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Thinking of investing in buy-to-let? This is what you need to know

Royston Wild
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These are confusing times for those thinking of investing in buy-to-let. Rents, for many, are skyrocketing in most parts of the UK because of huge property shortages. Home prices are also galloping higher again following the Conservatives’s victory in December’s general election.

The news flow has been broadly more positive of late, sure. But do these developments really make residential property rentals a worthwhile  endeavour?

Maintenance mayhem

Well, fresh data from Howsy should give all prospective buy-to-let investors reason to stop and think. The online lettings agent says the cost of maintaining the average buy-to-let home in Britain sits at £2,313 per year. This equates to a colossal 28% of the average landlord’s rental income.

Howsy used the so-called 1% rule to calculate these figures. This assumes that 1% of the property price is required to cover the costs of upkeep, on an annual basis. The agent then calculated the average annual rent in the UK to work out the percentage.

A drop in the ocean?

Quite an eye-popping figure, I’m sure you’d agree. But this is just one of the whopping costs landlords have to face today. Additional stamp duty costs are due on purchase, while the taxman’s recent raid has seen critical relief on items like mortgage interest axed. Then come increased fees and lower deposits, due to the Tenant Fees Act.

Throw in other miscellaneous agent fees, regulation costs and those aforementioned maintenance bills, well it’s understandable why buy-to-let investor numbers are collapsing.

A better bet

A better way to play the property market would be by buying shares in Unite Group (LSE: UTG). This company operates in the sub-segment of student lets. And it allows investors to avoid many of the onerous costs, along with the day-to-day supervision, that normal buy-to-let operators have to swallow.

A combination of booming student numbers and huge property shortages is driving earnings at this FTSE 250 share to the stars. Results today showed EPRA earnings boomed 25% year-on-year in 2019, to £110.6m.

The medium-to-long-term trading outlook remains white-hot too. “Reservations for the 2020/21 academic year are in line with record levels,” the business says, leading to predictions that like-for-like rents should grow between 3% and 3.5%.  A development and partnership pipeline of some 5,000 rooms leaves it in top shape for the years ahead too.

City analysts believe there’s much more to come. Current consensus suggests Unite’s earnings will jump 22% in 2020, and 16% in 2021. These hot predictions leave little wonder why the business trades on an elevated price-to-earnings (or P/E) ratio of 28 times.

Irrespective of whether you think the lettings giant is worthy of such a handsome premium, Unite’s progressive dividend policy helps take the edge off. The 2019 full-year payout was hiked 14% to 33.2p per share. And the number crunchers expect more meaty hikes to 38.1p and 43.9p in 2020 and 2021 respectively. Such figures yield a meaty 3% and 3.5%.

I’d much rather invest my cash here than in buy-to-let.

The post Thinking of investing in buy-to-let? This is what you need to know appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares 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 2020