It no longer pays to be a landlord. Here’s the proof

The average sold price for a buy-to-let property was £161,404 in the first quarter of 2014, according to Savills, and an investor borrowing 70 per cent of the purchase price would have needed a deposit of £48,421. They would have paid stamp duty at a rate of 1 per cent — £1,614 — meaning an upfront cash outlay of £50,035.

Now all the numbers are much higher. In the first quarter of this year the average sold price of a buy-to-let property was £236,311 and an investor borrowing 70 per cent of the purchase price would need a deposit of £70,893. If this were their only property there would be no stamp duty to pay because the stamp duty threshold has been raised to £250,000, but since 2016 a 3 percentage point surcharge has applied to second home purchases. On the assumption that the property is not their only home, the investor would pay £7,089 stamp duty — meaning an upfront cash investment of £77,982.

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Rental yields, however, have hardly changed. In 2014 the average property would have generated rent of £10,072 a year while this year the average would be £14,812. That gives both a gross yield of about 6.5 per cent (the income as a percentage of the property’s value), but a landlord a decade ago would have made a profit, while today they would be in the red thanks to tax changes and interest rate rises.

What changed?

Property investment boomed in the decade after the first buy-to-let mortgage hit the market in 1996. Then came the 2008 financial crisis, which forced many landlords into negative equity, but those who survived were rewarded with years of rising rents as tenant demand grew. But after the boom came the crackdown — as the government tried to calm the buy-to-let market and free up much-needed homes for first-time buyers.

The landlords’ wear and tear allowance (which was worth 10 per cent of rental income and did not require any proof of expenditure) was abolished in 2016. Landlords can now claim income tax relief only on the costs of replacing furnishing and appliances on a like-for-like basis. The 3 percentage point second-home stamp duty surcharge kicked in during the same year, and has since raised more than £10 billion for HM Revenue & Customs.

Then, in 2017, the chancellor began phasing out mortgage interest relief, removing it altogether by 2020. Instead of being able to deduct their lending costs from their income before paying tax, saving higher-rate taxpayers 40 per cent, landlords now get a tax credit on mortgage expenses at the 20 per cent basic rate. This is a worse deal for higher and additional-rate taxpayers, who risk paying tax even when they make a loss.

This hit landlords particularly hard once the decade of low interest rates came to an end — the Bank of England base rate, which affects mortgage rates, has gone up 14 times since its historic low of 0.1 per cent in December 2021.

Cook said: “The effect of restricted tax relief on mortgage payments was hidden while interest rates were low, but since they have risen there has been quite a dramatic change in the market.

“The combination of the two means the typical buy-to-let investment would have generated a cash loss over the past year, despite a strong burst of rental growth that has caused the average gross rental yield to move from 5.3 per cent to 6.3 per cent over the past two years.”

Soaring interest rates have hit buy-to-let landlords hard

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‘I’m not building any more houses’

The Sunday Times asked landlords for their experiences of the buy-to-let market and has been inundated with responses from investors planning to sell properties.

For many, higher tax bills and mortgage rates mean that the sums no longer add up, while others have spent months going through the courts to remove rogue tenants and been left thousands of pounds worse off in the process.

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Andrew Salter has been a developer and landlord for 30 years, building new flats to rent in London on brownfield sites such as old bakeries, car showrooms or petrol stations. “I create new properties,” Salter said.

He is a qualified chartered surveyor and higher-rate taxpayer. He has 20 rental properties, bought with buy-to-let mortgages and corporate loans. Salter, 62, has kept his borrowing low and managed to avoid any losses, unlike many of his peers.

But despite having a “good working relationship” with his tenants, he will not be building any more new flats because of the stricter tax rules. “It has made it uncommercial for landlords to provide rental properties,” he said.

Salter said the prospect of mortgage interest relief being totally removed and tighter rent controls under a Labour government meant he was considering getting out of the market altogether. “Landlords are vilified for being a real problem but I’ve been adding properties to the rental market by my own developments. This endless tinkering with tax laws is reducing supply,” he said.

The sums

In 2014 a landlord with a £112,983 mortgage on the market average 3.85 per cent interest-only loan would have annual borrowing costs of £4,345. With an annual rental income of £10,072 and average management fees and upkeep costs of £2,156, they would have a pre-tax profit of £3,571. If they were a higher-rate taxpayer they would have paid 40 per cent tax of £1,428 a year and have a post-tax profit of £2,143.

Today, a landlord with the average £165,418 mortgage on a 5.48 per cent interest-only loan would pay £9,058 a year. With an annual rental income of £14,812, and average management fees and repair costs of £2,934 they would have a pre-tax profit of £2,820.

But a higher-rate landlord would pay £2,940 in tax each year —104 per cent of their profit, giving a post-tax loss of £120.

Cook said: “This type of investment would have made a post-tax loss for each of the past four quarters. This is essentially the first time since 2007 that a cash loss would have been generated from the average mortgaged buy-to-let investment and represents a significant shift from the years between 2014 and 2021.”

‘I’m thinking about cashing in — we hardly make any profit’

Ray Couch became a landlord in 2005 when his mother died and he rented out her home in Liverpool.

After remortgaging her house Couch, 64, was also able to buy a flat in Croydon, south London, which he has been renting out for the last 11 years. He also rents out his wife’s old flat in Croydon, where he has had troublesome tenants — two different renters stopped paying and had to be evicted.

Despite changing managing agents, which has helped to resolve tenant-related problems, he is still questioning whether being a landlord is really worth the hassle.

“We don’t make a huge amount of profit out of my properties to be honest. Around £12,000 a year on all three. It’s no film star’s wages,” said Couch, who lives with his wife, Angela, in Lincoln.
“We never used to have to pay tax on profits, but now we do,” he added. “We had looked at buying another property, but the extra stamp duty put us off.”

Couch, whose main source of income comes from his job teaching engineering apprentices, has considered selling up several times, and estimates this would make him about £250,000. However, this would mean losing out on about £21,000 of gross earnings per year.

“The thing that stops us selling is capital gains tax plus the hassle of giving notices and all the other expenses that come from selling,” he said. “I’m over 60 now, though, and I’m thinking, do I want to keep doing this? Once my tenancies end I will definitely consider selling because of all the issues we’ve had.”