Many landlords in the UK are divesting from the buy-to-let market, citing escalating costs and an inability to generate a profit. Helen Dixon, a landlord from Newcastle, is selling her second buy-to-let property after experiencing significant financial strain and property damage from tenants. "When you take out all the expenses we were left with very little," Dixon stated, highlighting that even without a mortgage, the property yielded minimal returns after agent fees, service charges, and repairs.
This exodus occurs as landlords face a "tax squeeze" with increased property income tax rates and stricter regulations under the Renters' Rights Act. Mark Imray, another landlord, plans to sell his properties as his fixed-rate mortgage deals expire, attributing his decision to the combination of high interest rates and the current tax regime. "You simply cannot make a sensible profit with interest rates at 5 per cent or more - even with rents at their highest ever level," Imray commented.
Rising mortgage rates are a significant concern, with the average buy-to-let mortgage rate reaching 5.84% in early 2024, a sharp increase from rates below 2.5% a few years prior. For a £110,000 mortgage at a 5% rate, monthly interest payments alone can amount to £458, significantly eroding potential profits before tax. Additional mortgage-related fees, including product fees, valuation fees, and broker fees, can add thousands of pounds every two to five years when landlords remortgage.
Taxation on rental income is also becoming more burdensome. From April, landlords will pay 4 percentage points more tax, with rates rising to 24% for basic-rate taxpayers, 44% for higher-rate, and 49% for additional-rate taxpayers. This increase, coupled with limitations on offsetting mortgage interest costs, further reduces take-home profit.
Beyond mortgages and taxes, landlords contend with a growing list of regulatory costs. Annual expenses for gas safety certificates, electrical installation condition reports every five years, and potential council licensing fees can collectively amount to hundreds of pounds per property annually. A new national landlord database registration in England will add a further £65 per property each year.
Letting agent fees, typically 10% plus VAT of the monthly rent, plus additional one-off fees for finding new tenants, inventories, and end-of-tenancy cleans, can reduce rental income further. These cumulative fees can add up to an estimated £500 per year.
Maintenance and repair costs are another substantial expense. Budgeting for 1% of the property's value annually is advised, which for a £200,000 property equates to £2,000 per year. Major repairs, such as replacing a boiler, can cost between £2,500 and £4,000, potentially wiping out years of profit.
Additional costs include buildings insurance (around £300 annually) and, for leasehold properties, service charges and ground rents, which can average £2,845 per year. Void periods between tenants, averaging 28 days, incur costs for council tax and utilities, estimated at around £150 per year. The risk of unpaid rent and potential property damage further compounds the challenges, with eviction processes potentially taking up to ten months and incurring significant legal fees.