Is Buy to Let Dead? The Maths Most Landlords Never Run

Serious Money Podcast

The episode examines the structural decline of the traditional buy-to-let market due to shifting tax laws and increased regulation. Hosts Ch

Key takeaways

• In 2024, a record 26% of landlords sold at least one property, whereas only 8% purchased new ones.
• The removal of mortgage interest tax deductions for sole traders has significantly increased the tax burden on individual landlords.

Main topics

• Buy-to-let market trends
• Taxation and Section 24

Notable quotes

It's the most least passive thing in the world.

Conclusion

Property investment is transitioning from a passive hobby to a high-ri

Transcript preview

Speaker 2 (0:00) Is buy to let dead or is it an opportunity? One of my clients, he said he would never ever now buy a rental property just to rent on the private market. He said there is just no profit in that whatsoever. If you're going to invest Speaker 1 (0:14) in property to make it beneficial, you've got to have an angle. A record 26 % of landlords sold at least one property. Only 8 % bought. For every five homes sold out of the rental market, just one was bought to replace it. Speaker 1 (0:34) Welcome to episode two of the Serious Money podcast, unfiltered money talk for people who've outgrown the basic stuff. I'm Chris. And I'm Gareth. 30 years in financial planning between us. Let's get into it. It's buy to let dead. That's Speaker 2 (0:46) the Speaker 1 (0:46) topic of today's episode. I'm sure we got some things to say on that one. I'm going to slap you with a stat. Oh, I love a stat. It's a statto. Yeah. So, right. In 2024, just going back a year or so, a record 26 % of landlords... sold at least one property. Only 8 % bought. For every five homes sold out of the rental market, just one was bought to replace it. Rents at record highs. Supply is collapsing, according to this report. So is buy to let dead, or is it an opportunity? I used Speaker 2 (1:22) to have rental properties. I have done actually, I've done it in a few phases over the last few years, but I've never really got into it properly. So I would never class myself as like a professional landlord. Just an unprofessional. Speaker 1 (1:32) Property Speaker 2 (1:32) is a great asset, right? If we start on that point, yeah. Okay. It's tangible. You can touch it. You can feel it. You can drive past it. You can see it. Okay. And people like that. And I get that. That's the allure. That is the allure of property. And I get that 100%. I think, but what has happened? And it's a necessary evil. Okay. People need places to rent because people can't afford to buy. People don't want to buy properties. Yeah. Okay. Not everyone wants a mortgage. Some people want the flexibility to be able to rent and move around and things like that. That's another episode, isn't it? Speaker 1 (2:05) Renting Speaker 2 (2:06) versus buying. Yeah, renting versus buying. Okay. But what I'll tell you from my own opinion and from speaking to clients is this. I've got a lot of clients who are landlords. I've got some clients who are accidental landlords. I've got some who are professional landlords. That is what they do for a living. Okay. What I'm finding is my clients have got a handful of properties and I'm talking probably less than 10, I would say. investment properties, have been quite aggressively selling them. And that's coming from a point of view of offsetting the interest of the mortgage has changed. The whole kind of taxation has changed quite a bit. The legislation has changed a lot. So it's a lot harder if you have a tenant that you need to evict. People say it doesn't happen that often, but it does happen. I've got clients who've had it. And the rules have changed very much, I think. The ability to evict clients is getting harder. Taxation is getting harder. upkeep of the property is getting harder as well and more costly. Cost of materials. Just inflation, right? Inflation. Don't get me wrong. The rental market is strong. Rents are high and things like that. But I'm speaking to a lot of landlords where they're saying they're not really that profitable anymore. Properties are not going up quite as quick in value in certain areas as they were, so you're not getting the capital appreciation. You're not really getting the income out of properties. I think a lot of people are now thinking, what is my better option? And I get a lot of clients coming to me now saying, I'm going to sell my property. Can you invest the money? Okay. Because