Recent research has revealed that landlords are taking home less profit from their buy-to-let (BTL) investments, even as they charge more for rent.
Over the last two years, the typical return on BTL properties has seen a 6% decrease, a significant dip attributed to a combination of rising mortgage costs, increased charges from agents, and a slowdown in property value growth. This downturn occurs despite a notable 19% rise in rental income, painting a complex picture of the current state of the BTL market.
Octane Capital, the firm behind this research, has taken a comprehensive look at the costs associated with acquiring and maintaining a BTL investment versus the expected returns in the current economic climate. This comparison sheds light on the changing landscape of profitability for landlords.
Jonathan Samuels, Octane Capital’s CEO, offered some perspective on these findings, “The average landlord has benefited from a very healthy level of rental income growth in recent years and so while the level of capital appreciation seen on their property may have cooled, both aspects of their investment are still bringing healthy returns despite the instability of the current market landscape. Of course, higher running costs, most notably as a result of higher mortgage rates, have dampened the overall net return they’ve seen. But it’s fair to say that this reduction in net profits has been fairly marginal considering the current economic landscape and the storm of property market uncertainty that we’ve weathered in recent months.”
Costs of BTL Investments
A surprising insight from the research is the 17% reduction in start-up costs for BTL investments, dropping from £12,037 in the previous two years to £9,952 today. However, this silver lining is clouded by a 19% increase in tenant-finding fees and a 7% rise in the costs associated with property vacancies.
Running a rented property has become significantly more expensive, with costs escalating by 18% over two years to an annual figure of £15,592. This increase is largely driven by a 25% hike in mortgage interest rates, now averaging £10,210 per year, alongside a 19% increase in agency management fees.
Growth Amidst Challenges
Despite these challenges, it’s not all doom and gloom for landlords. The average rental income has surged by 19% over the past two years to £15,144 annually. This growth has boosted the average yield from BTL investments from 4.9% to 5.8%. However, the property market’s sluggish performance has dragged down the capital appreciation of BTL properties by 6% annually, resulting in an average growth of £15,728.
After accounting for all these variables, the net annual return from property investments stands at £15,280, considering ongoing costs against rental income and capital growth. This figure represents a 6% decline from two years ago, when landlords enjoyed an average annual return of £16,285 from capital appreciation and rental income after deducting expenses.