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Why I think rising buy-to-let costs are a warning for investors!

There’s no disputing that buy-to-let investing no longer provides the magic formula to make big profits.

Until a couple of years back, property prices in the UK were still ripping higher, a trend that ongoing Brexit uncertainty has put to bed. But what’s really damaged landlord returns is the stream of increased tax grabs by HM Revenues and Customs – most notably higher stamp duty costs and the loss of mortgage interest relief – as well as the financial costs of recent regulatory changes (like those associated with the Tenant Fees Act, which came into effect in June).

Big bills

What tends to get much less attention are the huge costs associated with the repair and general maintenance of buy-to-let properties. And fresh data from Howsy underlined just what an increasing problem this is becoming for UK landlords.

According to the lettings management platform, the average rental investor needs to set aside a whopping £2,344 per year – a figure based on the average house price here in Britain – to cover the costs of the general upkeep of their property.

It’s no wonder that more and more buy-to-let investors are heading for the exits, then, and that the mortgage market for rental properties is steadily drying up. The average annual return that landlords can now expect has shrunk to just £2k, and it’s likely that profits will keep sinking as the government steps up its attacks.

A better bet than BTL!

It’s still possible to make some mighty returns from buy to let, though I’d argue that investing in the share market is a better way to achieve it. And this is where Grainger (LSE: GRI), the UK’s largest listed residential landlord, comes in.

The FTSE 250 firm is a specialist in the build-to-rent and private rented sector, and is capitalising handsomely on the country’s huge shortage of rental properties, which is driving rental costs higher and higher.

In the last fiscal year (ended September 2019) Grainger saw net rents rise 3.6% on a like-for-like basis, gathering pace from the 3% rise recorded in the prior 12 months. And what’s more, these rent rises far outstripped that of the broader market, which clocked in at 1.9% over the period.

What’s more, Grainger saw the value of its property portfolio rise 1.9% over the year, also an improvement from financial 2018 when growth came in at a more modest 1.6%. All told, it’s no surprise the firm is bulking up its property pipeline – last year it delivered a whopping 1,152 private rental homes in the last fiscal period, and has a pipeline of more than 9,100 more.

Unsurprisingly City analysts expect Grainger’s long record of annual earnings growth to keep rolling, forecasting a 7% bottom-line rise for the current financial year. A forward price-to-earnings ratio of 23.6 times might be high, but I reckon the company’s bright trading conditions and ambitious growth prospects make it worthy of such a premium.

Indeed, I’d much rather buy into Grainger than get involved in buy to let today.

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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.