Anyone worth their salt in the residential property sector knows that every buy-to-let (BTL) property should ‘wash its face’, meaning that the monthly rent should at least breakeven after all costs and taxes, and not leave the landlord dipping into savings to pay his or her BTL mortgage. But does this mean that the first month it fails to do so that landlords should call their local estate agent for a valuation because they now want to sell?

If we talk about timeframes, does the property manage to wash its face over the calendar year if you can remortgage at a lower fixed rate than the variable rate you just crash-landed into when your latest fix ended? What about over a three-year period? If you take the rental profit earned in 2022, some losses in 2023, and the small profit in 2024 once you have increased the monthly rent etc., does it make a profit then?

Why not look at half a decade, like the first half of the 2020s? What does the profit/loss look like then? And this is just the rental income we are talking about here. If you factor in capital growth, then calculate the return-on-investment (ROI) from your initial deposit and stamp duty/legal fees, what does the percentage return look like? Now compare that to the 3.5% per year (before tax) currently being offered in a savings account. Are you still rushing for the exit door? And with a potential 28% capital gains tax bill to pay to HMRC?

Let’s be realistic here. All investment sectors go through cycles, some are short and some are long lasting. If any sector consistently churns out annual returns in excess of 20%, eventually the masses arrive, some of whom no doubt bought Bitcoin at $60,000 a couple of years ago, and that sector is then flooded with money, prices rise too high and then, inevitably, there is a downturn. The current residential property downturn in the UK was long overdue a correction.

The +20% annual returns were plentiful in BTL from the mid-90s until the global financial crisis in 2008, and in most regions of the UK a significant downturn (collapse in property values) was avoided thanks to 0% interest rates. That situation was never going to last though, and now that interest rates are returning to historical norms, property prices will likely reduce because demand to buy falls. However, residential property is like a seesaw, if demand to buy goes down, demand to rent goes up…
and conversely it is that factor which has been pushing up rents in many regions over the last 18 months.