Buy-to-let returns on investments are improving, with a five year geared investor almost breaking even, according to The Model Works’ latest index.
Indeed, investors may even begin to see a profit in the next quarter.
Its index uses Bank of England, Nationwide and Association of Residential Letting Agents data to calculate the historic returns over 25, 20, 15, 10, and 5 year periods, for a cash buyer or a geared investor, with a repayment or an interest only mortgage, selling today.
Its previous four quarterly indices showed losses over five year investment periods. This was primarily due to falling property prices.
A year ago the five year index was based on a purchase in Q3 2007, when an average first time buyer property was £156,634. Five years later its value had fallen to £138,561, a £18,073 loss.
In comparison, the latest index assumes a purchase in Q3 2008, when the average value was £140,387. Five years later the value has risen to £142,930, a capital gain of £2,543.
Brian Hall, founder of The Model Works, said: “If we look a year ahead, the value of this property bought in Q3 2009 was £133,611. Four years later its value has already risen by £9,319. And property prices are still rising.
“Investing in Q3 1007 versus Q3 2008 resulted in a £20,616 difference in capital gain. Clearly, understanding the market and timing are critical in maximising buy-to-let profitability.
“Those investing today really need to be aware of this marketplace volatility. We have done a lot of work in this area and it is one of the factors that really jumps out from the data, particularly on shorter investment periods, with highly geared investments.”
Hall said other factors are contributing to improving profitability.
“Generally rates are falling. We use a Bank of England, monthly, combined bank and building society rate and this has dropped by a full one percent over five years. Over the same period, rental yields have increased leading to improved margins
“Over the same five years, the Bank of England deposit rates we use have halved and are now at 1.72%. This reduces the opportunity costs (the comparative returns from investing the funds elsewhere) and this further increases buy-to-let profitability.
“Obviously, with savings rates at a nine-year low, many investors are looking to buy-to-let.”