Home » Can the average buy to let make money in 2024?

Can the average buy to let make money in 2024?

female landlord looking at spreadsheets to see if the buy to let makes money

Now were are well into 2024, many landlords are looking at their numbers to figure out whether their buy to let rental property makes any money. If you’re thinking of investing in a buy to let, or wondering whether to sell up, can you make any profit as a landlord?

In this blog post, I go through the figures on a hypothetical house in the East Midlands to see if the landlord will make a profit if they have a standard 75% loan to value (LTV) mortgage. I then compare the costs of using a high street letting agent to manage the property, and the DIY route using OpenRent to find tenants and managing the property themselves. Finally, I explore ways in which landlords can improve profitability in the era of higher interest rates.

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What is the average buy to let in England?

row of terraced houses in london

According to Rightmove, the average yield across GB in Q4 2023 according was 6.4%.

Averages can be very misleading, so I’ve tried to answer this question by being more specific, choosing a hypothetical house in the East Midlands. Here are the key metrics for the East Midlands house:

  • The value of the house is £209,437
  • Deposit: £52,360
  • Stamp duty: £6,283
  • Gross Yield: 6.4%
  • Rent: £1,123 pcm or £13,476 pa
  • Capital growth from 1 January 2003 to 1 January 2023: 75% (Hometrack)

Would the average buy to let get a mortgage in 2024?

I gave the East Midlands Buy to Let scenario to Rachel Lummis of Xpress Mortgages. She confirmed that a higher rate tax payer would be likely to get a 75% loan mortgage with these numbers and gave a product from The Mortgage Works available on 17 February 2024 as an example. (Please don’t rely on these exact figures as products are constantly changing, but they give a sense of the impact a mortgage can have on returns).

  • Principal sum borrowed (75% LTV): £157,078
  • Higher-rate taxpayer, unincorporated landlord
  • Monthly mortgage payment: £575
  • Fees: £1,495
  • Fixed rate for 62 months: 4.39% (reverting to the standard variable rate of 8.99% after the fixed term)
  • 165% ICR stress test for higher rate tax payer: rent of £1,024 pcm
  • Buyer has no more than 3 rental properties

As the rent is £1,123 pcm, this investment would be likely to pass the 165% ICR stress test and be eligible for a mortgage if the buyer is a higher rate taxpayer buying in their own name. The stress test is lower for basic rate taxpayers or limited companies (typically an ICR of 130% of the rent for TMW).

>> Related Post: What does ICR or Interest Cover Ratio mean?

How much money does the average buy to let make in 2024?

For this scenario, I am going to assume that the property is ready to let, with no refurbishment needed. This is very unlikely as most properties will need some work to get them ready to let, even if it’s just simple painting and professional carpet cleaning. I also don’t include the stamp duty figures in the calculations.

To keep it simple, we assume that the house is ready for renters, and already has a valid Gas Safety Certificate, EICR and EPC.

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Overview of the average annual costs of running a buy to let

As you’ll see below, landlords make considerably more money if they manage the property themselves and use OpenRent to find tenants. I’ve summarised the expenses in running a buy to let in the table below, with the full detail below the table.

The cost of running a buy to let where the landlord manages the property themselves and uses OpenRent to find tenants is about one third of the cost of using a letting agent’s full management service.

Costs of running an average buy to let with an annual rent of £13,404 pa (excluding mortgage)

What are the running costs of the average buy to let using full management?

Here are some ballpark figures for the costs of running a buy to let. I use the gas safety and insurance figures from one of my buy to lets, and the maintenance is an industry rule of thumb. Although I use the standard 10% of gross rent as a line item for maintenance and repairs, my experience is that it’s often more than this, and I try to contribute another 10% of the rent to a sinking fund for unexpected repairs and maintenance (for instance, new boilers). For the full management fees, I take the fees published by Connells, one of the largest letting agents in England. All figures include VAT.

  • Gas safety certificate plus boiler service: £150
  • Landlord insurance: £230
  • Maintenance and repairs: average of 10% of gross annual rent (£1,347) plus Connells fee to supervise of £160 = £1,500*
  • Full management using Connells as a guide: 19.4% of gross rent or £2,614.
  • Other costs levied by Connells:
    • Annual deposit compliance fee: £60
    • Rent review / tenancy renewal fee: £300
    • Annual statement of income and expenditure: £102
  • Grand total of average annual costs with full management: £4,992

*Connells charge an additional 12% of the net invoice from contractors for repairs, redecoration, refurbishment where the net costs of work exceed £750 + VAT.

Of course there are letting agents who do charge less than this for full management, but I think it’s useful to spell out the total costs of full management from one of the market-leading letting agents.

>> Related Post: How to terminate a management contract with letting agents

What are the running costs of the average buy to let that is self-managed?

Here are the costs of running a buy to let where the landlord self-manages the property and doesn’t use a letting agent. Of course there are the opportunity costs of the landlord’s time, but in terms of cash paid, these are the figures:

  • Gas safety certificate plus boiler service: £150
  • Landlord insurance: £230
  • Maintenance and repairs (average of 10% of gross annual rent): £1,347
  • Grand total of average annual costs with self-management: £1,727

Not everyone wants to manage their own properties, and it’s not something to do by “winging it”. If a landlord is embarking on self-management, I would recommend joining either the NRLA for £99 pa (less a £15 discount for the first year if you use this affiliate link: NRLA) or the Guild of Residential Landlords (£119 pa) to provide draft agreements, documents and a helpline (NRLA) or email advice (Guild).

