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Is it still worth being a Buy to Let landlord?

a female landlord deciding whether to sell her buy to let or keep it
“Should I stay or should I go?”

With the sharp increase in interest rates and landlords’ costs, it can be difficult to know if buy to let investments are still worthwhile in 2024.

The good news is that I look closely at whether it still makes sense to invest in buy to lets in 2024. To do this, it’s useful to understand why buy to lets originally became such popular investments. Then, what’s has changed to make so many landlords want to sell up?

Profitability is at the heart of this, but profit means different things to different people. Property trainers talk about ROI, but when landlords are trying to decide whether or not to sell up, it’s useful to look at what the bottom line is, after interest and tax. Where’s the line when the buy to lets stop making money? This will vary for every landlord, as it’s linked to the amount of debt that buy to let businesses carry.

Finally, I look at what it takes for the standard single let buy to let to be a worthwhile investment in 2024.

The Growth of the Private Rented Sector since 1988

The growth of the PRS in England is a relatively recent phenomenon from a historical perspective.

In 1988, the PRS in England comprised 1.7 million households or 9.1% of all households (Source: English Housing Survey Section 1 Annex Tables).

The latest figures from the 2022-23 English Housing Survey published in December 2023 shows the PRS rising to a peak of 20.3% or 4.7 million households in 2017, and back slightly to 18.8% or 4,596,000 households in 2023. This is almost one fifth of the 24,408,000 households in England.

In other words, the number of households renting from private landlords has grown by a magnitude of 2.8 times since 1988.

>> Useful Resource: What the 2022-2023 English Housing Survey reveals about the PRS

buy to let text book

Here are some of the key drivers behind the increasing popularity of buy to lets after 1988.

1. Deregulation of the PRS in 1988

It wasn’t until the Housing Act 1988 deregulated the PRS that buy to let properties became an attractive investment. Not only did the 1988 Act abolish rent controls for tenancies created after 15 January 1989, but it made it easier for landlords to regain possession of their properties using Section 21.

These increased protections for landlords gave investors more confidence in investing in property.

>> Related post: How to terminate a tenancy using Section 21

2. The launch of buy to let mortgages in 1996

Buy to let mortgages were officially launched at the RAC Club in London, no less, in September 1996, at the instigation of ARLA. This new specialist mortgage product helped the private rented sector grow rapidly.

Gross advances on buy to let mortgages grew from just under £4 billion in 2000, to £45.7 billion in 2007, just before the financial crash in 2008. It went from comprising 2% of mortgages to 10%. However, lending fell sharply after the crash, falling to £8.6 billion in 2009. (Source: Paragon Bank).

3. Cheap money

Through much of the 1980s and even until 1991, base rates were in double figures (Source: Bank of England Official Bank Rate History). It was Margaret Thatcher’s tight money supply experiment to try to tame inflation. In 1989, base rates even reached 14%. it’s something that seems inconceivable now.

When investing in buy to lets really took off in the early 2000s, base rates were “cheap” in comparison, around the 4-5% level, and money was readily available for would-be buy to let landlords with softened lending criteria. For investors used to double digit interest rates, investing in a buy to let became very appealing.

Of course, we all now know that sub-prime lending became part of the global financial crisis of 2008, and leading to the failure of several banks. Stress testing was then introduced and lenders became more cautious.

However, the era of really cheap money started in March 2009 when interest rates fell below 1%, staying that way until May 2022 when they edged up to 1%.

>> Further reading: Paragon Bank, 25 years of Buy to Let

Enter the BRRR Strategy and Property Trainers

The BRRR Strategy explained as an infographic showing each step
The popular Buy, Refurbish, Rent, Refinance, Repeat strategy explained

From March 2009 to May 2022, buy to let landlords became used to almost free money to finance their expanding portfolios.

Property trainers began promoting courses to show investors how they could grow a portfolio using a fairly modest deposit and cheap money using the BRRR or Buy, Refurbish, Rent, Refinance, Repeat strategy.

