Is buy to let a good investment?

Harriet Meyer / 20 April 2015 ( 02 March 2020 )

Buy to let is a tempting option for investors, but is there real money to be made? Discover the pros and cons of investing in a buy-to-let property.



The simple answer is yes, there is real money to be made if you invest in buy to let, but it can take time, effort, and a fair amount of research.

However, investing in buy to let isn't a quick route to riches, and there are pitfalls to be aware of along the way.

So before jumping on the buy-to-let bandwagon, here are some considerations to help you work out whether buy to let could be a good investment for you.

The pros of investing in buy to let property

Investing in buy to let can be a good alternative to an annuity

Five years ago the government introduced new rules on how people can take their pensions. Until that point, most people had to use their savings to buy an annuity, which pays out a guaranteed monthly income for life.

Now, however, most of us have far more choice. Instead of only being able to invest in an annuity, it’s much easier to withdraw cash from the pension fund to use for other types of income-generating investment - such as buy-to-let property. Which brings us to the next point...

Property has been a good bet in recent decades

The UK housing market has increased hugely in value over the past 25 years or so, even taking into account the downturn after the financial crisis of 2008.

By using some of your pension to buy a house or flat, you have the opportunity to benefit from any continued growth.

Rents are rising too; a lack of housebuilding over the past decade means that there is a real shortage of homes in many areas. As well as pushing prices up, excess demand has led to a rise in average rents. So if you can't purchase your buy to let property outright, you should still be able to generate an income to meet mortgage repayments through rental payments and, hopefully, enjoy some extra income on top.

If you manage to secure a low buy-to-let mortgage rate, you could further increase your profit.

Income from a buy to let property should be relatively reliable

If you are renting out a property, you should have a good idea of how much income you will get and for how long, based on the tenancy agreement you put in place.

If you can hang on to the property for some time, you’d hope also to benefit from rising property prices. If you buy at the right time in the right area, this could add a significant boost to any returns.

Unlike investing in the stock market or leaving your money in a basic cash account, it can be comforting knowing you’ve got an investment in bricks and mortar. Whether through rental returns or capital growth, there’s arguably more certainty that you’ll get something back from owning property.

With stock-market investments, on the other hand, the amount of income you can safely take may vary as the value of your assets rises or falls.

And in terms of tax, you can offset any costs, including your mortgage interest, against tax. This can save a significant chunk of cash over time.

The cons of investing in buy to let property

Shortfalls

Sustained growth means that property is less affordable now than in the past: depending on the size of your pension, you may have to borrow extra money in order to buy.

And remember, while house prices may have performed well since the early 1990s, there is no guarantee that will continue. If prices were to fall, you could find yourself in negative equity (if you used a mortgage to make your purchase), and rents might drop as well.

You’ll have to make up for any shortfalls between rental income and mortgage payments.

And remember, if your buy to let property is empty for a few months, you’ll still have to pay the mortgage.

Maintenance

As a landlord, you are obliged to ensure your property is in a decent condition as well as to deal with your tenants’ reasonable requests.

If the boiler breaks, or pipe bursts, it’s your responsibility to put it right. Unexpected repair bills can come as a nasty shock and, if you haven’t factored these into your spending, they may even put you in short-term financial difficulty.

It is possible to pay an agent to manage your property for you, but the cost of this service will eat into your returns.

Keep your property in top condition or get it ready to go on the market with Saga's guides to DIY and maintenance

Finding tenants

You’ll either have to do this by doing the work yourself, or employing an agency to find tenants for you.

Either way, you need to ensure you’re happy with them living in your property and that they’ll pay the rent on time.

This can prove a headache, with various checks on their financial history, references and employment status needing to be done.

Don’t forget you’ll also need to arrange the deposit and ensure it’s held in an appropriate scheme.

Five things that make a good buy-to-let property

Unexpected costs

This includes everything from tax on rental income to agency fees and landlord insurance. Renting out a property can come with an array of different costs and fees that you might not have budgeted for, so make sure to brush up on these first.

An increasing number of people over 50 are investing in rental property. Known as ‘grandlords’, they are turning to the rental and the buy-to-let markets to supplement their retirement income.

Rule changes for landlords

Back in 2016 the rate of stamp duty increased significantly on second homes, and since 2017 landlords have faced limits on how much mortgage interest they can offset against income tax.


The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.