>> Related Post: How to self-manage your buy to let

How much does it cost to set up a tenancy with a letting agent?

Again, using Connells as an example, this is how much it costs to set up a new tenancy using a high street letting agent, with VAT included:

  • Tenant introduction service only (not full management): £1,608 as a one-off payment. Full management is £2,614 pa.
  • Other set-up costs for new tenancy using Connells, including VAT:
    • Tenancy agreement: £300
    • Right to rent checks for two people: £24
    • Tenant referencing for two people: £120
    • Inventory administration at the start of a tenancy (unfurnished): £162
    • Arranging for a third party to do the inventory for a 3 bedroomed house: £204
  • Grand total to set up tenancy with Connells’ tenant introduction service: £2,418
  • Grand total to set up tenancy with Connells if using full management: £810 (NB on top of full management)

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How much does it cost to set up a tenancy with OpenRent?

OpenRent is an online platform that enables landlords to advertise their properties to tenants and arranges the set-up administration on the platform. I’m a big fan and use it for my buy to lets, after finding high street agents too expensive.

  • RentNow tenancy creation service, including deposit registration: £69
  • Other set-up costs for new tenancy:
    • Tenancy agreement: £0 (included)
    • Right to rent checks for two people: £0 (the landlord does this)
    • Tenant referencing for two people: £40
    • Inventory for a 3 bedroomed house: £115
  • Grand total to set up tenancy with OpenRent’s RentNow service: £224

It’s more than 10 times cheaper to use OpenRent’s premium RentNow service than it is to use Connells’ tenant introduction service. This is an obvious area for a landlord to reduce costs.

>> Related Post: How to find tenants using OpenRent

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Do buy to lets make a profit in 2024?

Costs of running an average buy to let in first year (6.4% yield, 75% LTV mortgage)

The increase in borrowing costs in 2022 and 2023 means that a landlord with the average buy to let with a 6.4% yield probably won’t break even, let alone make a net profit after tax, if they have a 75% LTV mortgage and use letting agents to manage the property.

Using our scenario of a house worth £209,437 in the East Midlands, with a 75% LTV mortgage, and an annual rent of £13,476, if the landlord uses Connells for full management, the net income before tax will be £774. With self-management, the net income before tax is £4,625, or £385 per month. Don’t forget that I’ve not included the costs for a Gas Safety Certificate, EICR and EPC, as I assumed the property would have these.

All it would take is one unforeseen bill (broken boiler, water leak, new cooker etc) to turn a small paper profit into a loss. Any investment to improve energy efficiency would reduce the profit further.

Unincorporated landlords can’t deduct the full cost of their mortgages and can only get a 20% tax credit. If the landlord buys through a limited company, they’ll need to add in the costs of running a company, and will have more complex tax affairs.

Consequently, the average buy to let landlord buying in 2024 probably won’t break even after tax, and would only make money overall if the property increases in value. The East Midlands has a fairly good track record with capital growth of 75% from 1 January 2003 to 1 January 2023 (Hometrack), but past performance isn’t to be relied on.

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Final thoughts

Now we are in 2024, it’s very difficult to make the “average” buy to let stack up financially. What’s the solution? How can landlords make a profit?

Let’s look at the component parts of the equation Net Profit = Income less expenses and tax, and see what levers there are to improve net profit. For instance, instead of buying the “average” buy to let, look for a property significantly below market value and adding value in a cost effective way to increase the income as a percentage of the total cost of the property and the refurbishment. This might be through creating extra space, modernising the property, or reconfiguring the existing space to create another bedroom.

A note of caution: whilst some areas have higher yields, they tend to have lower capital growth. Although we can’t bank on past capital growth being the same in the future, when we look at the total return from buy to lets, it’s an important factor. Hometrack’s free interactive chart is really useful to give you a ball-park idea of capital growth.

With inflation, it’s really important to focus on work that increases the value of the property in terms of rental income and/or value. Many investors are looking for higher yielding opportunities such as an HMO negotiate a lower management fee, or manage the property themselves.

For investors who pay higher or additional rate tax, it’s likely to be more efficient from a tax point of view to buy via a limited company than as a sole trader, although there are direct and indirect costs of running a company.

The simplest way to reduce expenses is to self-manage. I know that’s not for everyone, but if you do want to use a letting agent to manage your property, don’t be afraid to negotiate on fees. If the fees are too high or you’re unhappy with the service, go elsewhere. There’s no shortage of letting agents, and some of the smaller, local ones are high quality. That said, do your due diligence.

Finally, as the mortgage costs are a such a large part of the expenses, using a larger deposit or buying the property with cash will transform the bottom line. Maybe this isn’t the time to be pulling money out, and instead landlords should be concentrating on building equity?

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does the average buy to let make money picture of woman looking at spreadsheet

3 thoughts on “Can the average buy to let make money in 2024?”

  1. Another option would be to engage a short term rental / furnished holiday let specialist agency and benefit from higher rental income and exclusion from section 24 tax impact.

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