Is the buy-to-let market shifting towards longer-term returns on investment?

Achieving sustainable success in the buy-to-let sector can often feel like a challenge due to the unpredictable nature of short-term market trends. Fluctuating property prices, economic downturns and regulatory changes such as the government’s recent buy-to-let tax clampdown can all have an impact on landlords’ profit margins, making it difficult to tell which way the market is moving.

However, significant gains are still available for those landlords who are able to cultivate a portfolio of properties and maintain it sustainably over an extended period of time. This has been illustrated by a new report from Kent Reliance, which has demonstrated that property investors can generate a healthy profit margin if they are willing to adopt a long-term approach to their business model spanning multiple decades.

A significant margin for long-term profits

According to the bank’s analysis, a basic taxpaying landlord placing a typical 30 per cent deposit of £73,908 on a property can generate a total profit of around £265,500 over the course of a 25-year investment, once all costs and taxes are taken into account. When also factoring in the impact of inflation over this period, this would be equivalent to a profit of £162,000 in today’s money, or £6,475 every year.

Capital gains account for a significant portion of this total, with the average buy-to-let property set to grow in value to nearly £516,000 over 25 years, even assuming that house prices and rents only rise in real terms by one per cent annually – well below the performance level seen over the last 20 years. This would result in gross capital gains of £269,464.

A typical property would also generate a total rental income of £369,495 over this period; on the other side of the equation, meanwhile, are buying, running and selling costs of £373,000, including taxes of £99,600 per property, mortgage finance costs of £157,000, and £72,000 on maintenance and upkeep.

Potential risks

Any landlords wishing to generate long-term success need to be aware of a number of potential risks, however. For example, the report noted that profit margins vary significantly from region to region, due to significant differences in house prices, yields and initial deposits, making local research essential.

Moreover, policy changes can alter the market dynamic in various ways – notably, the recent regulatory and tax reforms introduced by the government have served to reduce its attractiveness to amateur landlords and increase tax bills paid by higher-rate investors. Landlords need to take additional changes of this kind into account when putting together a long-term strategy.

John Eastgate, sales and marketing director at Kent Reliance’s parent company OneSavings Bank, said: “In spite of rising costs, there are still healthy returns to be found in property for committed investors. However, the days of speculation are gone. It is a long-term business endeavour, requiring commitment and expertise.

“Investors must be prepared to undertake business and tax planning, understand the risks as well as the rewards and, most importantly, the responsibilities they have towards their tenants.”