Why buy-to-let is dead unless you can hit this rental yield

On the face of it, conditions couldn’t be better for landlords. Buy-to-let investors are spoilt for choice for properties they can get at bargain prices as the market remains in the doldrums.

And the rent they can charge is soaring – up 22.6 per cent since July 2022, according to the HomeLet rental index.

But despite the excellent conditions, buy-to-let investors still have a tough job turning a profit due to the endless taxes, regulatory charges and extra fees they now face.

Money Mail has found the exact return landlords need to achieve just to break even and it’s a bitter pill to swallow. It lays bare the extent of the ongoing raid on profit margins.

Landlords need a return of 7.7 per cent just to stay in the black when accounting for high mortgage rates, crippling taxes and the cost of upkeep on the property, we can reveal.

This return – known to investors as yield – is calculated by dividing the annual rental income by the house price and multiplying it by 100. 

For example, if you buy a house for £200,000, you would need to collect £15,400 in rent every year to get a 7.7 per cent yield.

However, the average gross rental yield is 6.04 per cent, according to Zoopla. That means many landlords could be making a loss.

Ashley Osborne, of Lexit, a service that helps analyse buy-to-let deals for investors, says that despite higher gross yields, it has become very difficult for ordinary investors to turn a profit.

‘By the time you strip out the cost of debt, maintenance and the risk sitting on the landlord’s side of the table, there’s very little left.

‘Under the Renters’ Rights Act, the landlord has no real control over rent increases, and if a tenant relationship breaks down, removing them is slow and expensive,’ he says.

In May, Labour introduced the Renters’ Rights Act. This has shifted the balance of power from landlords towards renters. 

But there could be more pain ahead for landlords, as Chancellor John Healey is said to be considering a raid on capital gains tax at the Autumn Budget next month. 

Mr Healey could raise the tax as high as 45 per cent, in a move that would slash profits for landlords who sell.

This is Money ran the numbers to see exactly how much a landlord needs to earn to make a profit. Based on a home worth £200,000 and a return of 7.7 per cent, here’s how the numbers stack up.

We list the key figures you need to beat every year. Use our barometer to see if you can turn a profit on your buy-to-let.

Higher stamp duty bills

Buying a £200,000 property that you can rent out for £15,400 a year, or £1,283 a month, may seem like a good deal at first glance. It represents a 7.7 per cent yield.

However, before you’ve collected a penny of rent you will have to pay stamp duty – an expense many times higher than investors would have faced ten years ago.

A buyer today would pay £11,500 in stamp duty thanks to a 5 per cent surcharge. In early 2016, when there was no surcharge, that investor would have paid £1,500 on a £200,000 property. 

The property in effect costs £211,500 today, meaning £15,400 or 7.7 per cent rental yield is more like 7.3 per cent to begin with.

When you factor in conveyancing fees and a surveyor you could be looking at an additional £2,500 in costs, which would reduce that gross yield even further to around 7.2 per cent.

Stamp duty cost: £11,500, cutting the yield to 7.2 per cent.

Rising mortgage rates

Landlords typically face higher mortgage rates than those taking a loan on their main home. A buy-to-let investor currently buying or remortgaging can get a rate of around 5 per cent for a five-year fixed-rate mortgage.

Seven in ten mortgaged buy-to-let purchases are now on an interest-only basis as most landlords want to keep as much spare cash as they can, according to estate agent Hamptons. 

This is where homeowners only pay the interest on their loan each month and not any of the borrowed amount.

On a £150,000 interest-only mortgage at 5 per cent covering 75 per cent of the property’s £200,000 value, a landlord would pay £625 a month (£7,500 a year). 

If they charge tenants a typical £15,400 a year, this leaves the landlord with £7,900 a year.

Buy-to-let mortgage deals usually come with high fees that can be paid upfront or added to the loan. 

These are often between 1 and 3 per cent of the total loan amount but can be more or less depending on the lender, the type of property and the rate offered. 

On a £150,000 mortgage that could mean additional costs of between £1,500 and £4,500.

Given that landlords need to remortgage every two to five years, these fees can snowball.

Lenders can also charge mortgage valuation fees, ranging from £150 to £350 each time a landlord remortgages. 

Many mortgage brokers also charge their own fees, typically around £500 for every purchase or remortgage.

Mortgage costs: £7,500 a year based on 5 per cent interest rate.

Letting agent fees

Most landlords use a letting agent to help manage the property and tenants. This typically costs around 10 per cent of the rent, but full property management fees can range from 8 to 20 per cent.

Two-thirds of private rentals in England and Wales are administered by a letting agent, according to the National Residential Landlords Association (NRLA).

In our example, if a letting agent takes a 10 per cent fee on the £15,400 rental income, that equates to a £1,540 charge each year.

Letting agents also charge additional fees when they have to find a new tenant. These will include set-up fees, the cost of drawing up an inventory and check-out reports. 

There is often an end of tenancy clean required even if a tenant leaves the property in good condition. 

