Buy-to-let property has an excellent long-term record of delivering inflation-beating returns for investors. According to Land Registry figures, average house prices rose from £84,620 in January 2000 to £287,506 in February 2023. That gain of nearly 240% has been accompanied by good growth in rental incomes and, on well-chosen properties, highly rewarding yields.
However, some landlords have been leaving the sector over the last year, deterred by higher taxes and regulatory change. Investing today certainly entails more challenges, so to maximise their returns, new investors must start by asking the right questions.
Is BTL a good investment?
With proper research and planning, property has the potential to outperform most other asset classes over extended periods. The market has slowed recently but the foundations that have underpinned rising values for many decades are still intact. Most obviously, demand remains exceptionally strong and supply is tightly constrained.
Rising mortgage costs have been a significant concern, but there’s a broad expectation that both CPI inflation and the base rate will fall. The Bank of England expects inflation to decline sharply to 5.1% by year-end while the Office for Budget Responsibility predicts an even faster drop, to just 2.9%. In time, the base rate should follow. Consequently, the outlook for borrowing should improve steadily, particularly given the strength of competition between lenders and, in the meantime, rental growth remains very strong.
However, there are pitfalls to be avoided and important costs to be considered, so it’s important to seek the best possible advice on issues such as tax, finance, cash flow and legal obligations. But armed with the right research, it’s certainly possible to find reliable, high-performing properties that should deliver excellent long-term rewards.
Where are the UK’s best investment markets?
There is no one ‘right location’. Good choices depend on local market conditions and each individual investor’s objectives, timescales and attitude to risk. However, where capital growth is a priority, it’s clear that the UK’s more affordable markets have tended to perform best and, in many cases, they have produced the highest yields too.
Lesser-known markets are worthy of particular attention. They may not attract so many headlines as the big cities, nor so much attention on the part of investors. However, many of them are set in city regions that are seeing massive investment, urban regeneration and job creation, all of which help to boost average earnings and demand for accommodation.
Most house price indices are reporting the strongest capital gains in the UK’s more affordable regions, in the Midlands and further north. Renowned investment markets such as Nottingham and Manchester are certainly performing well but some of their outlying towns and communities are faring even better. Around Manchester, for example, investors are seeing impressive growth in Bolton, Salford and Oldham, and much the same is true of communities outlying other major cities such as Liverpool, Sheffield, Leeds and Birmingham. But city-wide averages can only be so useful; more locally-focused research is always essential.
What property types are best?
Again, there is no single right answer. However, there’s certainly a growing preference for new and more energy-efficient homes. They are subject to more tenant demand, so voids should be fewer, and because they tend to have better EPC ratings, investors shouldn’t have to face expensive energy-efficiency retrofits.
What are the most common investor mistakes?
Perhaps the biggest mistakes include failing to do proper research and buying on the basis of emotion rather than proper financial analysis. Both can be avoided by talking in advance with a specialist advisor to work through important issues such as research, investment priorities and due diligence. Mistakes can be expensive so it’s important to develop the right strategy from the outset.
Another mistake is to under-appreciate the demands placed on an investor: the need to manage routine tasks, find tenants, collect rents, pay bills, ensure regulatory compliance and so on. Investors can handle such things themselves, but where personal time is limited, such responsibilities can be delegated to a rental management agency.
Lastly, it’s important to recognise that property investment isn’t about quick wins. It works best as a long-term venture and, over timescales of 5, 10 or more years, its track record has been excellent.