Is Being a Landlord Still Profitable? Insights & Challenges

It may seem strange when all we hear is about record rent increases, but some landlords believe their businesses are no longer profitable.

How is this possible? Well, demand from tenants is sky high because there is a significant lack of available housing to rent. This impacts cost (supply and demand) but ignores the impact of interest rates on landlords with multiple buy to let mortgages.

At some point, you keep increasing the price and no one can afford to live there. So what are landlords meant to do?

This insecurity is causing some landlords to consider quitting the private rented sector (PRS) altogether.

It’s not just rising interest rates, but also changes in energy efficiency regulations, and potentially the reform around no fault evictions. Whilst many professional landlords have traditionally seen higher return from property than from comparable investments, at the moment it seems to be becoming more difficult for some.

There are both legislative and economic challenges facing landlords today, such as:

Buy to let mortgages

According to research conducted by BVA-BDRC earlier this year, just over 60% of the UK’s rented homes have mortgages attached and interest rate increases have hit properties owners hard. The Bank of England’s Monetary Policy Committee raised the base rate to 5.25% on August 3 – the fourteenth consecutive rise since December 2021. Then, the 2-year fixed mortgage rate was around 2.4%. Today, according to Moneyfacts, the cost of a 2-year fixed rate is 6.85%.

Additionally, buy to let mortgages tend to have higher rates than residential mortgages and may demand higher fees. Some landlords may not be able to recoup their additional costs solely by increasing rental charges. In those cases, they would have to top up their mortgage payments from their own pockets. Buy to let mortgages also tend to require larger deposits with a minimum loan-to-value of 25% and many lenders demand a 125% rental income against the monthly mortgage charge.

Mortgage cost tax changes

The Government made changes to mortgage interest tax relief in 2017. At that time, landlords could claim relief of 40% of their interest charges, if they were higher rate tax payers. Today, however, landlords receive a flat-rate tax credit of 20%.

There are new arrangements for capital gains tax, too. In April this year, the tax-free allowance was cut from £12,300 to £6000. In April 2024, this is planned to be reduced still further to £3000. This means that landlords selling previously rented property will have to pay more to the Treasury. 

Minimum Energy Efficiency Standards

As part of the drive to Net Zero, Government regulations on setting Minimum Energy Efficiency Standards are set to be tightened in the near future. The current Energy Performance Certificate minimum rating for a rented home is ‘E’ but this will be set at ‘C’ for all new lets possibly from April 2028 and ‘B’ at some point thereafter. 

Landlords are concerned that the cost of meeting the new minimum standards may be prohibitively expensive (especially for older houses) and are calling for financial help from Government.

Would it help to be incorporated?

There has been a trend recently for more landlords to form limited companies. This can be more tax efficient because mortgage interest, finance costs and arrangement fees can be offset against rental income. However, changing properties from personal to corporate ownership can be complex and may incur charges, so anyone considering such a move should consult a professional tax advisor. The pros and cons of incorporation were recently outlined by Landlord Today.

To sum up

To return to the original question, ‘Is it still profitable to be a landlord?’ – the answer is: it depends. Many landlords own their rental properties outright and are, therefore, unaffected by rises in buy to let mortgage rates or other interest charges. Many more may have relatively small mortgages in comparison to the value of their properties.

One of the big positives for landlords is that the underlying demand for rented homes remains extremely strong and is likely to remain so because of shortages of supply.

Also, it is worth remembering that despite the current fairly stagnant housing market, in the medium and longer term, houses have historically risen in price and landlords have enjoyed considerable capital growth.

Nevertheless, there is no doubt that the cost of living crisis and consequent rises in interest rates have hit some landlords and the tax changes and other legislative measures have added to the financial challenge for many who may be considering selling up and leaving the PRS.