Traditionally, investment in Buy-To-Let (BTL) property has provided a lucrative income stream for investors and landlords. However, with ever-growing challenges, including Brexit uncertainty and the introduction of new legislation, is property investment still a viable choice? In this blog, we discuss the key challenges now faced by investors.
One of the most profitable BTL properties is the HMO, or ‘House in Multiple Occupation’. Given their potential for high yields, many landlords have opted to invest in this type of property. Yet there are a plethora of licencing requirements of which they need to be aware.
Many inexperienced landlords are unaware that they must have an HMO-specific licence if the property which they let out has facilities which are shared between five or more tenants, who are not related, over three or more floors. However, although generally such a licence is not required in buildings of one or two floors, in some areas local authorities can still demand a licence using their powers of selective licencing.
To be granted a licence, the property must be suitable for the number of tenants, and you, or your agent, must be seen as ‘fit and proper’, that is to say you have no criminal record. You must also send your local council an up-to-date gas safety certificate annually, fit and regularly check smoke alarms and, when requested, supply electrical safety certificates for all appliances within the property. HMO licences are only valid for five years and must be renewed before they run out.
If a landlord operates an unlicensed HMO, they can be charged an unlimited fine.
A further headache for investors was the 2016 introduction of the 3% SDLT surcharge on second homes and additional properties. One result of this was that sales of BTL properties fell, as investors already on the market consolidated their investments by holding onto their properties. It also meant, and still does, that investors increasingly struggle to purchase new properties
The Bank of England’s Base Rate rise in 2017 led to increases in mortgage rates. However, when compared to interest rates of the past, the UK is not currently facing particularly high rates.
A further issue facing landlords is that of the tough lending restrictions which were introduced in September 2017. The legislation means that portfolio landlords who own four or more properties must present full financial information for every property they own when they come to apply for finance. Additionally, when assessing a landlord’s suitability for a mortgage, providers now place greater emphasis on the experience of the landlord and will take into account their wider property portfolio.
Furthermore, there has recently been a surge in investors purchasing property via limited companies. Lenders have viewed these purchases as impulsive, driven in part by the current political and property market instability. They are therefore less willing to offer financing, making the purchase of new investment properties increasingly difficult.
This issue has been exacerbated by changes to tax regulations. Prior to April 2017, landlords in the BTL sector could deduct the cost of mortgage interest from the income they obtained from their rental properties, thus allowing for a reduced tax bill. A transition is currently in progress, until April 2020 which will lead to the phasing out of this method of deductible mortgage interest. From this date, a tax credit worth 20% of the mortgage interest will be introduced instead, which landlords will not be able to offset against their profits.
The other issues which have always plagued landlords still continue. Perhaps the most troublesome of these is void periods, which are an unavoidable part of being a landlord. During these periods, landlords are unable to collect any rent and so are left to cover mortgage repayment costs and pay bills associated with the house, such as council tax, out of their own pockets. Landlords can of course avoid this issue by making their property as desirable as possible and encouraging renters to remain in the property. When coming up with a budget, landlords should make allowances for void periods.
Another issue, but one which is relatively rare, is that of difficult tenants. Troublesome tenants very occasionally damage properties. Landlords will then be responsible for refurbishment costs. To avoid this issue, landlords should make it explicitly clear that renters should care for their property carefully in a suitable condition. Fair wear and tear is to be expected in rental properties, though the tenant’s deposit can be used for decorating and cleaning costs.
When calculating the yield that they will receive on their properties, landlords should always take into account capital yield, that is, the increase in the value of a property during the ownership period. The obvious issue here is the fluctuation in prices, which was exacerbated by Brexit. Landlords should look for property bargains. In the South of England, especially in London, property prices have stagnated. However, investors should consider turning to the North West, where cities such as Manchester have seen growth of 15% within the past 3 years.
Signs of Positivity
The issues highlighted above should not put investors off the UK property market, especially in the North West, where yields in university cities such as Liverpool, Salford and Manchester are particularly high. Indeed, according to research carried out by Shawbrook Bank last year, most BTL investors remain optimistic about the future of their investments, with 65% of those surveyed saying that they were confident about the success of their portfolios.
This optimism is in part due to high demand for rental properties and particularly high yields. The experts in Buy to Let property investments in Liverpool, Salford and Bolton, The Mistoria Group, provide properties which can earn combined yields of 13% (8% rental and 5% capital yield).