Is buy-to-let a good idea? Pros, cons and your best options in 2023

Demand for rental properties is buoyant

Rents have been rising every three months consecutively since the end of 2019, according to Rightmove’s latest rental market index.

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The gap between the number of properties available for rent and the level of demand continues to push rental prices up.

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The number of available properties to rent in 2023 is 46% lower than it was in 2019.

Average asking rents outside of London have risen to a record of £1,190 per calendar month.

Average asking rents in London have surpassed £2,500 for the first time.

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Renters are looking for homes for the long term

The biggest gap between supply and demand is for terraced houses, according to the Rightmove index.

It revealed that there are four times as many tenants enquiring as there are properties of this type available to rent.

If you’re considering a buy-to-let the first thing to decide is the kind of tenant you want to appeal to.

Families with young children typically want two-to-four bedroom properties with safe, private gardens, bathrooms with a full bath in a location near to good schools and green space.

According to Zoopla, a “garden” is the number one search term for renters using the property portal, closely followed by “parking” and “garage.”

Young professionals will typically be drawn to properties with good transport links, convenient for shops, pubs and restaurants.

A good rule of thumb for any landlord is: would you live there yourself?

While grabbing a bargain is certainly possible, in the current housing market there might be a reason (from pests to noisy neighbours) a property is competitively priced.

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It costs more to buy-to-let in 2023 – but yields are going up too

The amount of cash you need in order to buy a home to rent out has gone up.

This is because house prices have gone up, the Bank of England increased the base rate to 4.50% and banks have tightened lending criteria and increased mortgage rates.

To make money on a buy-to-let you either have to target capital growth (the amount the property will go up in value before you sell it on) or rental yield.

Yield is the income you get from the rent expressed as a percentage of the property’s value.

To work out a yield, you calculate the amount of income you generate per year in rent, divide it by the price you paid for the property and then multiply it by 100.

A good rental yield is anything above 5%. But if you target the right renter in the right place it could be much higher.

The latest Buy-to-Let Rental Barometer shows rising rental yields in every region of England and Wales over the past year.

On average rental yields rose to 6.5% in the first quarter of 2023, according to Fleet Mortgages.

So if you’re savvy with how you invest your money and know what will cost you upfront, you can account for it.

Let’s break the costs down:

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Mortgages

Over the past six months, mortgage rates across the board have gone up.

However, average fixed rate mortgages have gone down from the highs which followed the “mini-Budget” in September 2022.

The average five-year fixed rate mortgage for a 75% loan to value (LTV) mortgage is currently around 5%, down from a high of 5.6% last October.

However, fixed-rate mortgages for new borrowers are likely to remain between 4% and 4.75% for much of 2023.

Mortgages for buy-to-let investors are more expensive still, at around 6% compared to 4.5% a year ago.

Buy-to-let mortgages are generally interest-only, so lenders require the rental income generated to be at least 125% of the mortgage interest payments for lower-rate taxpayers.

Lenders also have strict and variable terms on which they will lend to prospective landlords, so make sure you read the small print.

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Deposits

You will also need a sizable deposit to get a buy-to-let mortgage.

In London, the equity needed to invest has jumped from £129,000 to over £257,000 - or 50% of the property value, according to Zoopla’s Rental Market Report. This delivers a gross rental yield of 4%.

Previously, low interest and cheap mortgages meant the potential yield for a buy-to-let property would far outstrip what you’d make in a savings account or pension.

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Stamp duty surcharge

Stamp Duty Land Tax is payable on any property over £250,000 in England and Northern Ireland (unless you’re a first-time buyer).

If you are already a homeowner, you pay an extra 3% in Stamp Duty on any second or additional homes, including buy-to-let.

The surcharge tax applies to all investment property of over £40,000. The 3% is charged on the entire property price, not just the value over a certain tax band.

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Energy efficiency

It is now the legal responsibility of owners of buy-to-let properties that these homes meet a certain energy efficiency rating.

These ratings are managed via Energy Performance Certificates (EPC). If the property you’re buying has a rating of F or G, you need to improve it to a rating of E before you can rent it out.

The Government issued a cap of £3,500 (including VAT) on energy efficient improvements. So if you spend that amount and the home still doesn’t have an E rating, you can register for an exemption.

But according to research by Shawbrook Bank, landlords have spent an average of £8,900 so far on improvements to gain appropriate EPC ratings.

Under current Government proposals, rented properties will require a minimum EPC rating of C by 2027, and B or higher by 2030.

This means buy-to-let owners have just over four years to act to achieve these ratings, which form part of the Government’s wider strategy regarding climate change and Net Zero.

Because the UK housing stock is some of the oldest in the world, making period properties energy efficient poses particular – and sometimes expensive – challenges.

But, the good news is this is something renters want because it both reduces their bills and carbon footprints.

A Social Market Foundation survey found that more than half (52%) of renters dislike being unable to make energy efficiency improvements to their home, rising to 60% among parents.

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Landlords are leaving the market

The buy-to-let market as we know it isn’t working either for renters or landlords. As a result some buy-to-let owners are voting with their feet.

Landlords sold 35,000 more properties than they bought across 2022, according to Hamptons analysis of data from Countrywide.

The Bank of England warned in an early 2023 Monetary Policy Report that landlords might sell up due “to a combination of factors including tax and regulation, higher maintenance and borrowing costs, and an inability to recoup increased costs in rents.”

But with a shortage of affordable housing and a landscape of people who expect to rent long term, this country needs buy-to-let investors.

So, what’s the solution?

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A smarter way to rent out property

At Smarter Rent we offer beautiful homes on terms that are flexible for renters and ensure high returns and occupancy rates for their owners.

We do this by sourcing or taking on existing rental properties in the right locations, fitting them out with the occupant’s needs in mind and providing outstanding service for the duration of their stay.

Our clients in the home counties achieve an average gross yield of 9.1%.

If you’re looking for a buy-to-let but don’t have the time to source the best possible investment, that’s where we come in.

Everything we do is informed by data and expertise, from attending multiple property viewings to shortlisting suitable homes, assessing them against our 107 point checklist to ensure suitability,  and helping secure the purchase.

With our help, you can own a fantastic property asset that generates you a healthy monthly income and capital appreciation, but without any of the headaches that make being a landlord feel like hard work.

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Interested in taking your first step on the buy-to-let ladder? Read how we're taking on the property management burden and giving landlords their time back.

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