Buy-to-let returns continue to beat all mainstream investment types

Investment News
29 Sep 2021
7 min read
Investment News

Buy-to-let returns continue to beat all mainstream investment types

29 Sep 2021
7 min read

In simple terms, buy-to-let investments are properties that are bought by investors not to live in, but to rent out as a means of gaining an additional source of income.

This is usually as an alternative to the investor’s main source of income and dependant on how long they hold the property before selling it, will determine what their capital gains are on the funds they originally invested.

It is highly likely that once they have sold the property several years later, that the investor finds that the property has increased in value, and hence the funds that they originally invested are likely to increase significantly in their value due to these gains.

Throughout this feature, Town Square Invest considers the performance of buy-to-let returns and compares its profitability with other mainstream investment types.

Is buy-to-let a good investment?

Investors choosing to invest in properties in this way are essentially counting on two things happening. The first is that the price that the property is being rented for, on a monthly basis, is earning more than their mortgage commitments to their lending Bank, which will then provide them with additional income to supplement their existing salary or pension. Secondly, that the equity contained in the property rises through the capital appreciation gained through the property’s value increasing over time due to positive market forces.

Typical BTL mortgage products have a minimum deposit requirement of 25% of the property’s value, this represents the equity that the investor puts towards the purchase of the property. For example, on a purchase of £100,000, the investor will have to contribute £25,000 with the Mortgage Lender providing the balance of £75,000. The low deposits required coupled with the low-interest rates achieved through leveraging the property by financing the purchase means that investors stand to make more from their money. This then results in the returns on their capital invested becoming extremely more profitable.

Buy-to-let investments are a major mainstream property asset class forming part of the Residential property classification with the likes of owner-occupier, Student and Student Property and sit alongside industrial, retail, and hospitality, which together form the major real estate asset classes.

The demand for buy-to-let properties currently as well as historically is extremely high among those looking to invest in property. As BTL interest rates can start from as low as 1.55% ( many are drawn to investing in property this way.  It has also been well documented that the price of properties increased between February to March this year by 1.8% (stat source) alone and there has been an overall increase of 10.2% from 2020-2021. This has substantially increased the total returns gained for those that have chosen to invest in property over other more volatile investments.

What is a good return on a buy to let property?

According to a study by Rob Thomas at the Wriglesworth Consultancy, landlord returns surpassed earnings from other investments within cash, stocks, shares, and commercial property. Those who invested in cash savings and have left their money in Banks to gain interest have ended up worse off than the rest. However, those who invested in buy-to-let over the past 18 years have seen for every £1 that they invested now worth £14.90.

The study also shows how financing the buy-to-let purchase with a 25% deposit on a Mortgage achieved a staggering 16.2% annual return, which outperformed buying a buy-to let with cash or investing in UK Commercial Property, UK Government Bonds, Equities (FTSE All Share Index) and Cash.

To put this all into perspective, investing £100,000 in 1996 would now see that property worth £300,000 today, providing the investor with a £200,000 gain on the original value of the property they purchased. 

Continued housing shortage

The Research Briefing compiled by Cassie Barton and Wendy Wilson commission by The House of Commons states that the number of new homes needing to be built stands at up to 345,000 houses per year. Whilst the number of new homes built in 2019/20 was around 244,000 homes which represents a 1% gain on the number of new homes built in the previous year, it is still far lower than what is needed and has increased the amount needed to be built yet further again.

Covid-19 house price gains

Quite clearly the UK is failing to meet housing needs with demand far outstripping the supply of new homes needed. Due to the lack of supply and the increase in the UK population, property prices are not only stable but increasing even through the recent COVID-19 Pandemic. 

Buy-to-let investments are a popular choice for this very reason as many investors see the long-term housing shortage and population growth as an on-going trend, that will not only see properties appreciate in value, but see more tenants enter the housing market as first-time buyers are priced out of the market.

Generation Rent exists out of necessity – as affordability is worsening and greater numbers are choosing to rent. What’s more, increases in real income and wages are not directly proportional to the increase in property prices.

Why are investors choosing to buy-to-let?

Many investors also choose buy-to-let over stocks and shares as they feel there is a physical representation of their money and this can make people feel more secure and confident in their investment. Stocks and shares are an online transaction and lack the tangible nature offered by property. Many also find that investing in Stock and Shares can sometimes be more hands-on, unless they have others trading on their behalf – which can also be expensive. The beauty of investing in a buy-to-let is that the tenant is responsible for the property whilst in occupation. As well as this, the investor’s chosen Lettings and Management Company will not only be responsible for resolving any issues that the Tenant cannot resolve but also be actively promoting the property ahead of the tenancy expiration date to prevent any voids between tenancies.

Low interest rates

Since 2009, the Bank of England Base Interest rate has been low and flatlined at 0.5% until 2016, when it dropped to 0.25%. It then rose briefly to 0.5% before climbing again to 0.75% in 2018. It has been at 0.1% since March 2020 due to the impact of the coronavirus. A low Bank of England Base Rate means that the cost of borrowing from Banks for property purchase also remains very low for investors. This is great news for buy-to-let investors, as they lock into interest rates as low as 1.55% meaning that they earn more from the property as the rental values are still rising.

Rental returns are rising

According to The Homelet Rental Index, rental values across the UK have risen by 3.4% between March 2020 to March 2021. Whilst London has not made gains, the average increase in areas outside of London has seen rental values rise by an average of 6.8%.

Property values are rising too

Within the next 4 years, Savills expects a 21.1% increase in average UK house price. For those considering buy-to-let, there is a major benefit of investing now as values are set to continue to climb. Interest rates are also predicted to remain low for a longer time than originally predicted. This means that investors benefit from lower borrowing rates encouraging them to invest.

What types of properties bring the biggest returns?

In the past, investing in a three-bed property would bring the highest return at a rental yield of 4.3% according to a lettings platform, Howsy. However, the latest figures show that one and two-bed properties will give you an average return of over 5.6%.

The impact of COVID-19 on the rental market has shown that smaller cities, towns, and suburban areas are locations that are increasing in value. Many people and especially families have been leaving big cities for areas that offer more green space and larger homes in general for better prices. Rental values are falling in big cities such as Edinburgh at -2.0%.

Areas of the likes of the East of England, South East, North East and North West and South East have shown rental increases ranging from 4.4% to 6.8% in the period March 2020 to March 2021.

Overseas investors

The UK has long been held as an established location for overseas investors offering a wealth of investment options for all budgets and requirements. The favourable exchange rates against all major currencies along with fantastic capital growth forecasts have created a resounding case for investment into UK property.

Similarly, Expats have sought to invest in the UK as a means of providing a foothold back to their home country as well as a means of giving themselves an alternative income for their retirement.

Investing in the UK for both the Overseas Investor or Expat Investor not only gives them a means of building long-term security for their future, but an opportunity to tap into a robust legal system, a world-class financial sector, and access to educational institutions that are second to none.

Now is the time to buy

Underpinned by the lack of housing supply, low borrowing rates, increases in property and rental values, and Generation Rent, there is a clear reason to engage with the property market and certainly, now more than ever is the time to buy. When you throw into the mix the low value of the British Pound and the UK Government’s Stamp Duty Holiday, Overseas Investors and Expats are finding the pull of investing in the UK property market too great an allurement to resist.

Throughout this article we have considered why UK buy-to-let investments have outperformed all mainstream investment types. For more information about UK buy-to-let investments or to discuss options that suit your circumstances, contact Town Square Invest to speak to one of our experienced property professionals.