A new analysis of the private rental sector suggests the typical buy to let investor will be lucky to generate annual returns above 2.5 per cent before 2021.

The latest BondMason index says the issue is down to the familiar cocktail of higher costs and restricted fiscal benefits. 

BondMason says the effective tax rate facing landlords has ratchetted up from eight per cent of their rental income at the start of 2015 to 47 per cent today.  

It will go up further to an effective rate as high as 56 per cent next year, when counting the non-deductibility of mortgage interest. 

The calculation suggests that with subdued house price growth this year and next “the typical buy-to-let landlord will be lucky to generate a return of more than 2.5 per cent this year or next from their investment and all the work involved.”

Stephen Findlay, chief executive of BondMason, says: “Britain has around 2.5 million private landlords, but we can see this to be a high water mark as the high tax rates that have now kicked in, mean that many landlords will struggle to cover the cost of their mortgage and other expenses, and may only make money by selling their property.

“By contrast to the decline in fortunes of the direct buy to let market, there are interesting opportunities for private investors who want exposure to residential property investments through corporate landlords.

“Corporate activity in the private rental sector continues to grow, with the burgeoning build-to-rent market gaining momentum. A number of these companies are now listed on the LSE and AIM stock markets, and provide investors with the investment opportunity to access returns from the underlying buy to let property market, without having to buy a property directly.”