renting property was always seen as this passive income. Okay. I think it's the most least passive thing in the world because it comes with problems. Spoilers break down. Tenants have a problem with things. You know, you've got to keep on top of the legislation. You've got to do exams to now be a landlord. Do you know what I mean? It becomes stressful. It's a liability. It's a liability. It isn't passive. I don't think it ever really was passive. It was probably a lot easier in the past. Okay. So that's one point. So my clients who've got properties generally under 10 and it's not really a business. It's just something they bought over the years as they were working. They had some excess cash. They were buying rental property. They were great. They started to sell those down for retirement. They're not seeing those as retirement income anymore. Okay. And they're actually looking at releasing that money and investing that money for the future. Speaker 1 (4:11) in sort of more traditional sort of things like stocks and shares and Speaker 2 (4:14) the Speaker 1 (4:14) great companies of the world yeah but like but I do think even still like if let's say let's say you're fortunate enough to have half a million million quid in a pension pot a couple of ices sloshing around you've got this buy to let property maybe it's somewhere nice maybe on the coast maybe you bought it as a holiday home and now you started renting out or something like it's you know It does produce a static level of income still, which is quite useful potentially, alongside your other pots if you've got enough slotting around also. So I think there's still an argument, even though it's woefully inefficient from a tax perspective, because most people have built these sort of property portfolios up in their personal names, I find, because there was no incentive to do it under a limited company. No, Speaker 2 (4:58) there Speaker 1 (4:58) wasn't. So from that point of view, yeah. And actually, people want the hassle in retirement. Speaker 2 (5:02) Right. Speaker 2 (5:04) feel that I get from clients is they just don't want the hassle anymore. You know, they're heading towards, they're in their 60s, maybe 70s. They can't be bothered with it, do you know what I mean? Because maybe their properties are just getting more old and tired, so it does need a new kitchen, it needs an upgrade, the roof has gone. I think it's all those things. I think, you know, tenants are becoming a little bit more demanding, which I kind of get that, do you know what I mean? People kind of want a better level of standard for what they're paying for now, so they're kind of not willing to have a back garden that's overgrown. whatever your colour might be, okay? I think that's from that point. Then I've got landlords or a class probably most professional landlords, that is their business. They were aggressively buying because they might be in a sector where like, I don't have many landlords with big properties who do what I would say, your run of the mill family-led stuff. No, so there'll be what? Service accommodation maybe? Service accommodation. HMO? HMO, house of multiple occupation, whereby they've got multiple tenants, which can be private, can also be rented. I've got a lot of clients who rent their properties to the local authorities, okay, for different type of tenant profiles, which the local authority will put in there, okay, which is what you would call a guaranteed income. You know, they will take on the maintenance and the Speaker 1 (6:17) repair of the property. And that could be used by what, you know, I know they have some for sort of foster. For kids, right? Yeah, for kids. The home office as well. And they have properties for adults with additional needs Speaker 2 (6:32) as well. Kids and adults for additional needs. That can come along with additional problems and raising capital against those as well. It can, yeah, because there are certain lenders who will do it and so on and so forth because it's a risk point of view. It's a reputational risk point of view from a lender's point of view. So I've got a lot of landlord clients who... Do that, okay? They're very aggressive in what they do because they know at some point that portfolio will be bought by a bigger company. Yes. So they have an exit plan with it. But Speaker 1 (6:58) this is the thing now, and this is the sort of transition that I'm seeing as well. Yeah. Buy to let, it is a business. It is a real business with real risks. It has to Speaker 2 (7:08) be now. It's