Investing in buy-to-let properties has always been popular. However, many experts are predicting 2023 will herald a spike in buy-to-let investments but why are more people planning to invest in buy-to-let properties?
On one hand it may not look like the right time. The best returns are usually realised when interest rates are at their lowest. With so much financial pressure being heaped on us by the ongoing cost of living crisis, rising energy prices and worrying inflation rates, is buying property to rent still a sensible commercial decision?
The statistics certainly suggest many feel it is.
During the first quarter of 2022, buy-to-let landlords have been the most active with property purchases since 2016 when rental properties accounted for 15.9% of all homes sold.
Admittedly the UK property market as a whole has proved surprisingly resilient during the recent economic turmoil but as all the recent uncertainty starts to clear, two key factors seem to be driving increased demand in the rental sector.
The first factor is the economy and the increased demand for rental properties the economy is likely to generate.
The Bank of England now expects inflation to get even higher. They have forecasted inflation will peak at 13% and believe interest rates could rise to 4.25% by March 2023. If this happens, mortgages will become even more expensive. This will make getting onto the property ladder even more difficult for first time buyers.
As a result, the demand for rental properties will increase. Obviously, this makes buy-to-let investment a more attractive prospect for landlords, particularly as it could also give them license to raise rents.
The second factor is the likelihood that housing prices are about to drop. This will improve yields for investors.
That said, landlords still need to consider the rentability of the areas they invest in. The lowest prices are probably to be found in the least desirable areas so there needs to be a little give and take to balance the initial price with long-term income and capital growth.
To get the best return from a buy-to-let, the value of the property needs to appreciate over time. This requires the property market to get back on an upward trajectory.
With high inflation and higher pressure on our personal finances looking like they will be here for some time to come, this could mean landlords will need to look even more long-term than ever before. If there is a possibility the value of your property could drop during the time frame you are working to, it may be better to invest elsewhere.
Similarly, inflation will also impact the costs of managing rental properties.
Stamp duty rates could well rise. Insurance and maintenance costs will almost certainly rise and could rise significantly if additional health and safety regulations come in. All these costs could impact your profit margins.
Although London has always been a popular hunting ground for ambitious landlords, it seems as though looking further afield could be more lucrative in the current market.
Partly this is simply because stock is running low in London and houses that do appear on the market will be priced highly because of demand. However, the latest Monthly Lettings Index from Hamptons Estate Agents also shows London offers the weakest returns of any region in England and Wales with an average gross yield of 4.9%.
According to Hamptons, this is one of the main reasons London-based investors are targeting higher yielding areas in the UK.
Looking into next year, Hamptons believe rental yields in all areas of the UK will continue to grow by between 6.1 and 6.7% between 2023 and 2025 because prices will weaken while demand for rental properties and rent levels rise.
These increases will be driven at the highest level by the more expensive rents in London and the South East. Nevertheless, the reason the North West, North East and Midlands are winning favour is their net yield (profit after all costs have been subtracted) is the same as London and the South East. This is because property prices and running costs are lower.
If you are planning to invest in buy-to-let property and would our hugely experienced property team make each purchase moving as easy as possible, please email me at Jeremy.Tulloch@collinshoy.com or call me on 0208 515 6600.