There is no doubt buy-to-let investing has generated a huge amount of wealth for investors over the past few decades. Property investors have benefited from numerous tailwinds including rising property prices, rising rents and falling interest rates, which has made it easier to own property and cheaper as well.
Landlords have also benefited from lucrative tax breaks as well as a relatively hands-off approach by the government towards the private rental sector.
Unfortunately, this golden era of buy-to-let investing is now coming to an end. The government is clamping down on landlords’ tax breaks and bad behaviour, weighing on returns across the buy-to-let market.
A huge change
One of the most significant changes the government has bought in recently is the way mortgage interest is treated. Up until the 2016/17 tax year, landlords could deduct mortgage interest and other costs from their rental income, before calculating their total tax liability.
Under the new system, which is being phased in over several years, from 6th April 2020, tax relief for finance costs will be restricted to the basic rate of income tax. Further, tax relief will only be given as a reduction in tax liability instead of a reduction to total taxable rental income as it is now.
For buy-to-let landlords who don’t have any other income, these changes will have a relatively limited impact on their finances. However, basic rate taxpayers could find themselves being pushed into the higher rate band as a result because the tax relief will now be deducted from the final tax liability, rather than the headline rental income figure.
These changes could mean many buy-to-let landlords who only have one or two properties, who are currently making a small net profit, will end up with a loss after taxes deducted making buy-to-let investing completely uneconomic.
A poor investment
I think these changes only reinforce my opinion that buy-to-let property is a poor place for your money, unless you have enough funds to construct a well-diversified multi-property portfolio. I reckon stocks are a much better assets to buy if you’re looking for steady long term returns without the hassle of managing a property, finding tenants and dealing with onerous regulations.
Property stocks, particularly real estate investment trusts, are a great way to play the property market without having to spend hundreds of thousands of pounds trying to get into buy-to-let investing.
Real estate investment trusts also offer exposure to properties most average investors would never be able to afford. For example, FTSE 250 constituent Derwent London owns a portfolio of properties across London with a market value of around £5.2bn.
Shares in the real estate investment trust are currently dealing and a price to book value of just 0.85, which implies you can acquire this property portfolio for just 85% of its market value. On top of this, the stock supports a 2.3% dividend yield. You can pick up this income without having to worry about finding tenants or being called to fix a leaky pipe in the middle of the night.
From an investment standpoint, I think this is a much better way to play the property market than buy-to-let investing.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019