The average private landlord has gained a post-tax return of 16.9% over the last three years, property investment specialist BondMason has found.
This is from 1 April 2016 to 1 April 2019 for higher-rate tax payers, assuming a 65% loan-to-value mortgage, 3% annual interest; and a 4.5% rental yield. Meanwhile over the same period investors in corporate residential landlords have seen a return of 37.7%.
Stephen Findlay (pictured, the chief executive of BondMason, said: “The number of private landlords has grown for decades, but recent tax changes and increasing regulations have left many wondering if the financial gain is worth the cost and hassle to maintain the property, do the administration and deal with tenants.
“Our calculations show over the past few years the likely post-tax gain for the typical private landlord has declined substantially, concluding that for most private landlords the hassle is no longer worth it.
“With hindsight, many would have been better off selling up a few years ago, ending the time-consuming activity of dealing with tenants, and instead investing their money with listed corporate landlords.
“Looking ahead, our research also predicts worse is yet to come. Many private landlords may start to struggle to balance the annual costs of owning a rental property, with the post-tax rental income received, particularly in areas of lower rental yield, as the allowable mortgage tax deductions continue to decline.
“This month the Mortgage Interest Relief continues to phase in, and by next year landlords will be restricted to claiming a basic rate of income tax (20%) on their mortgage interest costs, while having to pay their full tax rate on the rental income.
“In some cases, landlords will have seen their tax bills double or even treble over the last few years. I would not be surprised to see many private landlords making no income or even a loss next year as this change takes effect. This may lead to more and more landlords thinking again about their buy-to-let investment portfolios.”
Findlay said that historically the UK rental market has been dominated by private landlords, but that is now changing following the increased tax burden and new regulations which make it harder to generate a positive income each year.
He added: “These companies are filling the gap left by smaller private landlords exiting the market, satisfying the strong demand for rental properties, particularly from first-time buyers continuing to be priced out of the housing market in many areas.
“Our expectation is that we may soon see the peak in terms of the proportion of houses owned by individual private landlords, and that proportion will start to decline, unless tax legislation is changed or reversed.
“But the good news is that the growth in number of listed corporate landlords means a greater number of people can get exposure to good investment returns from the residential property market by investing in these companies, with the added benefit of being able to do so within a tax efficient wrapper such as an ISA or SIPP.”