Joe Gardiner (pictured) is head of brand and communications at credit eligibility firm TotallyMoney
A casual observer may be forgiven for regarding buy-to-let as a poor investment right now thanks to new taxes, increasing regulation and rising interest rates.
But think again - in reality, it still provides strong returns for those who research what to buy and where.
Undeniably, the sector is tougher than before but one truth should guide investors: demand for homes to rent is growing faster than the supply of homes to let.
Research based on the government’s English Housing Survey and other reports shows there are now 4.5 million privately rented homes making up 20% of UK households; the estate agency Knight Frank suggests this will hit 24% by 2021.
High house prices (first-time buyers now pay £409,975 in London or £207,693 across the rest of the UK, says the Halifax bank) mean growing numbers have no alternative but to rent privately.
With demand high and growing, how do landlords optimise profits in the current climate?
Consider incorporation
Changes to mortgage interest tax relief are underway and once completed in 2021 will prevent landlords with buy-to-let mortgages from deducting interest payments or other finance-related costs from their turnover before declaring their taxable income. The result could be significantly higher tax payments.
However, landlords who own properties as a limited company will instead pay corporation tax – currently 20% – on their profits alone.
Additionally there may be a capital gains tax benefit. Currently individual landlords with buy-to-let properties pay 40% capital gains tax on their total capital appreciation when they sell them.
Many companies, however, are not taxed on the share of the appreciation that is due to inflation, currently running at 2-3% annually - that could save thousands.
But there are pitfalls too; company set-up costs may be based on current market values of properties, so some experts suggest corporate structures work best for future investments, not existing ones.
Always seek out an independent financial adviser or accountant to help.
Switching properties to high-yield areas
Many surveys show the best yields are now in the north of England, with its low capital values and reliably strong rents.
TotallyMoney recently analysed over 500,000 homes across 2,700 postcodes, finding the bulk of the 25 highest yields (ranging up to 12.63%) in the north; none was in London or the south east.
If you do sell to buy elsewhere, remember some evergreen rules: locations with strong employment stats and transport links and substantial student populations, typically provide the best returns.
But always check local agents to assess on-the-spot market conditions.
Consider short-term lets
Letting out a property Airbnb-style for a few nights at a time can be an excellent income supplement if done between longer-term tenants.
On a rent-per-day basis returns are higher than for traditional buy-to-let but you must inform lenders and insurers and arrange someone to hand over keys, clean the property, provide fresh linen as appropriate and be on call in the event of emergencies.
Remember most local authorities have a maximum - usually 90 nights per year - that homes can be used for short lets before they require planning consent for this kind of use.
Remodel to become a home in multiple occupation
If your property permits and the local market shows demand from young renters in particular, seek planning consent to turn it into a home in multiple occupation (HMO) delivering larger monthly returns from a greater number of tenants.
An HMO is rented by at least three people who are not from one household and who share facilities like the bathroom and kitchen.
A large HMO is defined as one let to five or more people who form more than one household in a building with three or more storeys.
HMOs involve strict licensing and safety regulations and much greater maintenance in addition to the costs of conversion. Nonetheless, this is regarded as the most profitable buy-to-let investment; using a lettings agent means they (not you) have to know the regulations and manage tenants. And agents’ charges to landlords are tax-deductible too.
Optimise your borrowing
The total you can borrow is linked to a property’s value so if older buy-to-lets are revalued you may be entitled to a higher loan-to-value with a wider choice of products - and at better rates.
Monitor the mortgage rate for each buy-to-let loan you have and check how far through the initial deal you are.
If you have finished the initial deal you will be free to switch, probably at no cost - this is particularly sensible if you have fallen on to your lender’s standard variable rate, which often happens automatically.
With more interest rate rises likely, a move to a fixed rate may be best. Again, an independent financial adviser is a good idea.
