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In The Money: £162,500 profit from each buy to let over 25 years

11th May 2018

Time to put the gloom and doom about buy to let to one side - a new analysis shows that a typical investor in the sector will see an estimated net profit of over £265,500 per property over the next 25 years, through rental income and capital gains.

That figure takes into account projected inflation - so in today’s money that is some £162,000, or nearly £6,500 per property per year.

The claim comes from Kent Reliance, a specialist mortgage lender; it says that over 25 years from today rental income would on average be a total of £369,500 and capital gains some £269,000.

Take away from that the costs of investing for 25 years - these amount to £373,000, including over £100,000 in tax.

Larger tax bills mean higher-rate landlords generate 24 per cent less profit than basic rate investors over the period, a total of over £203,000.

Returns vary significantly across regions, with profits estimated to reach over £307,000 in London in today’s money, almost £12,500 per annum.

All of these projections are based on a 25 year investment, placing a typical 30 per cent deposit of £73,908 on a property now. 

Capital gains comprise a significant portion of these returns and Kent Reliance assumes that house prices and rents rise in real-terms by one per cent per year - this is well below their average performance over the last 20 years.

With regards to rent, a typical landlord receives £10,134 per year per property, based on current yields, and accounting for void periods, each year. 

Over the course of a 25 year period, a typical property would generate a total rental income of £369,495. Based on this, even if a landlord did not sell their property, making no capital gains, income alone would not only cover outgoings, it would provide a profit of over £65,500.

Buying, running, and eventually selling an investment property is not without its costs and Kent Reliance says that total expenditure adds up to just over £373,000 over 25 years, equivalent to 58 per cent of the total income.

Tax is one of the largest costs. Over 25 years, the typical basic-rate landlord will contribute approximately £99,600 per property to the Treasury’s coffers: over £60,000 in capital gains tax, £29,000 in income tax, and nearly £10,000 in stamp duty.

For higher rate tax-payers, the burden is heaver still following the recent changes. 

They can expect to pay three times as much income tax as basic-rate landlords – nearly £88,000. Under the previous tax regime, this would have been around £58,600, meaning their income tax bill over 25 years has increased by 50 per cent following the 2015 Budget changes. 

Higher tax bills see their overall return reduced to £203,000 over the period, a quarter less than their basic-rate peers. 

Mortgage finance costs are the largest cost for a typical landlord, at a total of £157,000.  However, as the mortgage debt does not rise each year, it represents a smaller proportion of the property’s value, and a smaller proportion of monthly income each year. 

Landlords will typically spend a further £72,000 in the maintenance and running costs of a property, excluding any improvements. The research also factors in an opportunity cost of over £34,000, the return an investor could have made from long-term savings instead.

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