Investing in buy-to-let investments is at the top of every British household’s mind. But not everyone around the world may be aware of this phrase. So, what exactly is BTL? It's fairly straightforward. The phrase " BTL " refers to the British practice of purchasing of or investing in real estate with the intention of generating financial returns by renting it out. This practice has been prevalent for decades and more recently, specialist financing options called BTL mortgages have become widespread across the United Kingdom. It's a popular investment strategy for many investors from both domestic and overseas, and today we're going to discuss what BTL is, why it's important, and the top ten advantages of investing in BTL.
Let’s start with the BTL market.
What do you think the current state of the buy-to-let market is?
Most people can tell that the buy-to-let boom is not new to us. Only 46% of landlords are currently confident about their prospects. While there is still much work to be done, we are seeing early signs of recovery.
Despite the current downturn, slightly more than half of existing homeowners want to boost their housing investments in 2023. According to Finbri, 68% of persons who own more than five properties plan to take advantage of "increased opportunities in 2023." Furthermore, 45% of landlords are interested in investing in BTL.
Indeed, demand is outpacing supply in the rental market, with many analysts forecasting that 2023 will be an excellent year for landlords. Now could also be a good time for newcomers as well.
There are some good BTL bargain deals on the market, resulting in better yields. This opportunity, though, may not last long. It is possible that a fresh BTL boom will emerge soon as interest rates start coming down.
What are the prospects for the BTL investment market?
Despite the bad news, things are getting back to normal. The economy is beginning to revive, and investors may return to the market once the situation in the BTL market improves,..
Recently, several economic indices have allowed for cautious optimism. Inflation is beginning to fall, while GDP is rising. Borrowing costs are likely to come down in the future as this trend continues.
Many economists anticipate the base rate will peak this year at circa 5% before falling in 2024. Both Savills and the Office for Budget Responsibility anticipate that house prices will begin to rise consistently again in 2025.
BTL investors may experience a complete turnaround in their fortunes in the near future. Much of the current debate contends that landlords are failing to generate adequate revenue from their properties due to rising costs. This, however, may not be the case for much longer.
According to Capital Economics, rents will climb further this year, peaking at 5.3% in the middle of 2023. Simultaneously, it forecasts a 12% reduction in peak-to-trough house prices, implying that gross rental yields will rise from 4.3% in mid-2022 to 4.6% in Q1 2023.
According to Andrew Wishart, the organization's chief economist, yields will rise to 5.3% in 2024, the highest level in nine years. Some investors appear to be taking notice of everything. Property Investments UK saw a 20% increase in BTL investor inquiries over the previous year, hitting the highest level in five years.
What Do Landlords Think of Rising Interest Rates?
Finbri summarised the situation as "the Bank of England (BoE) increased interest rates by 0.5 percentage point to 3.5% in December,". For the eighth time in a row, the rate has climbed, hitting its highest level in 14 years.
As recently as December 2021, the base rate was 0.1%, posing a dilemma for landlords who are likely to have multiple sources of funding in the shape of bridging loans and BTL mortgages. While landlords with fixed-rate mortgages will not see their mortgage payments rise during the fixed period, the monthly payments would most likely rise for those whose mortgages need to be refinanced.
However, for mortgages where interest is set to a tracker or standard variable rate (SVR), the monthly payment would climb in lockstep with interest rates. Rising interest rates have 49.55% of landlords concerned (26.97%) or very concerned (22.58%).
What is the typical yield on a UK BTL property?
Rental yields are affected by a variety of factors, and no two yields are alike. According to Seven Capital, the average rental yield in the UK is 3.63%, hence anything above that percentage is considered a high rental yield area.
What is the projected rental growth over the next two years?
According to a Hamptons analysis, rental growth from BTL properties is on the rise. Rents are predicted to rise in 2023 and 2024, increasing tenants' cost-of-living concerns. This, however, comes at a time when landlords are facing cost issues and some are considering leaving the rental market.
Their exit will aggravate the present housing crunch. However, it may create fresh opportunities for other landlords who take a business-like approach and are not looking to make some quick bucks.
This year, rents have risen by an average of 6%, which is faster than expected. Even if property values decrease owing to economic uncertainty, Hamptons anticipates sustained growth of 5% in 2023 and 4% in 2024.
"Rents will rise as landlords seek to pass on higher borrowing and servicing costs to tenants," says Hamptons' head of research Aneisha Beveridge. Naturally, the cost of living will act as a brake on price hikes. Rising mortgage rates, on the other hand, will make it more difficult for would-be first-time buyers who are renting to quit the market, hence raising demand."
