Buy-to-let returns down despite strong rental income growth, finds Octane Capital

The total return of the average buy-to-let (BTL) property has reduced by 6% over the past two years, driven by an increase in mortgage costs and agency fees, and a reduction in capital appreciation, research by Octane Capital has revealed.

Octane Capital analysed the cost of being a landlord, looking at the initial investment required when investing in a buy-to-let property, as well as the ongoing costs versus the total return expected in the current market.

The research showed that the initial start-up costs associated with a BTL investment fell by 17%, down from a total of £12,037 in 2021-22, to £9,952 today.

While tenant finding fees increased by an estimated 19%, this decline was largely driven by a reduction in Stamp Duty and the cost of tenancy deposit registration fees. 

However, Octane Capital also revealed that the ongoing costs associated with maintaining a buy-to-let investment have increased, up 18% over the past two years to a total of £15,592 per year. 

This increase was driven by higher mortgage rates, with annual mortgage interest up 25% to £10,210 per year on average.

Agency management fees were also found to be up 19% annually, while the cost incurred as a result of void periods climbed by 7%. 

Despite an increase in costs, average rental income has increased by 19% over the past two years, now totalling £15,144 per year. 

As a result, the average yield of a buy-to-let property investment also climbed from 4.9% to 5.8%. 

Jonathan Samuels, CEO of Octane Capital, said: “The average landlord has benefited from a very healthy level of rental income growth in recent years and so while the level of capital appreciation seen on their property may have cooled, both aspects of their investment are still bringing healthy returns despite the instability of the current market landscape. 

“Of course, higher running costs, most notably as a result of higher mortgage rates, have dampened the overall net return they’ve seen.

“But it’s fair to say that this reduction in net profits has been fairly marginal considering the current economic landscape and the storm of property market uncertainty that we’ve weathered in recent months.

“There are still a great deal of opportunities available that will allow buy-to-let investors to reduce their borrowing costs in the current market and utilising a specialist lender is the best way to secure these.”

He added: “It’s important to note that the government’s insistence on making tax digital will add a further cost to consider, although with an initial start up cost of £350 and an ongoing cost of around £110, it’s unlikely to reduce the appetite for investment. 

“And while the Government is also looking to tempt more landlords away from the sector with their reduction in Capital Gains Tax, our research shows that it remains a profitable endeavour, albeit slightly less so today versus a few years ago.”