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How to Make Money From Your Home

Buy-to-let landlords have seen their profits squeezed by tax changes this year. But their are still tax-efficient ways to make good money through your home

Karen Kwok 13 March, 2017 | 8:56AM

This week as part of our Guide to ISA Investing we reveal the top rated and top performing stock and fund ideas – as well as sharing where the experts stash their cash, the latest news from the 2017 Budget Report and how to reduce your tax bill.

Making money from residential property is getting harder. After a 3% stamp duty charge on buy-to-let properties and second homes introduced from April last year, next month there will be a change on buy-to-let mortgage interest tax relief. Landlords can claim a full tax relief on their mortgage interest payments at the moment – however from next month the tax relief will be cut back 25% a year, hitting 0% in 2020.

The number of new landlords instructing agents in February is at its lowest reading for two years at -10%, according to the latest RICS Residential Market Survey. This negative trend is likely to persist in coming months as investors are seeing their profits squeeze with more regulations changes kicking in next month, the survey said.

While buy-to-let is under threat from regulatory changes, number of homes in the rental market is showing downward signs, and this is likely to support rental price growth, said Johnny Morris, research director at Countrywide, the property service group.

Stephen Wasserman, managing director of West One Loans agreed, saying with many hungry renters, landlords should not walk away completely.

Data from the Office of National Statistics revealed private rental prices paid by tenants in the UK rose by 2.2% in the year to January 2017. The rise of rental prices is likely to be caused by demand in the market outpacing supply, the ONS said. However, more recent data from Countrywide showed the cost of renting a property in Britain declined for the first time in over six years last month.

Earn 7% from Buy-to-Let

Investors looking for a buy-to-let investment should be aware that rental yields can vary widely across the UK. Properties out of London tend to offer higher yields, said Jonathan Harris, director of mortgage broker Anderson Harris.

The latest research available by HSBC suggests that regionally, Manchester offers investors the best return on their investment. With an average house price of £108,870, average rent of £719 a month, gross rental yield totals 7.98%. Kingston upon Hull has an average house price of £69,135, average rent at £450 a month, resulting in a gross rental yield of 7.8%.

Blackpool’s average house price is £79,654, average rent is £488 a month resulting in a gross rental yield of 7.35%.

Profitable Options for Homeowners  

While buy-to-let mortgage interest tax relief is being reduced, homeowners have other options available to them. By signing up to the Rent a Room scheme, landlords can enjoy up to £7,500 a year exemption from tax. The Rent a Room scheme is an optional scheme that is open to owner occupiers or tenants who let out furnished accommodation to a lodger in their main home. It allows you to earn up to £7,500 a year tax-free, or £3,750 if you are letting jointly.

Harris reminded investors however they make money from residential property it is important to have a contingency budget to cover void periods and ensure the mortgage is paid each month.

“This can also cover emergency outgoings, such as replacing the boiler, as the monthly rental income may not be enough for this. Some landlords look to cut costs by taking on the management of the property themselves as opposed to paying a management fee to an agent but while this could save you along the lines of 15% off the rent each month, work out whether you have the time, inclination and skill set to do this before committing,” said Harris.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk