Buy-to-let returns beat all other mainstream investments
04-12-2015
Every £1 poured into buy-to-let in 1996 is now worth £15 – outperforming cash, bonds and shares over the same period, a new market study suggests
Buy-to-let property
Research published today shows landlord returns have outstripped all main asset classes, since buy-to-let mortgages were introduced in 1996 Photo: David Sacks
By Kate Palmer
Buy-to-let investments have outperformed all major asset classes over the past 18 years, according to a study of the sector.
As well as reflecting property price growth over the period, the data highlights the effect of borrowing - or "gearing" - which has hugely magnified total returns.
Every £1 invested in buy-to-let is now worth £14.90, if investors put down a deposit of 25pc and borrowed the rest via buy-to-let mortgages. These specialist loans first became available in 1996, the point from which performance is calculated.
This has produced net annual returns 16.2pc over the past 18 years, compared with 6.5pc if the same amount was put into the stock market.
Cash buyers who poured money into buy-to-let 18 years ago have now turned £1 into £5.07 – a net annual return of 9.4pc.
The study, published today by former economist Rob Thomas, found that landlord returns outstripped the earnings from investments in cash, stocks and shares and commercial property. In the same time-frame, commercial property investments turned £1 into £4.49.
Cash savings were the worst performers, according to the report, where £1 is now worth just shy of £2. The study did not include gold, which has fallen fast in recent years but was the best performing asset in the previous decade.
The vast returns on buy-to-let were helped by low interest rates. This low-cost "leveraging", coupled with rising prices for most of the period, helped amateur landlords build equity against which to borrow again, repeating the process to profit further.
The research assumed that buy-to-let investors who took out a mortgage started with a single property, and later reinvested in more properties when they earned enough to put down another 25pc deposit.
By contrast, the report assumed re-investments by cash investors who also started with a single property would only be made when they had gained enough to buy another property outright.
For example, if a £100,000 home bought in 1996 is now worth £300,000, a capital gain of £200,000, the cash buyer would have trebled their investment.
But if they put down a £25,000 deposit, financing the property instead with a 75pc loan-to-value mortgage, the buyer will have turned their equity of £25,000 into £125,000 – a gain of five times their investment. This capital gain can be used to re-mortgage the property, releasing equity to finance another house purchase.
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This is the unique feature of buy-to-let as an investment, said Mr Thomas. "The investor can borrow against it and, when property prices have risen, remortgage to provide cash to buy more property."
Serial re-mortgaging was the highly lucrative tactic of Judith and Fergus Wilson, the Kent landlords who bought almost 1,000 properties.
The teachers turned property tycoons amassed a £200 million empire over the previous 18 years, generating an annual rental income of £12m.
The method is risky. Rising interest rates could wipe out rental income generating ongoing losses. And if prices fall, landlords could ending up in negative equity - owing more than the value of their properties.
Landlords who borrow continually against their existing buy-to-let properties are most at risk. But if - and when - a rate rise will occur is still unclear. Mark Carney, Bank of England Governor, said the Base Rate – 0.5pc since March 2009 – could "only go up" in spite of record-low inflation levels in the UK.
Would-be landlords can still err on the side of caution by build cash reserves, Mr Thomas advised. Or they could eliminate interest rate risk altogether by buying with cash.
He said: "Returns have been lower for cash buyers, because of abnormally low interest rates, but if you have a big pile of cash and don't want to take risks buy-to-let will produce a steady return."
Buy-to-let boom predicted for 2024
The report predicted buy-to-let borrowing would continue to outperform other investments. It said £1 invested in buy-to-let, with a 25pc deposit, will return £2.87 over the next decade. For cash buyers, the report predicted £1 invested in buy-to-let today will be worth £1.81 in 2024.
Mr Thomas said this is a "conservative estimate" which assumes mortgage rates will increase to 5.5pc by 2022, and that house prices will rise by 4pc.
He dismissed the "fear factor" of any possible crackdown on buy-to-let from a potential Labour government. Ed Miliband, Labour leader, would cap rents for existing tenants and impose three-year contracts on some tenancies.
"Controls on the rented sector simply means less supply, fewer new landlords, and will result in higher rents for new tenants," Mr Thomas said.
The biggest losers in this situation would be tenants, because there will be a lack of supply, he added. "Ironically, it will be landlords who benefit as they can push up rents."
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