A Buy-To-Let (BTL) is a great investment option. You can buy a property and rent it out. If you don’t have the funds to purchase a property, there are Islamic banks that offer BTL mortgages. You can then also use the rental income to pay off the money borrowed.
Recently landlords have suffered from many tax changes and lower yields, so this area is not as lucrative as it used to be. However, there are some parts of the country where you can still achieve a high yield.
In this article, we’ll take a look at
- What you need to know about BTL
- Where you can still get a decent yield.
What you need to know about BTL
There are only two things you want when investing in property:
- A good yield; or
- Capital growth
It’s rare that you will get both
With a BTL, you’re typically looking for a high yield.
We have a further explanation on our Halal Property Investing 101 Guide. However briefly, I will explain.
What is a yield?
Yield = the money you get back per year.
It’s important to carefully calculate the yield on the property before you purchase it. It shows you how much you will make on the property through rent.
The very basic way is as follows:
Yield % = Rental Income / Price x 100
If you buy for £100k and rental income is £10k per year, the yield = 10%.
Yield = £10,000/£100,000 x 100 = 10%
This is a very basic calculation, and you’ll need to account for costs, insurance, upkeep, etc (you can deduct this from the rent per annum) in the calculation above. Bear this in mind if you’re calculating if it’s a good return. Net rent yield is a better measure.
Net Yield = [(yearly rental – costs)/property value] x 100
What’s a good yield? Different investors give you different answers. Typically, an average yield in London is around 4-5% while the best yields are in commercial and HMO properties and can be up to 15%.
What is capital growth?
Capital growth = an increase in the value of an asset or investment over time.
- e.g., the increase in the price of the house you bought.
BTL Islamic Mortgage
If you can’t afford to purchases the house with cash, you can borrow money from the bank and then let it out.
Al Ryan and Gatehouse offer halal BTL mortgages. I’ve done a screening comparing the prices of their BTL offerings in this article.
Note: the fees are much higher on a BTL compared to a conventional mortgage. Al Rayan charge set up fees of £1,747.43. Gatehouse charge an application fee of 1% (min £999).
This is a bit of a headache when it comes to BTL.
The government in April 2016 imposed a 3% stamp duty surcharge on second homes and buy-to-let properties.
However, the current SDLT holiday means homebuyers won’t pay any tax on properties worth up to £500,000. Those buying an additional property just pay the 3% surcharge (the previous amount had a 5% surcharge for a property over £250k).
Since April 2020, BTL landlords now must also pay income tax on the entire rental income, regardless of how much is taken up by mortgage interest (previously there was a relief for this). However, now you can receive a tax-credit on 20% of your mortgage interest payments.
Furthermore, tax liabilities will apply regardless of if you are a private individual or a business.
Do also bear in mind Capital Gains Tax implications upon exit.
Check the GOV website or speak to your accountant if you would like to know the full tax liabilities and credits available for a BTL.
Now you know a bit about tax liabilities, let’s look at some areas that can give you a good yield.
Where you can still get a decent yield
According to Zoopla, the highest yields in England is in Middlesbrough in North Yorkshire. In Scotland, they are in East Ayrshire, North Ayrshire and Inverclyde.
The north has low house prices and feature in many of the top hotspots for BTL.
The ‘investor triangle’ of Sunderland, County Durham and Hartlepool is a great place to look in North East England. The yield numbers speak for themselves.
Hartlepool has a yield potential of 10% or more. The average yield is 7.3%. House prices average £107,000 approx. with monthly rent at £530.
Zoopla says Sunderland and County Durham both generate a 7.4% gross annual average yield.
But how much can you get a house for? Let’s use the latest data from ONS, showing us stats from a year in November 2020 for the North East as a whole.
The North East continued to have the lowest average house price, at just £140,000. It’s also the final English region to surpass its pre-economic downturn peak of July 2007. New builds are a bit pricier and will cost you around £200k.
If you’re interested in capital appreciation, house prices in the region increased by 8.3% a year to November 2020.
Average price by funding was:
- £128,927 for cash purchases, and
- £146,722 for mortgage purchases.
Therefore, you could pick up a bargain and maximise the yields even further with a cash purchase.
Remember: Currently, there is no stamp duty for property under 500k, and additional purchases only have a 3% surcharge.
The average rental value for new tenancies in the North East is £540 PCM, according to HomeLet. This is, of course, differ vastly in different parts of the North East
Yield % = Rental Income / Price x 100
(£540 PCM x 12) /average house price of £140k x 100 = 4.63%.
This is only using averages, so you could get better rental incomes and cheaper prices.
So overall, the North East has the cheapest houses and great yield potential.
Last May online mortgage broker Mojo revealed the best performing postcodes in the country between 18th and 25th May. This is great as it takes into account the pandemic, but it was before the SDLT holiday.
It revealed Liverpool as the top performer. The city appeared numerous times in the top 20 list, making it the highest-yielding location overall. The top of the list was its L7 postcode, with yields average yields of 10.3%. The average house price at the time was £95,000. Other postcodes in Liverpool included was followed by:
- L6 with 8.4% yields,
- L1 with 8.1%,
- L15 and L4 both with 7.4%.
Manchester also features on the top list. Their M14 postcode has an average yield of 7.6%.
Latest figures show that the average property price in the North West is £180,280. But as we mentioned, you can get a house in Liverpool for around £95k.
Average price by funding was:
- £164,592 for cash purchases, and
- £188,601 for mortgage purchases.
So, houses are a bit more expensive compared to the North East. However, capital appreciation is much greater. Manchester has seen the best growth in the UK – a 333% rise over 20 years, although the pace of growth slowed to 60% in the past 10 (Times).
Average rent in the region is £775 PM, however, this will differ vastly across different areas.
Islamic banks offer Halal BTL mortgages if you do not have the funds yourself. They are similar to your traditional mortgage with some key differences. This includes fees and interest rates.