Is Buy-to-Let in Derby Still Worth the Risk?
Is Buy-to-Let still a safe bet when it comes to investing in property around Derby? With legislation and taxation on the rise, things have got a lot harder for local landlords over the last 5 years. Or, could this be the next golden age for landlords in the local property market? If you are a local landlord, read this article to find out...
Over the last five years, life has become a little trickier for Derby landlords, with changes to their taxation status, mortgage interest relief and an additional 3% stamp duty for a buy-to-let property and has made lots of Derby landlords ask themselves:
‘Is buy-to-let in and around Derby still worth the risk?’
Regarding taxation, in 2016, the Government added a 3% supplement in stamp duty on all buy-to-let properties. Then, in 2017, the Government started to reduce mortgage interest by stopping landlords from deducting the interest they paid on their mortgage before paying tax on the rental profits and replacing it with a flat rate tax credit based on 20% of the interest they spent on their mortgage.
There would be no effect if a landlord were a basic rate 20% taxpayer. Yet Derby landlords who were higher-rate (40%) or top-rate taxpayers (45%) saw an effect as their tax relief was cut in half.
So, is buy-to-let in Derby still an advisable investment?
The response to this question is much more significant than the issue of taxation.
To a large degree, as with all investments, it depends on why you are investing and what your final objective is. Let me expand.
The rewards of Derby buy-to-let
You can earn money two ways with buy-to-let;
The first is the rental income from the property.
The average rent achieved in Derby is £843 pcm, a rise of 7.6% in the last 12 months.
This rent is expressed as a yield and is described as a percentage figure that's calculated using the annual rental income and dividing it by the value of the buy-to-let property.
Landlords and buy-to-let investors use rental yield to judge and measure the value of their rental investments and portfolios. e.g., rent is £1,000 per calendar month (pcm), which means the annual rent is 12 x £1,000 = £12,000. If the property is worth £180,000, the rental yield is £12,000 divided by £180,000, which, when expressed as a yield percentage, is 6.67%.
The average yield in Derby is 4.5%.
Some areas around Derby can easily achieve a 5.3% to 6.8% yield, sometimes even more, depending on your choice of property and type of tenancy you wish to have.
If yield is your number one focus, the highest average yield in the UK can be found in Bradford City Centre, where it is 12%, Hyson Green and Radford in Nottingham at 9.6% and Pontypridd at 8.7%, while other areas in the UK can be as low as 2.2%.
So, is the best strategy to go for high-yielding properties?
The problem with pursuing high-yielding Derby buy-to-let properties is that you usually must compromise on the property’s capital growth to attain that high yield.
The second way to earn money with buy-to-let is capital growth as your Derby property increases in value.
For example, DE21 property values are 17% higher than 3 years ago.
A reasonable return in anyone's books. Of course, this all depends on the rent coming in, yet you can buy landlord insurance to cover against loss of rental income, tenant damage and legal costs.
Interestingly, using Government data and Industry data, Denton House Research has found that in the first lockdown, landlords who managed their rental properties themselves were 272.5% more likely to be in arrears of 2 months or more compared to those who utilised the services of a letting agent to manage their property.
The drawbacks of Derby buy-to-let.
Your tax bill is higher today than a few years ago, but isn't everyone’s?
If Derby property prices fall, the capital you invested will reduce, yet if it sat in the bank, it would decline in value anyway.
Being a landlord is a big responsibility, with over 170 pieces of legislation and orders to comply with. That's where a suitable letting agent can help you with your rental property to ensure you remain compliant.
I recommend all landlords consider all options to maximise their rental income whilst reducing their outgoings concerning their rental property.
Rents are rising in Derby and many landlords appreciate the demand-led increases in their rent... and why shouldn’t they? They have been exposed to many legislative and taxation changes over the last five years haven't they?
Ok, last point and the elephant in the room.
Will there be a house price crash, and should Derby landlords wait for it?
A house price crash conjures up a big event that makes house prices go down, and it certainly happened like that in 1988 with the removal of dual-MIRAS tax relief on mortgages and the Credit Crunch in 2008. Yet this time, it’s different.
As there is more normality and balance in the Derby property market at the moment compared to 2021/early 2022, the price that is being paid today on most houses in Derby is not as extreme or as extravagant as what was being paid in 2021/early2022 when people were outbidding each other.
Therefore, if you were to look at the house price indexes going into the spring and summer of 2023, then there will be a reduction. The doom-mongers and newspaper editors will call that a house price crash, yet I see it as the market easing back to normality.
A massive driver behind landlords and home buyers ‘waiting for a house price crash’ is that they fear they have ‘missed the boat’ when it comes to buying/investing.
There is always media, both newspaper and social, attention when house prices explode. This means people quickly feel pressure to enter the 'property market', as everyone is making money, yet they aren't.
The problem is that during the previous boom phases in the late 1980s and early/mid-2000s, house prices increased quicker than some people could save money for their deposit. They saw their friends and acquaintances snapping up buy-to-let deals and they were missing out on the spoils of house price growth. As a result, many of these excluded house buyers judged that a house price correction was foreseeable, inevitable, and sometimes even needed. Not with any rational economic argument, but classic FOMO (Fear of Missing Out)!
Yet a ‘house price crash’ isn’t the silver bullet that many think it will be.
‘House price crashes’ virtually never drop house prices to reasonable levels, and in fact, they have a lot of additional effects that make house buying even harder.
Investing in buy-to-let is a long-term investment. Remember what I said at the start. It would help if you decided why you're getting into buy-to-let investment, when you will get out and what you want to get out of it. Buy-to-let has advantages and disadvantages, but it is something tangible and something that investors can understand.
The UK needs to build more houses, so the demand for rental properties will only continue to grow.
The heady days of the early 2000s, when anybody could make money from any property, though, have gone. With increased legislation and taxation, you need the advice of a great agent to guide you on what to buy, and what not to buy, for an excellent yield, incredible capital growth or a balance of the two. That agent should be able to find you a great tenant who will pay the rent on time and look after the property to ensure that when they leave, your investment is returned to you in the best condition possible.
Our team are very experienced. If you would like to pick their brains, whether you are considering becoming a landlord in Derby, an existing landlord, irrespective of which agent you use, or even a self-managed landlord, do not hesitate to pick up the phone.
They will tell you what you need to hear, not necessarily what you want to hear.