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Landlords could see £162,000 net profit per property over 25 years despite rising costs

A typical landlord in Britain would see an estimated net profit of over £265,500 per property over the next 25 years, through rental income and capital gains, new research has found.

In today’s money, that’s £162,000, or nearly £6,500 per property per year, but returns vary significantly across regions, with profits estimated to reach over £307,000 in London in today’s money, almost £12,500 per annum.

The research from specialis lender Kent Reliance, part of OneSavings Bank, points out that this kind of significant return is possible despite recent regulatory and tax changes which have been adding to landlord costs.

The calculations suggest that over the course of a 25 year investment, a basic tax paying landlord, placing a typical 30% deposit of £73,908 on a property, would generate a total profit of £265,500 after all costs and taxes. Accounting for the impact of inflation over the period, this represents a profit of £162,000 in today’s money, or £6,475 every year.

Capital gains comprise a significant portion of a landlord’s returns. Assuming that house prices and rents rise in real terms by 1% per year, well below their performance over the last 20 years, over the 25 year period, this would mean an average buy to let property would grow in value to nearly £516,000, providing gross capital gains of £269,464.

Capital gains might be considered speculative, but the report points out that landlords need not exclusively rely on them. A typical landlord receives rent of £10,134 per year per property, based on current yields, and accounting for void periods, each year. Over the course of a 25 year period, a typical property would generate a total rental income of £369,495.

Based on this, even if a landlord did not sell their property, making no capital gains, income alone would not only cover outgoings, it would provide a profit of over £65,500.

The research points out that the figures vary substantially from region to region, driven by significant differences in house prices, yields, and importantly, the initial deposit investors must place. While investors in London may see by far the largest total profit in cash terms, nearly £308,000 in today’s money, they must also supply an initial deposit of twice that of the national average, and face much higher costs.

The research also looks at the long term costs of property investment which is says could reach £375,000 over 25 years, equivalent to 58% of the total income and capital gains a landlord would enjoy.

Tax is one of the largest costs. Over 25 years, the typical basic rate landlord will contribute approximately £99,600 per property to the Treasury, over £60,000 in capital gains tax, £29,000 in income tax, and nearly £10,000 in stamp duty.

For higher rate tax payers, the burden is heaver still following the recent changes. They can expect to pay three times as much income tax as basic rate landlords, nearly £88,000. Under the previous tax regime, this would have been around £58,600, meaning their income tax bill over 25 years has increased by 50% following the 2015 Budget changes. Higher tax bills see their overall return reduced to £203,000 over the period, a quarter less than their basic rate peers.

Mortgage finance costs are the largest cost for a typical landlord, at a total of £157,000. However, the report points out that as the mortgage debt does not rise each year, it represents a smaller proportion of the property’s value, and a smaller proportion of monthly income each year. Landlords will typically spend a further £72,000 in the maintenance and running costs of a property, excluding any improvements. The research also factors in an opportunity cost of over £34,000, the return an investor could have made from long-term savings instead.

‘The buy to let market is undergoing a sea change. Regulatory and taxation changes have altered the market dynamic, reducing its attractiveness to amateur landlords, and increasing the tax bills of higher-rate investors. In spite of rising costs, there are still healthy returns to be found in property for committed investors,’ said John Eastgate, sales and marketing director of OneSavings Bank.

‘However the days of speculation are gone. It is a long term business endeavour, requiring commitment and expertise. Investors must be prepared to undertake business and tax planning, understand the risks as well as the rewards, and, most importantly, the responsibilities they have towards their tenants,’ he pointed out.

‘Policy change remains a threat, however it is essential that the role of professional landlords in providing vital housing stock is not undermined. Without them, the supply of housing in the sector would naturally shrink, leading to higher rents for a growing number of tenants competing for accommodation,’ he added.

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