In December last year, the Economist newspaper asked if Britain’s buy-to-let boom had come to an end as landlords faced up to new regulatory and tax pressures. Fast forward a month to a report published in January 2018, and by Finance UK, which found that mortgage arrears on properties owned by buy-to-let landlords had jumped by 20%. Meanwhile, many property owners have reportedly decided to quit the rental market. Clearly something has happened. Rain clouds have appeared in a clear blue sky.
There is no one reason for the question marks that currently hangs over the residential rental market. Over the past year or so, pressures have been piling up on landlords and some have found they don’t have the headroom to keep their head above the financial water.
Some of the pressure is a direct result of Government policy. For instance, in 2015, the then Chancellor, George Osborne announced changes to the Stamp Duty regime, effective from 2016. Prior to the change, home buyers could escape the tax if they bought properties valued at less than £125,000. That is still the case for those who own a single property, but anyone who buys a second home (for rental purposes or otherwise) faces a charge of at least 3.0%, a figure which rises through the tax bands.
Arguably that’s something that can be budgeted for, but other changes are also taking their toll on buy-to-let landlords.
These include a change to the expenses regime, meaning that landlords no longer benefit from quite such a generous wear-and-tear allowance.
Landlords are also finding that evicting a tenant for non payment of rent can take almost a year. For someone who is relying on rental income to pay a mortgage on the property and take an income on top, this can be devastating financially. The mortgage still has to be paid but the income dries up.
Meanwhile, the market is changing. There is strong demand for rental property in the UK and – many would argue – an undersupply. This has pushed rents up. But the price of buying a property has also been rising, making it more expensive for prospective landlords to enter the market. The uncomfortable truth is that in some areas, achievable rents have hit a ceiling while purchase prices have gone on rising. In areas where the market is particularly hot – notably London – the consequence has been a fall in yields.
The Most Vulnerable
So does this mean that investment in residential rented property is a bad thing? Far from it.
As the Economist pointed out, the buy-to-let market in the UK is dominated by people who have only one property and, sadly, these are the investors who are most likely to be feeling the squeeze in the market.
For instance, a single property owner is much more likely to come under real stress when a tenant (or group of tenants) fails to pay the rent for a protracted period, simply because there is no income from other properties to mitigate the shortfall.
Less easy to pin down is the level of professionalism displayed by landlords who own one, or perhaps two, properties. In some cases, they will be very professional indeed, but others may struggle to manage their finances, particularly when regulations change.
But for professional – and smart – investors, the buy-to-let market is still full of opportunity. Careful investment will ensure that the problems outlined above can be managed or avoided completely.
Stamp Duty, of course, can’t be avoided, but what you can do is keep the liability down to a minimum of 3.0% by buying properties valued at under £125,000. That doesn’t necessarily mean looking for low cost houses. In fact, by buying a block, an investor can keep the tax bill to 3.0% as long as the individual apartments within the property fall into the lowest Stamp Duty band.
Buying into block developments has other advantages. For one thing, there will be more than one tenant, so any loss of income that occurs when the renter moves ( leaving a vacancy) or defaults is cushioned by the income from other units. Equally important, investing in a department block usually secures higher yields, due to the relationship between the overall cost of the property and the rents achievable from each of the units. There may also be a saving per unit on maintenance charges.
Finally, it’s important to note that yields are not falling everywhere. Again, it’s a question of the relationship between the rent that can be commanded and the cost of the property, but while yields are hovering around 3.0% in parts of London, in the North and Midlands they are much higher.
The problem facing individuals is that finding properties that offer superior yields is not always easy. To do so requires some very localised research and possibly also the right contacts. Equally, even High Net Worth individuals may be deterred by the prospect of buying into larger apartment blocks, even if it is more financially efficient,
The Route — Property offers a means make smart investments. The Route has a team of residential property experts who have identified superior yield opportunities, which are available to Members of The Route City wealth club. These include apartment blocks (existing and in development) and properties that have come onto the market at relatively low prices due to mortgage defaults on the part of of the previous owner.
Residential rental property is a sound investment but it’s important to allocate resources carefully to obtain the maximum benefit. The Route is dedicated to finding the best deals for it’s Members.
To find out more call: 020 3141 9040
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