In a previous blog post, I presented the notion that now is the wrong time to invest in UK residential properties. Take a look below for additional reasons why residential property investment is the wrong choice for your money.
Reason No 2: Increase in Stamp Duty on Buy-to-Let Property
In addition to the phased withdrawal of high rate tax relief, the government of the UK has also increased the Stamp Duty Land Tax on properties purchased by investors. The new rules mean that, in addition to the standard SDLT, there is another payment of 3% of the purchase price that is required if a buy-to-let residential property is purchased.
SDLT is already 5% on properties purchased between £250,000 and £925,000, so with the addition of the investment charge, the rate that investors will pay will now be 8%. On a £300,000 property, that is an additional £24,000 tax for a property investor. This has to be factored into your calculations for return on capital.
Reason No 3: Increased Costs
Whilst individually they might not be relatively small, landlords are experiencing a creeping implementation of small charges by agents, often on the back of new government directives. Instead of being absorbed within the agent’s management fee, they are usually being added to the burden paid by the landlord.
Some that come to mind from the last few years include:
- Deposit resolution service—annual fee
- Portable appliance testing—annual fee
- Legionella assessment—bi-annual fee
- Freeholder approval for renting property—fee usually charged annually
That’s on top of many other fees and charges that agents have found reasons to add to the burden that the landlord carries. The overall result is a steadily falling yield, far more paperwork and a general switch from property investment as a positive and viable investment option, to a far more nuanced debate about the benefits of property investment.
Reason No 4: Poor Rental Yields
There are enormous variations in rental yields across the UK, but if you look at the reality of rental income, the average rental yield is now about 5% gross. However, owning residential investment property with a gross yield of 5% is likely to end up netting you, after charges, perhaps 3%.
The numbers are likely to be lower in London or the South-East. The reality is that there are many costs attached to owning investment property that are not reflected in the gross rental yield. These include: agent fees, service charges, ground rent, insurance, repairs and renewals, rent defaults, void periods, council tax during void periods, safety inspections for electrics, gas, Legionella, check in and check out, renewal of rental agreements, mortgage interest, bank charges and fees, and more.
Phew! No surprise that as an income strategy, owing property for investment can end up returning far less in income than you expect.
There are still another reason why now is a bad time to invest in residential properties, so be sure to read my next blog post to find out what it is. And in the meantime, don’t’ forget to request a copy of my F.R.E.S.H. investment report!