A new buy-to-let index has been launched. The Model Works Buy-to-Let Profitability Index provides a quantitative assessment of the returns on investment in the private rental sector over time.
The index is founded on the following source data: house prices from the Nationwide Building Society; mortgage and deposit rates from the Bank of England; rent and void levels from ARLA; Stamp Duty rates from HMRC and mortgage repayment and balance calculations from Mortgages Exposed.
The index has found that overall, buy-to-let profitability fell again this quarter, for both geared and cash investors.
Over a short investment period of five years, costs and falling property prices outstripped rental yield surpluses and resulted in losses for geared investors, with interest-only landlords experiencing a 68% loss and repayment landlords experiencing a 67% loss. Over the same period, a cash investor would break even, once opportunity costs are taken into account.
Over longer investment periods, the trend for falling profitability continues as past quarters, when property prices were rising, are switched for quarters where property prices were static or fell. The Model Works said this highlights that, historically, buy-to-let profitability depended on the asset price bubble that expanded during the 10 years prior to the credit crunch.
A simple profitability model has now been developed, which includes all factors and projects future profitability for any marketplace scenario. Those interested are invited to download a preproduction version for evaluation. This will be updated, tested and ‘productionised’, then released free of charge. The review model can be downloaded from www.themodelworks.com/review-model.