Public opinion has often favored tenants over landlords, with few acknowledging the challenges faced by property owners due to new rental market regulations and tax increases.

The situation has become increasingly complicated for landlords as various changes in the buy-to-let landscape—such as stricter regulations, rising expenses, and greater tenant rights—have shifted the financial viability of rental investments. Currently, about one-third of landlords report annual earnings below £10,000 from their properties, prompting many to reconsider their rental strategies.

According to the National Residential Landlords Association, 26 percent of landlords sold some of their properties in the past year, indicating a trend that shows little sign of abating.

Landlords contemplating their next steps might consider these five critical questions:

The most recent survey from HM Revenue and Customs (HMRC) revealed that 20 percent of landlords are planning to liquidate their holdings within the next year, and 33 percent within five years. In stark contrast, only 4 percent intend to expand their portfolios within the same period.

The primary factors influencing these decisions appear to be tax regulation shifts and evolving landlord-tenant laws.

The buy-to-let market experienced significant growth in the late 1990s and early 2000s, but subsequent regulatory crackdowns have impacted profitability:

• In 2016, the 10 percent “wear and tear” allowance, previously available without receipts, was eliminated. Landlords can now only claim tax relief for actual replacement costs of furniture and appliances.
• That year also saw the introduction of a 3 percentage point stamp duty surcharge on second homes, sometimes significantly increasing purchase costs. This surcharge has since risen to 5 percent.
• Mortgage interest relief was phased out from 2017 to 2020, eliminating the 40 percent relief previously enjoyed by higher-rate taxpayers. Now, all landlords only receive a basic-rate tax credit of 20 percent.
• The forthcoming Renters’ Rights Bill is expected to eliminate “no fault” evictions and fixed-term contracts, allowing tenants to vacate with two months’ notice, while landlords will require valid reasons to terminate tenancies. Additionally, rent increases are to be capped.
• New energy-efficiency regulations are anticipated, with new tenancies needing to achieve a higher energy performance certificate (EPC) rating as early as 2028, with compliance expected by 2030 for all rentals.

For Linda Webb, the regulatory landscape has derailed her retirement aspirations. At 61, the Hayling Island resident had planned to acquire four properties in Liverpool to help fund her retirement and leave an inheritance for her children.

However, after purchasing two homes, she chose to halt her plans. “With the new regulations, requesting tenants to vacate has become increasingly difficult. If a tenant damages the property and leaves, we would face significant financial loss,” Webb explained, who also operates a home-moving service.

“One property had an EPC rating of E. The costs to refurbish it would exceed the property’s value,” she said. Webb has since sold both homes, realizing slight profits on one and £50,000 on the other, stating, “The notion that buy-to-let generates ‘passive income’ is a myth.”

What are the Financial Demands of Buy-to-Let?

The initial costs of entering the buy-to-let market have significantly increased. Data from estate agent Savills indicates that a landlord now requires approximately £86,000 in cash, compared to £50,000 in 2014.

In 2014, the average rental price was £161,404, necessitating a 30 percent deposit of £48,421, plus a 1 percent stamp duty (£1,614), totaling £50,035.

Today, escalating property prices, larger deposit requirements, and increased stamp duty have driven upfront costs higher. Lucian Cook, head of residential research at Savills, stated, “For the majority of landlords, the decision now revolves around whether to hold or sell, with only the most daring choosing to expand their portfolios.”

What Are the Profit Margins?

Contrary to the notion that landlords are thriving, many earn relatively modest incomes. The majority report gross rental incomes below £20,000 annually, with a significant third earning less than £10,000. According to HMRC, only 2 percent generate over £100,000.

Landlords with multiple properties tend to see higher earnings; 89 percent of those making under £10,000 own just one property, while 17 percent among the six-figure income group possess 15 or more.

Post-expenses, the profit margins diminish further. On average, landlords earn roughly £17,665 before taxes, pocketing about £9,000 in profits, as reported by Savills.

The shift in mortgage interest relief has particularly affected higher-rate taxpayers. In 2014, a landlord with a mortgage of £112,983 at 3.85 percent would pay £4,345 annually. Given a rental income of £10,072 and £2,156 in additional costs, their profit would stand at £3,571. After a 40 percent tax, this translates to £2,143.

Under contemporary figures with new rules in place, a higher-rate taxpayer would retain merely £483, paying roughly 87 percent of their profit in taxes. Meanwhile, basic-rate taxpayers experience minimal changes.

How Are Rent Prices Evolving?

Rents have surged as property availability struggles to keep up with demand, partly due to landlords exiting the market. Rightmove reports that rental listings now receive an average of 12 inquiries, a notable rise from five in early 2019.

Nationwide, excluding London, average rents have climbed to £1,028 monthly, up from £757 in 2020, while average London rents increased from £1,661 to £2,101 within the same timeframe.

Are There Still Buyers in the Market?

Conversely, some landlords are seizing the opportunity to grow their portfolios. Sanjay Arora, a former accountant from Berkshire, has acquired ten rental properties within the last nine months, managing a total of 39.

“This is an excellent time to buy,” he remarked. “With high yields and a robust rental market, void periods are minimal, and recent interest rate cuts have led to lower mortgage rates.”

Arora manages his properties through a limited company, subjecting him to corporation taxes rather than income taxes, shielding him from the effects of lost mortgage interest relief.

He also factors in the additional stamp duty when calculating potential yields and meticulously checks energy ratings. “EPC ratings are among the first criteria I assess. The upcoming efficiency regulations will have a substantial impact,” he stated, planning to utilize government grants for necessary upgrades.

Where Should Investors Focus?

Calculating rental yield should feature prominently in property investment decisions. To determine yield, divide the annual rent by the property’s purchase price and multiply by 100. For example, if a property costs £220,000 and rents for £1,200 monthly (£14,400 yearly), dividing £14,400 by £220,000 gives 0.0654. Multiplying by 100 results in a rental yield of 6.54 percent.

Rental yields vary significantly by location. According to Savills, the northeast boasts the highest average yield at 7.8 percent, while London has the lowest at 5.1 percent.

As with any significant financial decision, whether to sell, maintain or expand will depend on individual circumstances. Landlords burdened with substantial mortgages or those with only a few properties may find the regulatory challenges daunting. Conversely, those with less debt or more extensive portfolios may still see favorable financial outcomes. Newly constructed homes are generally better suited for future energy efficiency assessments and tend to involve fewer maintenance concerns.

Cook emphasizes, “As we approach the most substantial reform of rental regulations in a generation, landlords will need to assess their options carefully. Despite rising costs and regulations, the rental sector continues to maintain profitability for many, with strong demand supporting rising prices. As some landlords exit the field, there will be opportunities for those who remain to grow, diversify, and enhance their investments.”