Buy-to-let investments can be lucrative, but there are several pitfalls that can derail their profitability.
Emma Wells, Managing Director for Lettings at Leaders Romans Group, shares key reasons why buy-to-let investments often fail, and what investors can do to avoid these common issues.
Property value doesn’t rise in line with inflation
If your property’s value fails to increase with inflation, the real value of your investment decreases over time, leaving you with less equity when it comes time to sell. To mitigate this risk, there are two main strategies:
Buy below market value: Look for motivated sellers, especially in a slow market, and consider cash purchases for extra negotiating power.
Research the market: Use resources like the Land Registry and experienced local estate agents to identify properties that have shown consistent value growth.
Ongoing costs rise too high
Maintaining profitability requires managing expenses, with mortgage payments often being the largest outlay. The spike in interest rates in 2023 served as a reminder to account for potential increases in borrowing costs.
Know your break-even point: Estimate how much interest rates can rise before your investment becomes unprofitable, working with an assumption of 5-6% mortgage rates and keeping a buffer of 3%.
Monitor costs regularly: Keep track of income and outgoings monthly, and regularly review suppliers to ensure you’re not overspending.
High costs to meet health and safety regulations
Before purchasing, understand the health and safety regulations that apply to your type of let, especially if it’s a House in Multiple Occupation (HMO), which has more stringent fire and licensing regulations.
Research thoroughly: Check for any pending legislative changes that could increase compliance costs, and factor these into your budget.
Unanticipated major works
All properties need occasional significant work—new kitchens, bathrooms, boilers, or roof repairs. Failing to budget for these costs could leave you with a non-compliant property or one that’s unattractive to tenants.
Plan ahead: Create a 15-year maintenance budget and set aside a portion of profits each month. Update this budget regularly to account for inflation and changing costs.
Low tenant demand and void periods
Empty properties mean no rental income, which can quickly erode profits. To avoid prolonged vacancies:
Buy in high-demand areas: Work with local letting agents to identify properties and locations that consistently attract tenants.
Stay informed about tenant needs: Ensure your property aligns with current market demands by offering popular amenities and features.
Inability to raise rents with inflation
If tenant demand is low or wages stagnate, raising rents in line with inflation may not be possible, squeezing your margins.
Choose high-demand properties: Prioritise investments that are likely to maintain strong demand, giving you more flexibility to raise rents over time.
Build in a profit cushion: Ensure that your initial profits are sufficient to absorb any market downturns or stagnant rents.
Unexpected tax liabilities
Understanding your tax liabilities is essential for ensuring that post-tax profits meet your expectations. Rental income can push your total earnings into higher tax brackets, reducing overall profits and affecting benefits like child benefit.
Consult a tax specialist: A property tax advisor can help you navigate complicated tax rules and ensure your buy-to-let remains a viable and tax-efficient investment.
By taking these steps and planning for potential challenges, you can maximise the chances of long-term success with your buy-to-let investment.
