How do you maximise buy-to-let returns following the 3% stamp duty increase?
April’s stamp duty increase, for buyers of second homes and buy-to-let properties, is just the latest in a long line of changes facing landlords and investors.
So with an extra 3% stamp duty to pay, how do you maximise your buy-to-let returns?
Looking at the long-term picture, you’ll get to recoup some of the additional outlay when you come to sell, as stamp duty is tax deductible. But that could be a long way in the future so may be small consolation to you now.
Another thing to look at is the rent you are charging. Generally speaking, landlords don’t often raise rents charged to existing tenants, which means they don’t increase in line with wages and inflation. The result is that you could end up effectively giving yourself a ‘wage cut’ each year. I often find landlords charging a lot less than market rates as they don’t keep rents up in line with wage and inflation rises. This might not recoup all of the upfront stamp duty increase, but will certainly help your finances over time.
What might mean you increase your returns to cover stamp duty rises is building rather than buying. This has the potential to give you greater returns as well as helping to ease the national shortage of homes. Your small contribution may feel insignificant when compared to the 240,000 properties reported to be needed each year, but if just 10% of landlords went down this route, it has the potential to add 100,000-200,000 properties to our stock levels.
You can build to sell, or build to let. If you purchase a plot of land and build just two or three properties, or split a large property into two smaller ones, there is the potential to make a 20-30% return as soon as you sell. Alternatively, hold on to your new homes and let them out, and you’ll see greater yields than you would by buying an existing property and carrying out the work needed to prepare it for letting.
To help with cash flow, why not consider partnering with a local builder and share the profits? This gives the builder a great incentive to build a really good home at a reasonable cost. You do need to pick your partner carefully, such as a member of the Federation of Master Builders and have a watertight contract from a legal company who has done deals like this before. It is potentially a great way for everyone benefiting from your investment.
Once your properties are bought and built, consider refinancing with a mortgage, but do seek specialist regulated mortgage broker advice for your circumstances. Owning a rental property outright may seem like a great plan as you initially earn more income, but it can reduce your returns if house prices don’t grow in line or beat inflation. For instance, a £100,000 property purchased for cash at the height of the market in 2007 would need to be worth (on average) over £125,000 now to keep up with the cost of living and just ‘stood still, which is an increase of 25%. Although some areas have exceeded this growth rate, others are areas are still seeing property prices lower than they were in 2007, so if you own with cash, it’s worth reviewing future investment as it can reduce your returns and prevent you from mitigating increased costs such as a bigger stamp duty bill.
Need any help and advice buying to let? Then do contact me at www.propertychecklists.co.uk and I’ll be happy to answer your questions or there is lots of free help online.