Buy To Let - Should You Stay Or Should You Go? Updated Version

The biggest casualty of our current economic climate appears to be the small buy to let landlord. Many have low yielding properties that haven’t increased much in value in recent years and only made profit because rates were so low for such a long time. I just quickly googled ‘buy to let’ and all the news results were negative. The political and economic arena for small landlords has changed massively in recent years. There are many factors that have huge impact on both new and existing landlords;

· Higher stamp duty on purchase

· Tax on rental income has hugely increased due to the mortgage interest relief changes

· Heavier regulation, rules and expectations of landlord – selective licencing is increasing and it’s about to become much harder to evict tenants

· Property prices haven’t done as well in recent years

· Flats are particularly decreasing in value and difficult to sell

· Mortgage costs have increased massively – average buy to let interest rate is near 5%

· Mortgages are now subject to affordability so the amount of lending landlords can achieve is lower

· The cost of builders and materials is much higher making maintaining multiple properties costly

· Property is inefficient for inheritance tax and passing on wealth to loved ones

The effect of all the above is a mass exodus of landlords. I can see it in my client base. Many are selling. However, this will create a huge opportunity for the landlords that are left as demand far outstrips supply. We have already seen one rent bubble increase and I predict that we will have another one next year as we approach the introduction of the Renters Rights Act.

· Rents are spiralling to highest levels ever seen and will continue to

· Will be easy to take your pick of tenants and keep properties rented

· House prices will rise on properties eventually once the economy recovers

· Regulation will make landlords more professional and efficient

· It is likely that government will have to back track on some of the above regulation and taxation once a rental crisis really takes hold

· Mortgage costs have come down a bit and will likely continue a little bit further in the medium term

· There is potential to expand profits further with growing HMO and short term rental markets and other innovative ways of renting property as tenants look for alternative smaller renting options as rents increase

One point that I saw being made recently was that in the future it will be so much harder to enter the buy to let market. Because of this competition won’t return, so rents will stay much higher and there will be an abundance of tenants. Secondly if you leave the market, it will be much harder to ever get back in to having multiple properties again. The cost of additional rate stamp duty to purchase and the lack of mortgage affordability means you would need huge sums of money to buy a new rental property. This will be a huge barrier to entry for most people so there is an argument for staying ‘in’ and riding out the storm. I would imagine that a future government will have to incentivise landlords again in the medium term once a housing crisis really takes hold. As soon as early next year I can see a situation where rents are sky high, the property market is flooded with rental properties being sold, there is no market to purchase those properties so prices will crash and young occupiers will be left unable to save to buy and struggling to afford high rent. Something will have to be done to resolve that and it could be a good opportunity for the landlords that are left.

Flats are just not selling at the moment. Post covid people that can buy want houses with gardens. There’s no first-time buyers, no buy to let investors purchasing and they are the people that typically buy the smaller single let properties that are coming on to the market. Considering that the selling market is dire - anyone that does come out of the woodwork to buy knows they can offer 20% under and more. This position is only likely to worsen. So do consider whether selling at the worst time is also the right thing to do (and don’t forget your capital gains tax bill!).

The average person is very squeezed at the moment. Once the new rent rules come in you could find yourself stuck with difficult tenants, gaps in rent, costly repairs and unable to make decisions about your property quickly any more. Landlords must ask themselves if they can survive paying two or more mortgages (at higher interest rates) if their tenants failed to make every payment. Tenants are very aware of their changing rights and the media rhetoric around landlords impowers poor tenant behaviour. I have personally seen landlord clients in very stressful situations over rental properties and that was with the ease of section 21. At the very least now is the time to think about having a back up savings pot, rent insurance, consider reducing mortgage debt to increase security and really think about the long term plan for your portfolio. I don’t think it will be long until labour goes for more inheritance tax on properties too.

I have no answers – just info. Is there an argument that if you’re in you should stay in? That’s down to your personal circumstances but I just wanted to give you some food for thought. My answer is always do the numbers. It’s business! Work out your costs and returns and find out your yields – it’s amazing how many buy to let owners have no idea if they have a good investment or not. If you’re dealing with all the stress of tenants to make 2% on your money maybe it does make more sense to sell and invest in something with less commitment and more return. You can make far better returns in safe investments without any where near as much stress or risk. However, if you can make it work then you could capitalise on increasing rent and much more demand for your property in the future.