These one-off fees for every change of tenancy can mount up to around £1,000. 

Most letting agents say two and a half to three years is the typical length of a tenancy, according to Propertymark, a leading membership body for letting agents.

Cost of letting agent: £1,540, based on 10 per cent rate.

Maintenance costs

Landlords must bear the costs of any repairs and maintenance. General advice is to budget for 1 per cent of the property’s value. 

So for a £200,000 home, that would be £2,000. The average cost of replacing a like-for-like gas combi boiler, for example, is between £2,500 and £4,000, according to Checkatrade.

Landlords with leasehold properties will also have service charges and ground rents to contend with, which have risen significantly in recent years. 

Flat owners in Britain currently face the prospect of paying an average £2,845 a year on service charges, analysis of sale listings in June revealed.

Maintenance and repair costs: £2,000 a year on average.

Regulatory costs

Regulatory costs, checks and insurance also add up. These include buildings insurance, gas safety certificates, EPCs and electrical installation condition reports (EICRs). 

For example, a gas-fuelled home requires a gas safety certificate every year. This costs between £30 and £250 on average, says MyBuilder.

An EICR needs to be carried out every five years and is required for all rental properties. Most EICRs cost £100 to £400, according to MyBuilder. And, these checks can uncover issues that need fixing.

Some councils also charge landlords a licence fee to let out their property – a new phenomenon that famously caught out former chancellor Rachel Reeves.

These selective licences vary from council to council but typically cost £1,000 or more per property. They last for up to five years.

House in Multiple Occupation (HMO) landlords – who rent out a home to three or more tenants who share facilities such as a kitchen, bathroom or toilet – also have to secure a special licence every five years and ensure their properties comply with the latest regulations. 

These can cost over £2,000 in extreme cases.

When accounting for how often these various regulatory charges are incurred and excluding any additional options, the average landlord would spend around £685 a year.

Regulatory costs: £685 a year on average.

Hefty tax bills

Landlords who own buy-to-lets in a limited company can fully offset their mortgage interest costs against their tax bill. 

Landlords who own a property in their own name receive a less generous form of tax relief on their mortgage payments – and again only on the interest element. 

They receive just 20 per cent of the interest on their monthly mortgage bill in tax relief.

For example, take a landlord who is a higher-rate taxpayer and has mortgage interest payments of £7,500 a year on a property they rent out for £15,400 a year.

They would be charged tax at 40 per cent on their earnings minus expenses. In this example, their expenses total £5,355 so they are taxed 40 per cent on £10,045, which is a bill of £4,018.

They receive £1,500 in tax relief (20 per cent of £7,500), so their total tax bill is £2,518 (£4,018 minus £1,500). Those buying in their own name rather than through a company should be able to secure a rate around 5 per cent. 

Investors buying within a limited company should expect to secure a rate of 5.5 to 6 per cent.

Tax bill: £2,518 a year for a higher-rate taxpayer.

Void periods

When tenants move out there is often a period when the property is empty before new tenants move in. During that time, the landlord is likely to be on the hook for both council tax and utilities.

The average rental void period across England is 21 days, according to analysis by property management company Rushbrook & Rathbone. 

The average Band D property pays £2,392 per year in council tax. Over the average 21-day void period that could mean a £137.62 bill to pay.

Can it still work?

A landlord who charges a rent of £15,400 a year on a £200,000 property takes a profit of just £27 after they have paid the mortgage, taxes, the ongoing cost of upkeep and regulatory charges.

However, many investors are still buying. Landlords accounted for 14.1 per cent of all home purchases in July, according to Hamptons, up from 12.4 per cent across the year-to-date on average.

Many are doing so because there are deals to be had. Landlords paid an average of just 88.7 per cent of the asking price in July, meaning a typical home initially listed for £400,000 is being bought by an investor for £354,800. 

Investors buying today also tend to focus on higher yielding properties, well above Zoopla’s average 6 per cent yield.

Hamptons says buy-to-let purchases in 2026 to date across England and Wales are yielding 7.3 per cent on average, that’s up from 6 per cent in 2021.

In fact, recent analysis by buy-to-let lender Paragon Bank showed that student lets in some locations can yield over 9 per cent.

Sam Smith, of Property Hub, which sources deals for buy-to-let clients, says it still makes sense for long-term investors as long as they can maintain a positive cash flow.

‘The most important thing is that your property is profitable month to month after all your costs and likely expenses,’ says Smith. ‘It’s worth noting that your rent will increase over time so it’s likely that your returns will improve over the years.

‘It’s this combination of income growth and leveraged capital growth that makes property work so well over the long term.’

Ashley Osborne, of Lexit, however, disagrees and says that even some of the high-yielding property investments come with too much risk and compliance these days.

‘I don’t think there’s a UK market that makes sense for buy-to-let investment now,’ he says.

For those still drawn to bricks and mortar, Osborne suggests they focus on working out the net return after tax rather than focusing on pre-tax rental yields.