Thu, 03 Jan 19
Investors have long turned to residential property as a means of supplementing their income, supported by strong demand from tenants and stable yields.
But buy-to-let is no longer the investment of choice for many people, including financial journalist Rupert Hargreaves, mainly due to tax and regulatory changes over the past couple of years.
There is plenty of evidence to suggest that the majority of landlords still view buy-to-let as a money-making asset class, but there are undoubtedly those who feel now is the right time to exit the market.
A number of other tax and regulatory changes have hit landlords’ profits over the past couple of years, including the scrapping of the ‘wear and tear’ allowance, the introduction of the 3% stamp duty surcharge, and mortgage tax relief cuts which simply do not add up for buy-to-let investors.
Landlords used to be able to deduct mortgage interest and other finance-related costs from their rental income before calculating their tax liability.
However, this interest relief is being slashed from 100% to 0%, with the change being gradually phased in between April 2017 and April 2020, and as a consequence Hargreaves thinks that buy-to-let is ‘dead’.
The phasing out of mortgage interest relief means that those filing their tax returns before the 31 January deadline will only be able to offset 50% of their mortgage costs against their profits (financial year 2018-19), falling to 25% on 6 April, and then to 0% in April 2020.
This would see the amount of tax owed by some landlords’ potentially double or even triple, which is why Hargreaves is advising people against the idea of investing in buy-to-let.
Writing for The Motley Fool, he stated: “One of the reasons why owning a buy-to-let portfolio can be so profitable is the ability to gear up your money with a mortgage.”
He continued: “With the outlook for the buy-to-let sector becoming more uncertain by the day, I think it’s now time to avoid the asset class. Using borrowed money to improve returns in a bull market is an excellent strategy, but when the tide turns, losses can mount quickly.”
The journalist makes reference to the fact that asking prices are currently falling, as reflected the latest Rightmove data.
“It looks to me as if buy-to-let is dead money,” he added.
However, with many sellers becoming increasingly realistic and recognising that values have become somewhat out of kilter with what many purchasers are prepared or can afford to pay, Hargreaves fails to mention the fact that some astute investors are flexing their muscles and negotiating significant price reductions when acquiring property.
He also fails to acknowledge that rents are rising due to the drop in the supply of properties to let on the back of a jump in the number of landlords exiting the buy-to-let market.
Many experts believe that the widening supply-demand imbalance in the buy-to-let market will inevitably push up rents in 2019 and beyond.
Countrywide estimates that rents are likely to rise 2.5% in 2019, followed by growth of 3% in 2020 and a further 2% in 2021.
A separate prediction report issued by RICS suggests that rents will increase by 15% over the next five years.
Is the buy-to-let market really as good as dead and buried?
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