Landlords are thinking twice about investing in the traditional buy-to-let market, but there are other ways to make a return from property.
One in five landlords plan to sell up during 2018, according to The National Landlords Association (NLA).
It’s the highest number for a decade and follows a series of rule changes including the 3% Stamp Duty Surcharge and the gradual reduction in mortgage interest tax relief.
But if you still have faith in investing in bricks and mortar, here are some ways to beat the barriers.
Buying in a profitable location
You can ensure you boost potential profits by buying in the right location. Remember, you don’t have to stick to London – there are plenty of other big UK cities that have the potential for greater capital growth and rental returns, including Manchester, Birmingham and Leeds, for example.
Popular university cities typically offer a strong rental market, provided you’re happy to focus on the student market.
According to Zoopla research, half of the top 10 university towns that offer the highest yields are to be found north of the border.
Edinburgh ranks in pole position, with a gross yield of 6.59%. Letting in Glasgow, meanwhile, could secure you a yield of 6.49%, with Stirling and Salford in third and fourth place, respectively.
Yield is calculated by dividing the annual rental income by the property’s value. And bear in mind that buying a cheaper property will also reduce the impact of the 3% Stamp Duty Surcharge.
Understanding tax rules
Tax bills can take a big chunk out of profits, so make sure you’ve got your head around these before taking the plunge into buy-to-let. After all, there are plenty of ways to offset any liabilities and boost returns.
Of course, you’ll need to factor in any extra Stamp Duty on buying additional property, which can be a whopping bill, but shouldn’t come as a surprise if you’ve done your homework.
The extra 3% in Stamp Duty on a £350,000 property, for example, is charged as a flat rate and comes to an eye-watering £10,500.
And there’s the gradual reduction of mortgage interest relief – which will be capped at the basic rate of 20% by April 2020. This could dent your profits if you pay a large sum in mortgage interest each month, especially if you pay the highest rate of tax.
Minimise your mortgage payments
It can feel like a lot of work to secure a mortgage, and it’s even tougher to borrow on a buy-to-let property, with lenders setting strict criteria for wannabe landlords.
The amount of rent a property must generate compared to the mortgage debt is known as the ‘interest cover ratio’, and has been gradually risen from around 125% to about 145% in the UK over recent years.
It can be particularly tough going through the mortgage arranging process if you’re buying an investment property, or already have several on your books.
Lenders will do a thorough check on bank statements and all your outgoings, which can be an onerous process.
If you’re already investing in four or more properties, be aware that lenders will look at all properties to ensure you can afford another deal.
Drip feeding money into the market
You may be put off by the tax-inefficiency and hassle of buy-to-let, or want an investment where you can buy and sell in smaller chunks than whole properties.
It’s possible to invest in residential property tax-efficiently and without the hassle if you pick a property fund, for example. This way, you’re gaining an investment in the property sector, but without the headache of dealing with tenancies and upkeep that comes from being a landlord.
But bear in mind that with investing comes risk. You might not get back your initial investments, and must be comfortable that there are no guarantees of returns.
Alternatively, you can get exposure to the retail sector. Zoopla partner Bricklane.com offers the chance to effectively be a buy-to-let investor, with investments starting at £100, and without a maximum investment amount.
Your money is placed in a fund that’s used to buy property in some of the most well performing UK cities.
The Regional Capitals fund invests in the property market in Leeds, Birmingham and Manchester – while the London fund focuses on the capital. So you can pick from either, or combine for a wider spread of investments.
Similarly to buy-to-let, your fund grows from rental income, and if house prices rise, so will its value. This rises or falls in line with underlying property values.
There are several different accounts, depending on your needs. You could opt for a Standard account or a Property ISA, and use your 2018/19 £20,000 tax-free ISA allowance, to shelter this sum from the taxman’s grasp.
Alternatively, if you are saving towards retirement, a Bricklane.com fund can be added to a self-invested personal pension (SIPP).
You can also open multiple account types, depending on your personal needs. If you have any questions about how best to use the platform, you can speak to a member of Bricklane.com’s dedicated customer support team on 0203 1111 432 who will be happy to help.
Whether choosing funds or physical bricks and mortar, it’s best to focus on the long-term. This gives your investment a chance to ride out any highs and lows in the market.
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As with all investing, your capital is at risk. Tax rules and allowances depend on individual circumstances and may change. Your investment may go down, as well as up. Although the share are listed, if you want to sell them, there is no guarantee that you will find a buyer within a timeframe, or at a price, acceptable to you. Past performance is not a reliable indicator of future performance.
This article does not constitute financial advice. If you are unsure about whether investment is right for you, you should seek independent advice before investing, including tax advice.
Zoopla Limited is an introducer appointed representative of Gallium Fund Solutions Limited (Reference number: 487176) which is authorised and regulated by the Financial Conduct Authority.