generates a useful short-term snapshot, while your yield expresses your gross annual rental income as a percentage of your investment and therefore a good indication of your overall ROI.

In recent years, rents have risen at a steady rate, positively impacting yields and proving profitable for landlords.

During the same period, average property prices have also grown rapidly. Admittedly, this could have a negative effect on the yields of investors entering the market. However, rising house prices are hugely beneficial for long-term landlords who may be looking to sell a property in the future.

Let’s have a look at some recent figures…

  • Rents

 

Despite a few dips over the past year, rental growth in the UK has remained strong. Our latest HomeLet Rental Index shows that the average UK rent was 0.9% higher this April than 12 months previously.

 

On a monthly basis, nine of 12 regions recorded rental price growth - with the North East reporting the highest at 2.8%.

 

Below are the five regions with the highest annual growth in April. You can download the full report here.

You can also sign up to our HomeLet Rental Index here.

Region

Average rent in April 2018

Average rent in April 2017

Annual variance

Greater London

£1,588

£1,519

4.5%

Scotland

£653

£632

3.3%

West Midlands

£679

£661

2.7%

East Midlands

£619

£604

2.5%

Northern Ireland

£628

£614

2.3%

 

  • House prices

Recent figures from the Office for National Statistics' official house price index show that average prices have continued to grow this year, despite many commentators pointing towards a slowing market.

 

In the year to February, average prices across the UK grew by almost 5%. The average UK house price during February was £225,000 - some £9,000 higher than at the same point last year.

 

In London, the average price for a property was £472,000 in February, while the West Midlands recorded the most impressive annual growth of 7.3%.

 

  • Yields

    The figures for average yields are also impressive. According to research by Precise Mortgages, in Q1 2018 the average yield was 5.8% - largely consistent with the final quarter of 2017.

 

Regionally, landlords in the North West recorded the highest average yields at 6.7%. Meanwhile, the rise of the professional landlord continues with portfolios holding 11 to 19 properties also averaging high yields of 6.7%.

 

House in Multiple Occupation (HMO) landlords have also seen some fantastic returns so far this year with an average yield of 7.1%.   

Considering a changing rental market

Existing investors will be well aware of the changes the buy-to-let market has undergone in recent years. The most significant have arguably been the gradual phasing out of buy-to-let mortgage interest tax relief as well as the introduction of a 3% stamp duty surcharge on the purchase of additional homes.

This is alongside a backdrop of increased Government regulation of the lettings sector and additional duties for landlords such as the Right to Rent scheme.

On top of this, the nature of the rental market has evolved - it is now the largest housing tenure in London (English Housing Survey) and more tenants are renting for longer as a lifestyle choice.

Renter expectations have also increased, with is higher demand for quality rental properties that tenants can treat as a medium to long-term home.

Landlords must therefore consider all of these factors when making property investment decisions. It's imperative that property investment is viewed as a long-term project, rather than a quick cash fix.

Moreover, there is increased need for landlords to be professional, proactive and organised. If approached the right way, with detailed consideration of changing market conditions, buy-to-let property still represents a very worthwhile investment option. 

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