An example of these trainers is Simon Zutshi who founded the highly successful property investing network in 2003 and the Property Mastermind Programme in 2007, a 12 month programme which now costs £25,000. His entry level course, the Property Mastermind Accelerator, costs £2,997. Numerous other property trainers provide similar programmes in different formats. I provide Simon Zutshi as an example, but as I’ve not attended his training myself, please don’t see this as either an endorsement or a criticism. I’m not an affiliate and the links are not affiliate links.

The BRRR model involves investors buying a property below market value, refurbishing it and renting it out. The next stage is to refinance the property at a (hopefully) higher valuation. The rent needs to be high enough to meet the stress tests for the increased borrowing. Next, the investor withdraws the some or all of equity in the property from the increase in the property’s value. This is then recycled to fund the purchase of another below market value to start the cycle again. In other words, “repeat” in the diagram.

This strategy was well suited to a period of cheap money. As Sarah Beeny always pointed out in The Property Ladder, it’s easy to make money in a rising market. This happens even if you do nothing to the property. The rising housing market has provided the tail wind for the crucial revaluations that enable investors to withdraw some or all of the original deposit and reinvest. It’s far harder to do it in a stagnant or declining housing market.

What’s gone wrong? Why are BTL landlords selling up?

for sale buy to let landlord selling up

The glory days of the buy to let landlord do seem to be over, at least for now, and landlords have increasingly been selling up over the last few years. This has been leading people to think whether buy to let is still worthwhile.

Although there’s been a lot of talk in the media about “increased regulation” and the impending Renters Reform Bill causing landlords, I think this is exaggerated.

People tend to sell up when either their personal circumstances change or they decide the buy to let isn’t worth the effort. Here are the 3 key reasons why some landlords have been concluding buy to lets are no longer worthwhile:

1. The consequences of Section 24 reducing mortgage interest tax relief

George Osborne holding the despatch box before his 8 July 2015 budget speech which introduced section 24 Finance Act 2015
George Osborne before his 2015 budget which introduced section 24 Finance Act 2015

After the boom years of buy to lets, clouds gathered on 8 July 2015. This is when George Osborne gave his budget speech, which limited the ability of landlords to set off the full cost of financing against their rental income. Instead, they would only be able to set off a 20% tax credit for the interest payments. This is the so-called Section 24.

Why did George Osborne do this? He explained he wanted to “create a more level playing field between those buying a home to let and those buying a home to live in” (UK Parliament). Landlords were characterised as having an unfair advantage against owner occupiers who had not been able to claim mortgage interest tax relief since Gordon Brown abolished it in April 2000.

In fact, what Section 24 did was create another inequality of treatment between “sole trader” landlords and those who own properties through limited companies. Corporate investors and landlords who have bought since 2015 using limited companies can get round Section 24 . This is because, unlike income tax, financing costs are a deductible expense for corporation tax purposes.

I have spoken to my MP about the issue, and she took it up with the Department of Levelling up. I was surprised to see the then Housing Minister Rachel Maclean continuing to justify Section 24 in a letter to my MP. I’m not sure if she’s being deliberately selective, or just fails to understand the relevance of corporation tax. In any event, Rachel Maclean misses the point on Section 24 (my bold):

The Government has a responsibility to make sure that the income tax system is fair. Under the old system, landlords got relief on their finance costs (including mortgage interest payments) at their marginal rate of income tax, which meant that higher-rate taxpayers got a more generous tax relief than those on lower incomes. To address this, and make sure that all landlords are treated the same by the income tax system, the Government phased in a set of reforms to restrict finance cost relief to the equivalent of the basic rate of income tax.

