Is Buy-to-Let Still a Good Investment in 2020?

Demand from private tenants continues to grow with one in five UK households
today being rented. While the Government has imposed tax changes that have
reduced profits for many landlords, is Buy-to-Let still a good investment?

Hiten Ganatra, managing director of Visionary Finance,
says: “Despite efforts to stem the growth of the Buy-to-Let investment market,
many would argue it has shown some serious resilience. “It is still a
compelling story for investors.”

If becoming a landlord is on your list of things to do for the New Year
then here are the eight things you
need to know:

1. Understanding Tax

Rental income is added
to any other relevant income you earn during the financial tax year. You must
declare this income on a Self Assessment tax return each year. Certain expenses
can be claimed to offset against your rental income and reduce your tax bill. Though
landlords will only be able to claim basic rate tax relief
on mortgage interest at 20% from April – previously it could be claimed at a
higher or additional rate. The property income allowance means property owners
can earn up to £1,000 rental income tax free each.

2. Stamp Duty

A 3% additional rate
of Stamp Duty Land Tax
(SDLT) is now payable on purchases of additional properties such as Buy-to-Lets.

3. Find Buy-to-Let Mortgage Advice

When it comes to
finding a Buy-to-Let mortgage,
the benefits of using a broker is a no-brainer. While many UK brokers
charge a fee, choose a broker that offer their brokerage service completely
free like Visionary
Finance. They offer a whole of market service which means they have
access to over 60 different lenders including all mainstream and specialist Buy-to-Let
lenders. This will help to ensure you find the best deal suited to your
individual circumstance.

4. Calculate Rental Income

Working out your expected profits is an
important guide for calculating if the investment is worth your while. Make
sure you factor in stamp duty, solicitors fees, mortgage payments, agency fees
and maintenance when you crunch the numbers. You must also be prepared for
times when a rental property is empty.

The net yield is calculated after all costs
have been deducted – upfront expenses such as transaction charges and stamp
duty, and ongoing costs including everything from mortgage repayments on the
property to the income tax due on rental income. You can do some number
crunching using a Buy-to-Let
calculator.

5. Location Matters

Making sure your investment property is in
a desirable area will help ensure demand – and a consistent rental income. You shouldn’t buy in an area just because you
like it. The numbers need to add up.

The UK’s top cities for
Buy-to-Let investment in 2020 are (in order) Birmingham, Manchester, Liverpool,
Sheffield, Leeds, Leicester, Nottingham, Oxford, Cardiff and London.

Birmingham came in at number one because growth has outpaced all UK cities outside the capital in recent years, leaving a chronic undersupply of homes. As a result, property price growth has hit 19.3% since 2014 and Knight Frank predicts a further 12.5% increase by 2022. What’s more, the city has rental yields sitting comfortably between 4.4% and 5.3%, according to PropertyData. But do your homework on your preferred location and see how the numbers stack up.

6. Choose Your Rental Wisely

Purchase something that performs well in
the chosen market. Having plenty of space is an important feature listed by
tenants. Space is important to a tenant because it does not feel they are
outgrowing the property and choose to move on elsewhere. Having decent storage
will mean tenants enjoy a less cluttered home – and hopefully, they will stay
longer. Having equal sized bedrooms will be very important to sharers, while a decent
garden is crucial for families.

7. Ownership Options

The cutting of tax relief on mortgage
interest for landlords has prompted more to move their properties into
a limited company. If the property is owned by a company, all costs,
including mortgage interest payments, can be deducted as business expenses.

Profits incur corporation tax at a rate of 19% marking a significant cut
to a tax bill for higher-rate taxpayers.

As a landlord, you can draw income in the
form of dividends. In 2019-20 the first £2,000 of dividends is tax -free but
you pay tax on further withdrawals at 7.5% as a basic rate taxpayer or 32.5% if
you fall into the higher rate bracket. 

Setting up a limited company is something to take professional advice on. Getting a mortgage on a limited company-owned
property means getting a special deal from a lender. A broker can help you.

8. Don’t Forget About Resale

While investing in residential property is
a long-term commitment and Buy-to-Let investors don’t typically enter the
market with a view to selling, it’s important to have an exit strategy.

Should your circumstances change and you
need to sell up to access your capital at, it’s smart to ensure that the
property you buy can sell without any obvious complications. Market conditions
are, of course, out of your control.

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