Try our useful free Excel tool to calculate how much you might make from investing in property.
Is Buy-To-Let the ideal investment for you? Is it as good as it used to be?
For the past few years, the BTL sector has been booming, propelled by an annual 5.6% rise in property values, with yields at 5% to 6% and base rates at a record low of 0.5%. It’s been good business for banks, too, with the market now accounting for 15% of all UK mortgages.
But fuelled by concerns that the resultant property boom might spiral and flip over into a bust cycle, the Chancellor and the Bank of England have headed off prospective landlords in a pincer movement that sees stamp duty on investment properties increase by 3% and new stress tests for BTL mortgages that raise the bar significantly for borrowing landlords.
In addition, the recent reduction in Capital Gains Tax pointedly excluded landlords – meaning that they’ll now pay 8% more tax than other investors on any increase in the value of their assets.
Landlords say “It won’t affect us”.
Still, it has to be said that most BTL investors remain unmoved by this perceived persecution. A recent YouGov poll of 1,000 landlords (commissioned by Aldermore Bank) suggested that more than half expected it to have no effect on them whatsoever.
And of course, for the majority, it won’t. 87% profess no intention of buying any more properties, and among those who are actively building a property portfolio (assuming they’re sensibly viewing them as long-term investments), even the pain of the extra stamp duty will be assuaged when spread over a decade or two.
Nevertheless, while 70% expected the number of tenants to rise over the next 5 years, a third felt the value of the BTL market would fall in the next 12 months.
So how much can you realistically expect to make?
All of which suggests that, while BTL will remain a valued part of the investment portfolio for years to come, newcomers to the market should take a very prudent long term view of their own prospects.
To this end, we felt it might be helpful to create this useful free Excel BTL Calculator to help you project what a BTL investment could earn you in a variety of circumstances. It allows you to project best and worst case scenarios, play with the variables and paint yourself a very clear picture of how things will likely pan out.
A simple example
Let’s say you have £100,000 to invest into a modest flat costing you perhaps £275,000, and generating a gross yield of, say, 6%. Immediately you will be out of pocket by almost £15,700 having shelled out for stamp duty, legal fees and mortgage costs.
After mortgage interest (let’s assume you secure a mortgage at 2.99%) and other costs (don’t forget to budget for void periods), your net income would be £4,598 – giving you a net yield of 4.6%, all of which is clawing back your upfront costs over the first three and a half years. Taking into account selling costs and assuming no capital growth, you would lose money if you sold before four and a half years were up.
Of course, this is only an example. Feel free to put in your own numbers and test different scenarios.
For instance, you could extrapolate scenarios like the property lying vacant for a couple of months, increasing or reducing the capital growth rate – or you could see how it would look if you decided to bypass an agent and do a lot of the management work yourself, if you have the time. You might also like to see what impact the Bank of England’s new stress tests might have. The example shows that a hike in rates to 5.5% would only leave you slightly underwater but any other additional costs, such as a longer void, would require you to put your hand deeper into your pocket.
The calculator allows you to plot out all these eventualities and draw your own conclusions – so play around with it and see how BTL works for you.
What are the alternatives?
If you decide BTL isn’t right for you at the moment, but you still want the comfort of property backed investment, it’s worth considering Peer to Peer property lending.
Since the banks tightened up, property developers typically find themselves with a piece of land, perhaps 20% equity of their own and a promise from a bank to lend 50-60% of their project cost.
In between those two figures, there’s a golden gap that needs filling – and it’s being increasingly filled by peer-to-peer investors.
www.capitalstackers.com, for instance, works with banks and developers to fill this funding gap, giving investors the option to choose different developments – from office blocks to housing developments – and different risk and reward profiles.
Instead of sinking your £100,000 into a single property and taking on the headache of managing it yourself (or at least managing the agent), you could spread your cash across several different ones. You can even lend against residential property through your pension fund and get the returns tax free.
How much could you make from P2P property lending?
The returns you get can vary from 5% for a let investment property to figures in the high teens if you lend on a development and where you have an appetite for a higher return against a higher risk (up to around 75% of the property value).
If this seems a strikingly large return for an investment, consider the experience of CapitalStackers investors who are currently lending against a residential development in York. Those with the lowest risk (less than 60% of the property value) are earning 8.5% which compares favourably with the example in the BTL Calculator irrespective of the differing risk profiles. Investors taking the most risk, sitting at 76% of value, are earning in excess of 20%. Since the developers have already sunk cash equity into the project which will make a profit, the investors benefit from a fairly deep cushion against possible downturns. Their returns take into account the fact that the property securing their lending is a development which at the time they committed had yet to be built out and sold (which, at the time of writing, it is and has). The developers take care of the whole process and will be making quite a tidy sum from it themselves, so they’re more than happy to reward those plugging the gap that the banks used to fill.
Okay, so you might forego any capital uplift from owning the property outright but you are also well shielded from capital depreciation by the borrower’s equity and profit margin. Essentially, it’s possible to make better returns for a lower and better spread of risk with someone else looking after your interests. What’s more, you don’t have to tie up your cash for so long and nor do you need to take on a mortgage.