Is Buy-to-let Worth It? My Property Income Revealed
If you’ve been thinking about investing in property, you’ve probably done a bit of Googling. And if you were to believe the search results, buy-to-let is a terrible investment.
Recent tax changes and increased regulation have crippled buy-to-let. After deducting all the costs of buying and managing your investment, there’s no money left.
Or is there?
Most property investing articles you find online are written by journalists that don’t own buy-to-let property.
Their opinion is based on “research” and not experience.
They pick terrible investments as examples and use calculations that no property investor actually uses to prove their point.
What use does net rental yield have in the real world? Anyone???
So, what’s the truth?
Is buy-to-let still a good investment? And just how profitable is buying a house and renting it out?
In this post, I’ll be cutting through the bullshit and giving you the honest, real-life scoop on buy-to-let. I’ll be discussing how much profit a typical buy-to-let makes, and I’ll be revealing how much I make from my eight buy-to-lets.
Let’s get into it…
Is Buy-to-let Worth It In 2021?
To be completely upfront; buy-to-let profits aren’t what they used to be.
The recently introduced legislation and tax changes have squeezed landlords’ profits.
In 2016, the 3% stamp duty surcharge was introduced for second properties and buy-to-lets.
The stamp duty in Scotland (where I invest) is higher at 4%. That means I have to fork out an additional £3,200 for an £80,000 property!
And in 2017, profits were squeezed further as the government started phasing out mortgage interest as a deductible business expense.
From April 2020, buy-to-let investors that own property in their own name can only claim tax relief for finance costs at the basic rate of income tax, and it’s also given as a tax credit rather than a tax-deductible.
In simple terms, that means your taxable income is higher, which may push you into the higher rate band:
The increased cost of managing a portfolio and jumping from 20% to 40% tax was enough for many landlords to throw in the towel.
And if that didn’t do it, the mounting safety legislation a landlord must comply was the final straw.
But while some are calling it quits, others are adapting.
They’re discovering ways of overcoming the challenges.
And they haven’t lost sight of an important fact: all the things that make buy-to-let a great investment still exist.
The Pros of Property
I’ve already covered the advantages of property investing before, so I’m not going to go deep into it here.
But if I were to pick just three reasons why buy-to-let still trumps other investments, here’s what they’d be:
1. Easy Leverage
Getting a buy-to-let mortgage is relatively easy. And as property values aren’t volatile, it’s a fairly safe way of borrowing to invest.
Using a mortgage allows you to buy much more property than you can afford, which means you benefit from capital growth on a larger asset.
However, winning big could also mean losing big.
If property prices fall, you could find yourself in negative equity – and possibly for YEARS!
The property market moves slowly, which means you could be in the red for two, five or even ten years!
However, these losses are paper losses and only materialise if you sell.
And if you’ve bought well to begin with – i.e. you have a surplus of rental income and your property is in a high rental demand area – they’d be no reason to sell.
Sit back, collect the rent, and wait for the market to recover.
2. Buying At A Discount
There’s a share market theory called efficient market hypothesis (EMH) that states that the price of shares reflects all the information available.
According to EMH, it would be impossible to buy shares at a discount.
Thankfully, that’s not the case with property.
The property market has major inefficiencies due to operating in smaller markets.
Each town has its own unique market, which could even be at a different stage in the boom-bust cycle from another town just 20 miles away.
Property prices in these smaller markets can be influenced by local developments, people’s perception of an area or street, or a buyer’s/seller’s emotional state or reasons for buying/selling.
These factors allow property to be bought below its true value.
With some negotiation, it’s possible to buy a £100k property for £75k.
And buying below market value creates instant equity and also protects against future market crashes. #winwin
3. Add Value
The other unique trait of buy-to-let is that you can force appreciation by renovating.
Adding bedrooms, replacing the kitchen and bathroom, and redecorating all add value to a property. And if you’re clever with your refurb, you can create value in excess of what you spend, boosting your equity.
This equity becomes cash if you sell or remortgage.
If you decide to remortgage, you can use the equity released to invest again.
Why’s that such a big deal?
Well, the same pot of money can be used an infinite number of times. If you buy right and add enough value, the same starting cash could be used to build your entire portfolio!