Speaker 1 (7:08) not a game. It has to be now. It's not sort of the default option that it used to be, whereby people would say, I've got this house, I've got plenty of equity, I want to move, I might as well keep on my old one as a buy-to-let. Any old sort of house would have made money back in 2015. Yeah, Speaker 2 (7:25) because that was what a lot of people did. That's Speaker 1 (7:26) how Speaker 2 (7:26) I did it historically, was I bought a house, I'd do it up, I'd live in it, I'd move on. It'd be mad not to. Historically, it wasn't. That was your kind of step. And I use it as a stepping stone to kind of get up. But now with the changes in stamp duty rules, if you move from your principal residence and buy somewhere else, you don't sell the previous home, you get caught for the higher rate of stamp duty and the normal stamp duty, which the higher rate is 5%. It's now the same in England and Wales. 5 % on top of the normal kind of stamp duty. So like, say for argument's sake, you're buying a £400,000 property, you're going to pay an additional... £20,000 in stamp duty. And you do not get, you don't even get a welcome gift, right? Or a bottle of Prosecco for that. You just repay your dues and that is it. And yes, you can claim it back if you sell the property in a certain amount of time and so on and so forth, okay? But in reality, if you're doing that, but even if you're buying rental property now, you will pay 5 % of anything over £40,000. Speaker 1 (8:25) But that's the sunk cost, isn't it? And that's where... Real business strategy now has to come in. Because if you're sinking five, well, let's say 100 grand property even. Yes. 100 grand property, 5%, five grand extra stamp duty, plus your moving in cost, not moving in, but plus your purchase cost, plus new carpet. Yeah, because the Speaker 2 (8:44) solicitor costs are more expensive. Everything when you buy a rental property is that more expensive. The mortgage rate is more expensive. The solicitor's costs are more expensive. Speaker 1 (8:54) So even on that 100 grand property, which doesn't exist in most parts of the UK, some exist around here, north of Cardiff, sort of up the valleys. Up in the valleys, yeah. Speaker 2 (9:02) And the prices are Speaker 1 (9:04) going up there because Speaker 2 (9:04) everyone's buying up there because people from London are buying portfolios in the valley towns, which is cheaper. So therefore, that's elevating the cost of properties up there. But even Speaker 1 (9:15) so, 100,000 pounds, five grand up the pan, well, probably 10 grand. down the pan. I reckon, yeah, with solicitor's costs, mortgage fees, Speaker 2 (9:25) and on a buy-to-let and all those type of things, you probably, on a 100,000 problem, you could be in for 10%. Speaker 1 (9:33) Right, okay. And then let's say mortgage costs, I'm trying to work this out roughly in my head, 5,500, so you've got... 5,000, so if you're an interest rate of Speaker 2 (9:43) 5.5%, you're 5.5 % and you're 5.5 % a year on your interest, yeah. Speaker 1 (9:47) Yeah, but it'd be 75 % of that then if you were under a grand property. Yeah, yeah, yeah. So what would it be, say, let's say for sake of argument... 400 pound a month. Yeah, 400 pound a month in mortgage payments, 100,000 pound property. 100 grand. What's Speaker 2 (10:01) that Speaker 1 (10:01) likely to rent for? 700 pound a month? Max. Yeah. Yeah. So that's a net profit of 300 quid. Assuming you purchased it in your own... That's Speaker 2 (10:10) a Speaker 1 (10:10) gross profit. Yeah. Gross net profit before tax. Yeah. And before any expenses. So yeah. Just after mortgage costs. But you've already spent 10 grand. Yes. So you're 10 grand in the red. In the red. Plus you might have to do some refurb on it. You know what I mean? Speaker 2 (10:29) You probably will have to do something, right? And what you're not going to get in a property in some of these valleys, towns, is the huge capital appreciation. You buy in a major city like Cardiff, you know, in certain areas of Cardiff, like Pernath, for example, they're like bomb-proof areas for capital appreciation because they're so sought after. They've got good schools and everything. But in some of these sort of cheaper areas, you're going to be buying valley towns and so on and so forth, not to be negative about it. you're not going to get the increase in equity in the properties Speaker 1 (10:59) market. It's not just that. Speaker 2 (11:02) It's like London as well. There are areas in London which have been horrifically stagnant. Yeah,