[…] The Government’s position is that finance costs are different to other expenses, since having a mortgage on a property allows the landlord to purchase a more expensive property and incur larger gains on the investment than they would have done without the mortgage. Our changes to taxation have helped reduce the disparity in income tax treatment between homeowners and landlords.
Rachel Maclean, Housing Minister, Letter dated 27 June 2023

Individual landlords who bought properties in their own names, ie not limited companies, are now taxed on earnings less operating expenses rather than profit after financing. It wasn’t so so bad when interest rates were under 1%. However, now rates are over 6%, it’s certainly begun to bite. Not only can landlords struggle to meet the stress tests at this higher rate, but they have the double whammy of paying tax on EBIT profits.

This is particularly bad for landlords who released the maximum amount of equity when they last refinanced on lower rates, so they could use it invest elsewhere using the BRRR strategy. This left them with no wriggle room. They now can’t afford the higher interest payments and the higher tax that doesn’t reflect these business expenses.

It is not surprising therefore, that many sole trader landlords are selling up as a direct result of Section 24.

>> Related Post: How did Section 24 change the way landlords are taxed?

>> Related Post: Are limited companies best for landlords?

2. Fears about EPC costs

EPC E to C symbolised by Sisyphus rolling a boulder up a mountain to EPC C rating made of cash

According to Table 2(g) of the Energy Efficiency Dataset for England dated March 2022, only 37.5% of existing private rented properties (ie excluding new builds) had an EPC rating of C or above.

Put another way, 62.5% of the existing housing stock in the private rented sector (excluding new builds) have an EPC rating of D or E.

The news in 2020 that landlords would need to spend at least £10,000 or ensure the property reaches an EPC C sent shockwaves through the private rented sector. Particularly for lower value properties where £10,000 would be disproportionate for the value of the property.

Although Rishi Sunak confirmed in September 2023 that the Conservative government would not make it compulsory, there are still concerns that a Labour government would bring it back.

>> Related Post: What landlords need to know about improving EPC ratings

3. Higher interest rates / stress tests rendering many leveraged BTLs uneconomic

bank of england official bank rate history

Even a casual glance at the above graph reveals how steeply interest rates have increased from their low of 0.1% in December 2021 to 5.25% in August 2023, having remained under 1% since March 2009.

As Hamptons said in their report Market Insight: Summer 2023, even though borrowers will have been stress tested at rates of 6-7%, it will still be a “painful adjustment”. This is even more so for those sole trader landlords who cannot set their full financing costs off against rental income.

This combination of high interest rates and Section 24 made 2023 a “turning point for Britain’s private rented sector”, according Savills. Despite increasing rents, Savills point out that net profits for private landlords have dropped to their “lowest since 2007, due to the impact of 12 successive increases to the Bank base rate, exacerbated by restricted tax relief”.

Can buy to let landlords still make money in 2024?

magnifying glass on the word profit to show profit is being examined
Does the buy to let model still make sense in 2023?

Are there any reasons for private landlords to be cheerful in 2024? Are buy to let investments still worthwhile, or has the bubble burst? In other words, can BTLs still be profitable in 2024?

Let’s first look at how to calculate the bottom line (net profit), and then see what’s happening at the net profit level.

>> Useful Resource: Can the average buy to let make money?

How to calculate whether a buy to let is profitable

Profit means many things to different people.

Most property trainers focus on Yield or Return on Investment as measures of profitability. These are legitimate metrics which focus on buy to lets as an investment proposition.

Yield is a percentage that measures gross income as a percentage of the value of the property. It will go up and down depending on the capital value of the property. ROI is a percentage of the net income as a percentage of the cash invested. As it excludes the debt, it favours more leveraged businesses. These two metrics are particularly relevant to new investors or those who have angel investors.

I’m going to look at profitability from a different angle. In other words, does the buy to let business as a whole makes any money? Is the buy to let worthwhile, or is it a money pit? What’s the bottom line?