Okay, all these benefits sound good in theory, but how do they translate into cash? How profitable is buy-to-let really?
To answer that, let me share my portfolio with you…
How Much I Earn From 8 Buy-to-lets
Now for the big reveal, how much do I make from my property portfolio?
Well, my gross income is £4,060 a month.
From that, I’ve got to subtract the cost of mortgages, maintenance, and insurance.
After all expenses (but before tax) I make £2,600 on an average month.
I’ve broken down all the figures in the table below.
This works out to be £336 per property each month – which I’m stoked with!
BUT, to achieve this cashflow, I do more than the average landlord…
Managing The Tenancies
I choose to manage all my properties.
If I were to outsource the management to a letting agency, it would cost 10% of the rental income (£406 per month, including VAT).
But I don’t feel the need to use a letting agent as I enjoy being hands-on, and I have systems in place that make management easy.
Doing My Own Maintenance
I also do most of the maintenance work to keep costs low. I only outsource jobs that require professional tradesmen.
My maintenance budget is 10% of gross rent. If I don’t spend the whole amount, I add it to the maintenance fund – which is saved for major repairs like replacing a roof or upgrading windows.
What If I Didn’t Work In The Business?
By managing my properties and doing the maintenance, I’m effectively paying myself a small salary from the business.
I’m happy working in the business now, but this may change as my portfolio grows and becomes more demanding.
If I were to outsource the tasks that I do, my income would drop to around £2,000 per month, or £250 per property.
What About Tax?
£2,612 is my gross profit, which I still have to pay tax on.
As I own the properties in my own name, I can’t claim the mortgage interest as a business expense – but I do get 20% of my mortgage costs paid back as a tax credit.
So, for tax purposes, my monthly income is £3,613, and my annual income is £43,356.
£43,356 is just under the higher rate tax threshold in Scotland, so I pay tax at the starter, basic and intermediate rate (19%, 20% and 21% respectively).
After deducting tax and national insurance from my gross rental profit, my net property income is about £2,100.
Note: this is an approximation as maintenance and other costs of running my portfolio fluctuate.
How Much Profit Should You Make on a Rental Property?
Most buy-to-let investors I speak to have an income target between £200-£300 per property.
My monthly profit per property is £336, but I’m effectively running a small business to make this much.
As I’ve already mentioned, my income would drop to around £250 per property if I outsource the management and maintenance.
I think £250 per property is a good minimum income target to shoot for. That’s my expectation for a property purchased for £100k or less.
That said, I invest in Scotland where high yield properties are easier to come by.
The amount of positive cashflow you can make depends heavily on where you invest. Properties in the South East of England tend to have low yields – and you may only break even with rental income – but they have much better capital growth prospects.
But if you’re targeting high yield properties, you should be able to make at least £250 per month net of all expenses.
So, Is Buy-to-let A Good Investment?
I’ve been investing in property for eight years, and it’s proved a good investment for me.
I’ve benefitted from an increase in the value of my properties, and the cashflow has provided an extra income source. If I had invested in shares, I wouldn’t have created as much wealth, and I wouldn’t earn as much passive income now.
I think the advantages of buy-to-let still make it an attractive investment but with one caveat…
It’s got to be done right.
The recent changes have professionalised the game.
They’ve made investors seek better deals and manage their portfolios better. They’ve also benefitted tenants by lifting the standard of housing and weeding out rogue landlords.
Despite all the changes, buy-to-let is still worth it, but only if you approach it professionally. Investors making good money from buy to let now “know their numbers”, are much more selective in their investments, and they’re willing to treat it as a business.
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Hi! I'm Jamie
I’m a 30-something money blogger that writes about saving, frugal living, investing and entrepreneurship.
I achieved financial independence at 30 through hard work, saving and learning to invest.
On this blog, I share everything I've learned about money to help you build a life you love, free from money worries.
If you'd like to achieve financial freedom, escape the 9 til 5 and spend your days however you want, then I know you'd love the newsletter.
I’m usually banging on about how to manage your money better. Save hard and invest wisely is my mantra. But today, I’m playing devil’s advocate.
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