Making money from buy-to-let has been a tough ask ever since former Chancellor George Osborne launched his triple tax attack on amateur landlords in April 2016.
He hit investors with a 3% stamp duty surcharge, reduced wear and tear allowances, and phased out higher rate tax relief for good measure.
The impact has been particularly brutal in London, where high prices have squeezed yields to among the lowest in the UK. The average property in the capital now yields just 3.4% a year, which falls as low as 1.93% in Highgate. These are well below the national average of 4.17%, according to TotallyMoney.com.
The stamp duty surcharge hit the capital particularly hard, typically adding £11,760 in London, against just £3,910 elsewhere. The average landlord now faces a £24,600 stamp duty bill in the capital, compared to £5,330 elsewhere, according to new research from Hamptons International.
Get out of London
Almost six out of 10 London-based landlords now choose to invest elsewhere. Rents in Greater London may have hit the highest level on record at £1,737 a month, but landlords still cannot make their sums add up.
Unless you are a professional investor with a tax-efficient limited company, I reckon buy-to-let is now more trouble than it’s worth. I say that as somebody who has been tempted himself, but no longer.
You need a 25% deposit to take out a buy-to-let mortgage. According to the Land Registry, the average London property cost £473,822 in 2018, which means you need £118,456. Then you need more money to cover stamp duty and other purchase costs.
The average UK property costs £230,776, so your deposit will still have to be £57,694 outside the capital, plus stamp duty and so on.
You also have to budget for doing up your property, complying with regulations, searching for tenants, taking deposits and doing inventories. Plus you have all the effort of managing tenants and maintaining the property, at the end of which you hand over a load of tax to HM Revenue & Customs.
Nice and easy
I don’t know why people still bother when they could take out a Stocks and Shares ISA in a matter of minutes, choose a balanced mix of individual stocks or investment funds… and that’s it! These three simple steps set you on the way to building a £1m ISA portfolio.
Better still, you don’t have to pay any tax on your income or capital growth, as you will do with a buy-to-let property. You don’t even need to mention your ISA on your self-assessment tax return, if you complete one.
You can keep running costs to a minimum as well by investing through a low-cost online platform and choosing funds with minimal annual charges.
Better still, if you want to sell at any point, you can do it in minutes, whereas it could take months to offload a property you no longer want. Especially if the market crashes or is in the doldrums. London typically sets the trend for the rest of the country and I suspect it will be the same for buy-to-let, whose best days are sadly over.
Harvey Jones 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.