The property market has always been a relatively strong one in which to build a business; property values trend upwards over time in spite of short-term market aberrations, creating powerful opportunities to generate real returns on investment. There are numerous ways to engage with the market, from investing in property construction and development to managing properties from a rental perspective.
Indeed, the latter model has become one of the more popular ways for people to engage with property, as individuals seek semi-passive ways to bolster income and entrepreneurs seek business opportunities from a growing rental market. This new wave of landlordism was recognised by the UK government in the mid-1990s, and bolstered with the introduction of the buy-to-let mortgage – which itself spurred a new ‘industry’. But the market is ever-changing; 25 years on, is buy-to-let a good investment for the budding entrepreneur?
The Buy-to-Let ‘Industry’
Buy-to-let mortgages are financial products designed specifically for existing and aspiring landlords, enabling them to secure additional property for rental purposes without adopting the same financial burden that second-home buyers experience.
The mortgage works by allowing the borrower to pay back the interest alone, paying the full amount at the end of the mortgage agreement. This levelled the playing field for new landlords, allowing them to expand their property portfolio without the large volumes of cash usually required for commercial purposes.
Buy-to-let mortgages are single-handedly responsible for an explosion of landlordism in the UK, with recent market movements selecting for landlords with the capital to expand their portfolio over individuals and domestic households. In 2022, landlords were responsible for more than 12% of all property purchases.
Buy-to-let mortgages are a powerful entry point into practical investment for individuals and small enterprises alike, and a useful tool in wider investment management strategy as a result. Buy-to-let mortgages minimise monthly outgoings and maximise earning potential, as rental income can be reserved almost entirely for re-investment as opposed to mortgage repayment.
Despite the relative ease of access to buy-to-let products, there is still something of a barrier to entry for budding buyers. Buy-to-let mortgages typically require a much higher base deposit, of 25% on average but in some cases up to 40%. This is to minimise risk for the lender.
Bumps in the Road
But is buy-to-let really a good investment? Current market movements are giving mixed signals. For one, property values are set to fall in the new year, as the medium-term impacts of the UK government’s disastrous ‘mini-budget’ finally hit the property market. Conversely, these price falls lower the threshold for property investors, and potentially raise demand for rental properties overall.
Meanwhile, the cost-of-living crisis is having its own industry impacts. More people are entering rent arrears, while rising costs make repairs and maintenance more costly for landlords in the short-term. There is light at the end of the tunnel but entering the rental ecosystem at this time could be costly for new entrepreneurs.