Buy-to-let investors switch to crypto seeking bigger gains

While few brokers approved of the move their clients are making, most are wary parts of the UK - particularly London - are becoming less attractive prospects for property investment returns as buy-to-let growth stalls.

Ben Michaelis, who manages his own financial services and property-focused digital marketing agency, contemplated entering the buy-to-let space a year ago. Having bought his first house and with family and friends already landlords, the move to become a landlord himself seemed to make sense.

But Michaelis was put off by regulatory barriers, including the high levels of investment required for a buy-to-let mortgage to generate worthwhile returns.

With property producing average gains anywhere between 5 and 10 per cent a year, Michaelis said he was drawn to the minimum advised return of around 30 per cent to be made from cryptocurrency in just three to six months on less money.

“It was the realisation I would never have had this return from property,” he told FTAdviser. “I tried a stocks and shares Isa - it was ok, but it was nothing special. With crypto, it’s liquid, so you can withdraw your assets at any time. You can’t do this with property, there’s lots of factors to consider.”

Michaelis added: “Buy-to-let is a commercial operation, you have to run it like a business - and I simply didn’t have the time around existing work commitments to facilitate such a responsibility. Equally, I recognised assigning this responsibility to a letting agency would reduce my rental yield further. 

“With crypto, I have a broker who manages my funds for me and takes a small percentage of my entry investment to the market.”

In the past five years, the government has made a series of reforms which have affected buy-to-let investors.

These include a 3 per cent stamp duty surcharge, more stringent affordability tests and reforms to mortgage relief.

‘Is it any wonder?’

In London, mortgage broker The Money Group’s buy-to-let business grew by 28 per cent in 2021 - the same rate it grew by in 2020.

“There’s no significant growth in London’s buy-to-let purchase market,” said Martin Stewart, a director of TMG, who said his firm was a “good litmus test” for what the London buyer was thinking.

You now need a quarter of a million to enter the buy-to-let market in LondonMartin Stewart

“The barrier to entry is so expensive from a deposit and taxation point of view,” Stewart explained. “We've got one client looking at a minimum £200,000 deposit for a three-bedroom flat. Add a stamp duty bill to that, plus 3 per cent, and the fact there's no longer any bells and whistles in terms of offsetting interest payments against rental income, is it any wonder that people are looking at some property on the market and deeming it overpriced?

“You now need a quarter of a million to enter the buy-to-let market in London. So borrowers simply aren’t there in the volume they were years ago.”

Asked what prospective buy-to-let investors are turning to instead, Stewart said simply: “Bitcoin.”

While Stewart doesn’t advise on cryptocurrency investments - much like the majority of broker - he understood why people could no longer feasibly invest in property, at least in London.

“Professionalisation of the buy-to-let space isn’t a bad thing - it needs more regulation and professionals - these are people’s houses we’re talking about,” said Stewart.

“You could house a family with practically no regulation. To me, it’s an investment, so it needs to be regulated like one.”

'We all know' tax will come

The big appeal of cryptocurrency, at least for the moment, is the lack of regulation which means gains are not taxed as heavily as those made from property investments. 

But some brokers were not so sure this would be the case for much longer, highlighting that even now, capital gains tax must be paid on any gains over £12,300.

Bulent Kandemir, managing director of broker Intra Private Finance, said: “We all know it will be regulated and taxed more in the future.”

Managing 17 of his buy-to-let portfolio clients, some three or four realised some of their property assets in 2018 and 2019, investing them into cryptocurrencies. They sold some properties as property taxation changes in recent years had meant their profits declined.

“They’re now looking to pull out of crypto, as dips and troughs become more intense,” Kendemir explained. “Some of my buy-to-let portfolio clients hold their property under their sole names, hence if they sold or switched to limited company buy-to-lets, then certain taxes would potentially be payable.

“The tax position is potentially the same as buy-to-let, when it first started,” Kandemir explained. “There were inadequate taxation follow ups by the authorities when buy-to-lets were very popular in the late 1990s and early 2000s. Surely some people took advantage at the time - so we could ask, is crypto the same thing?"

Kandemir reckons the government will reform the taxation of cryptocurrencies soon. "Then we’ll hear the same thing [from investors]: ‘You didn’t tell me at the time’."

Earlier this year, HM Revenue & Customs issued nudge letters to taxpayers it identified as holding crypto assets, or cryptocurrency, to ensure they paid CGT on their gains - pointing to greater scrutiny already being exerted on investors.

With significant gains in cryptocurrency hampered by short-term market volatility, many investors keep their money in cryptocurrency to achieve generational wealth.

“Most people aren’t going to take their gains out, as they want to gain more” said Kandemir.

“Adequate and appropriate taxation usually provides structure and better investment planning. However, some buy-to-let portfolio owners will not have learned their lessons and invested with no tax implication in mind.”

ruby.hinchliffe@ft.com