Here are two ways to measure the core profitability of a buy to let:

EBIT (earnings before interest and tax)

  • EBIT = Rental income – operating expenses excluding interest and tax
  • This is a very popular metric in the business world, as it focuses on core performance rather than the effects of financing costs. It’s similar to Gross Profit, but it includes any central overheads.
  • It’s the “pure” profit of a rental business, before taking into account the cost of debt.
  • Operating expenses include landlord insurance, repairs, maintenance, letting / managing agent fees from their rental income.
  • EBIT does not include any interest payments on a buy to let mortgage, as the metric focuses on the profitability of the underlying business.

Net Profit or “the bottom line”

Net profit is similar to EBIT, but it includes interest payments on a buy to let mortgage and tax. It’s the net figure, or the true bottom line. This is the figure that I use to assess the profitability of my BTLs.

The revenue line for landlords (rental income)

On the plus side in 2023, rental income increased significantly over the past few years. It’s even outpaced inflation outside of London.

A good example of how the revenue line has grown is to compare the pre-Covid Rightmove Q3 2019 Rental Trends Tracker with that of Q3 2023.

The average asking rent outside of London was £828 pcm and £2,104 pcm in London. However, in Q3 2023, the average asking rent outside of London is £1,278, an increase of £450 pcm or 54% on Q3 2019. The increase in London has been more modest, due to the Covid-related dip. The average asking rent is now £2,627, an increase of 25% on Q3 2019.

According to the Bank of England Inflation Calculator, the Q3 2019 asking rent of £828 is worth £1,010 today, £268 less than the current average rent. As for London, despite the headlines, average asking rents have only just kept pace with inflation. The £2,104 rent of Q3 2019 is now the equivalent of £2,566 in today’s money.

The upshot of this is that the earnings line for landlords is very strong. Rents have outpaced inflation outside of London, and have kept place with inflation inside London. On top of this, there is capital growth over the long term.

The reason rents have increased so much is that rental demand is very strong. This is largely due to a lack of supply.

The operating expenses line for landlords

Landlords’ operating expenses have increased because of inflation. This includes the impact of inflation on materials for refurbishments, labour costs, and landlord insurance. Also, as managing agents charge a fee that is a percentage of rent, the management fees have has gone up too in absolute terms.

Landlords can manage the operating expenses line to improve profitability. This blog post explains concrete ways to do this: 7 Ways for Landlords to Improve the Bottom Line. Self-managing is an easy way for landlords to cut costs: How to self-manage your buy to let.

However, as discussed above, a big looming cloud for landlords on the expenses line is the anticipated cost of improving the EPC rating of their properties to a C.

Although the draft bill has stalled, and Michael Gove said in July it will be relaxed, worries about the cost of energy efficiency improvements have been the final straw, convincing landlords to sell up. For so long as this remains unclarified, it will continue to make landlords more inclined to sell if their properties don’t already have a C rating.

>> Related Post: What Landlords Need to Know about EPCs

Financing costs for landlords

This is where the picture suddenly changes for many landlords. Despite the growing demand from renters and increasing rents, the ability of a landlord to make a profit in 2023 and 2024 will depend on the amount of debt they carry.

Financing costs, which include interest, arrangement fees, product fees and, indirectly, all the extra legal costs needed to borrow through a limited company, have increased dramatically for those with mortgages. Particularly if they are refinancing in 2023 or 2024.

In Rightmove’s Q3 2023 Rental Trends Tracker, they reported that 25% of landlords are concerned about the rising cost of buy-to-let mortgages, causing some to sell up. They estimate that 16% of properties for sale in June 2023 were buy to let investments. This is up from 13% in January 2019.

25% might seem like a low figure, but not all landlords have a 75% loan-to-value (LTV) mortgage. In fact, according to Savills, 75% of mortgaged buy-to-let properties have a Loan-to-Value (LTV) of under 60%, One third of landlords an LTV of less than 50%.

Savills also illustrate how crucial lending costs are to the question of whether buy to let investments are worthwhile. They estimate that in Q1 2023, landlords with an LTV of 60% generated an average profit of 10.2% and those with an LTV of 50% produced 16.5%. On the other hand, landlords with a 80% LTV saw profits turn into losses of -2.4%.

Tax costs for landlords

The final part of the calculation to arrive at the net profit is to deduct the total tax. For limited companies, that’s corporation tax. Individual unincorporated (sole trader) landlords pay income tax.

The tax costs for unincorporated landlords with mortgages who are in the higher rate tax bracket will be considerably higher than those who own properties via a limited company. Section 24 taxes EBIT, allowing only a 20% tax credit for the interest paid on a BTL mortgage. Higher rate tax-paying unincorporated landlords with mortgages therefore pay more tax those who operate through a limited company.

Section 24 does not impact landlords with no debt.

>> Related Post: Section 24 and its impact on landlords

What does 2024 look like for buy to let landlords?

mixed weather
A mixed outlook for buy to let landlords

Looking forward, what are the prospects for the private rented sector? Are BTL investments still worthwhile in 2024?

According to the quarterly survey by Landbay published in July 2023, 41% of landlords plan to buy more property in the next 12 months. Digging into the data, it’s the landlords with larger portfolios that are still keen to buy, with more than half (54%) of those with 11-20 properties planning to expand their portfolio. This shows that these larger landlords are optimistic about the future.

But surely, with the recent hike in interest rates, buy to let is no longer profitable? Yes and no. Rising rents and yields mean that buy to let investments are still worthwhile for landlords, certainly at the EBIT level before interest and tax. If the landlord has no or little debt, then the investment becomes a very attractive proposition. Not only are rents increasing in line with or even in excess of inflation, there will be capital growth too.

However, landlords who previously bought properties below market value to refinance using the BRRR model will struggle to make money from single lets at the current interest rates with a 75% LTV. Instead, they would need to focus on investments with higher returns. For instance, HMOs, short term lets or title splits, which are generally more profitable.

Savills conclude that cash really will be king for future investment in buy to lets:

“Future investment is now likely to be dominated by cash buyers and those with low borrowing requirements. Even landlords with modest gearing are now more likely to enter the sector or expand existing portfolios in areas furthest from London, with a greater focus on smaller properties which offer bigger returns.”

>> Related Post: Landlord Guide: How to Ride out a Downturn

Conclusion: Are buy to let investments still worth it in 2024?

The answer is “it depends”.

The fundamentals of the core BTL business model are sound: high demand from renters, increasing yields, rents keeping pace with inflation, and long-term capital growth. Rental demand will continue to increase; all the more so if more landlords sell up.

In other words, at an EBIT level, buy to lets are profitable and are worthwhile investments. They can and do make money both in terms of rental income and capital growth.

However, the picture changes radically at the net profit level for those landlords with high lending costs, especially if they’re sole traders. Some may try to sit it out, perhaps by paying off debt, or being prepared to accept a net loss in the hope that things will improve. Others may convert single lets to HMOs or short term lets in order to increase net returns.

Here’s what Savills conclude:

“Debt exposure of mortgaged buy-to-let landlords will play a critical role in the future shape of the private rented sector. Viability will be a real issue for smaller landlords with higher levels of debt who are coming to the end of their fixed rate, while larger, wealthier landlords are in a much better position to benefit from the rental growth seen in the period post pandemic.

PS. In case you’re wondering why I haven’t included anything about the Renters Reform Bill, which is likely to hit the statute book in 2024. It’s because I don’t think the Bill affects the intrinsic viability of buy to let investments. Increased regulation is a pain, but it’s manageable: How to get ready for the Renters Reform Bill. I will continue writing lots of practical content to help landlords navigate the change that the Renters Reform Bill will bring.

>> Related Post: Index of content on The Independent Landlord

>> Related Post: Renters Reform Bill Hub

are buy to lets still worthwhile in 2024?

4 thoughts on “Is it still worth being a Buy to Let landlord?”

  1. This is an excellent summary and comprehensive read. Thanks Suzanne. I have now signed up to subscribe to your newsletter

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