"Landlords will have to confront the changed conditions," Beveridge adds. Taxation and the legal framework are growing more restrictive. Some will come to the conclusion that it is time to hang up their keys."
According to Hamptons' head of lettings Catherine Westerling, the rental industry is ready to become more professional: "I sense that in a couple of years' time, there will be fewer landlords, each owning more properties." More of them will be limited liability companies. I would recommend that any landlord who has not sought legal advice on the structure of their business do so immediately."
Westerling predicts that rental yields will be keenly examined in the following months.
"Yields will rise because house price growth is slowing and rents are becoming more expensive," she predicts. We anticipate that the average gross return before costs will increase from 6.1% today to 6.7% by the end of 2025."
The North's average rental yield is at 7.4%. The South's average yield is 5.2%, showing a 2.2% difference.
However, Westerling predicts that the gap will narrow to 1.8% between now and 2025. "Lower yielding areas, particularly London and the South East, will likely record the fastest rental growth as landlords pass on extra costs to tenants," she predicts. This will assist to close the yield gap with higher-yielding areas of Northern England, where yields can approach double digits."
"Although some landlords will almost certainly sell up," she continues, "others will be able to use equity from other places to shift things around and ensure the sums still stack up." However, the overall supply of housing is expected to decline much further, pushing up rents even further."
Some landlords would sell low-yielding properties in order to invest in higher-yielding locations. However, because lenders' affordability stress tests are becoming more severe, only individuals with higher deposits are likely to be able to obtain financing.
Anyone interested in taking advantage of the increased returns should move soon, according to Westerling. "At Hamptons, we forecast that house price growth will resume in 2024, so investors looking to purchase new BTL properties may find it advantageous to purchase in a less competitive market in 2023," she says.
Why should you prioritise BTL investment in the UK?
Now, let's look at the importance of investing in BTL properties. Here are the top ten reasons why this investment technique is so appealing:
01. Consistent Income:
The fundamental draw of BTL is the consistent rental income it provides. It provides you with constant and reliable cash flow, especially if you've done your research and invested correctly.
02. Appreciation of Real Estate:
Property values have historically increased with time. You can benefit from possible capital appreciation and boost your overall wealth by holding onto your BTL property for the long term.
03. Diversification of Assets:
Investing in BTL property helps you to diversify your portfolio. It's never a good idea to put all of your eggs in one basket, and real estate can be an excellent addition to a well-balanced investing strategy.
04. Inflation Protection:
Real estate is frequently regarded as a strong inflation hedge. As prices rise, so do rental income and property values, providing you with some insurance against the corrosive impacts of inflation.
05. Tax Benefits:
Many nations offer tax breaks to buy-to-let investors, such as the ability to deduct mortgage interest, property management costs, and renovations from rental revenue. To understand the exact tax benefits available to you, you must consult with a tax specialist.
06. Leverage on Loans:
When investing in real estate, you can frequently employ leverage by obtaining a mortgage. This implies you can finance a considerable percentage of the property's value, giving you control over a valuable asset with a minimal initial expenditure.
07. Yielding Potential:
Certain areas, such as Coventry, Manchester, and others, provide excellent rental yields to investors. These cities are well-known for their high demand and appealing rental markets, which make them ideal for buy-to-let investments.
08. Long-Term Financial Investment:
Buy-to-let is a financial plan for the long run. You can reap the benefits of both rental income and property appreciation if you are patient and willing to hold onto your property for several years.
09. Tangible Property:
Unlike other kinds of investing, such as stocks or bonds, buy-to-let gives you a physical asset that you can see and touch. Many investors find it reassuring to have a tangible property in their investment portfolio.
10. Retirement Income Prospects:
Buy-to-let homes can be a fantastic method to ensure a steady source of income during your retirement years. You can construct a firm basis for financial stability in your golden years by gradually building a portfolio of rental properties.
Buy-to-let should be the first port of call for anyone looking to get their feet wet in the world of property investment. Buy-to-let is an enticing investment choice due to the possibility for stable income, property appreciation, portfolio diversification, and tax benefits. It becomes even more tempting when you consider the possibilities of high rental yields in well-known areas such as Coventry and Manchester.
By thoroughly analysing the market, selecting the right location, and understanding the characteristics of the rental market, investors can achieve financial stability and long-term capital building. So, if you're thinking about investing, why not start with the most profitable option: buy-to-let?