It’s been hit by new taxes, increasing regulation and rising interest rates but the buy-to-let market is still providing strong returns – and could be the best place for your cash in 2018.
Although the sector is tougher than before the Bank of England hiked the base rate to 0.5 per cent, it’s still good for investors because demand for rental homes is growing faster than the supply of homes to let.
Research based on the Government’s English Housing Survey, and other reports, shows there are 4.5million privately rented homes in the UK – that’s 20 of all households.
And estate agency Knight Frank says this could hit 24 per cent by 2021.
With house prices still high it means an increasing number of people have no alternative but to rent privately.
And then there is the student market. Plymouth sits alongside Manchester, Nottingham, Sheffield, Glasgow, and Cardiff – all university strongholds with large numbers of student looking for affordable accommodation – in the UK’s top 25 postcodes with buy-to-let (BTL) yields in excess of 7.25 per cent, a desirable return for investors.
So it’s a good time to enter the BTL market, but before you do, think about it carefully – and take advice.
It’s a complicated picture, but experts have listed seven things you need to do before making the BTL leap:
Do it for the right reason
BTL can be lucrative and a good alternative to a pension, but anyone thinking of entering the market should be clear on why they are doing it – and what a long-term proposition being a landlord can be.
And they are being warned that the days of soaring property prices may have come to an end. So look at it as an income, not an ever-growing pot of cash. And don’t forget your tenants are real people and you are dealing with their homes.
“Do it for the right reason,” said Jacqui Courtier, letting director at Plymouth Homes, a consultant for Plymouth City Council’s Plymouth Charter for Private Rented Housing steering group, and a BTL landlord herself.
“It’s not a one year job, you are in it for life. For me and my husband it’s our pension.
“We bought property 20 years ago but it took 15 years to benefit from it.”
David Vernon, a partner at Falcon, the largest estate agency Plymouth, with 350 rental properties, agreed.
“Go into it for the right reasons,” he said.
And he stressed landlords should not bank on the property to rise in value.
“People used to buy for the capital growth,” he said. “But since the 2008 crash that’s changed, they are not looking for that but for a return.
“If prices go up it’s a bonus. Property prices go up and down, so think long term.”
Mrs Courtier reinforced this and said: “Don’t rely on capital gain. The market is volatile. When you become a landlord you are investing in a small business.”
But she stressed: “The most important thing is respect your customer, and do the right thing.”
Research the market
Experts agree that before entering the BTL maelstrom it’s a good idea to find out a bit about what being a landlord is all about – and get some independent professional advice.
“Do a bit of reading yourself,” said Mr Vernon. “Get used to all the terms used.
“But there are experts out there too. So go to a truly independent advisor, someone who covers the whole market.”
He said that before you even start to look around for a property check out the costs of houses and how much income you will earn.
“Get the pen and paper out,” said Mr Vernon. “Work out the rent and what the return will be. Work out what the mortgage will cost you over 20 years.”
He said BTL lenders typically want rental income to be 125 per cent of the mortgage repayment.
“That’s quite significant,” he said. “I’ve seen BTL properties where the mortgage has been turned down because the rent is not high enough.
“And you have to factor in things like maintenance costs.
“And what if the property is empty, what we call a void property, for a couple of months? That could kill your investment for the entire year.
“So think of all the costs involved.”
Mrs Courtier stressed: “It’s all about doing your market research. Listen to a lettings agent, a proper lettings agent, not an estate agent. And get a second opinion. Get advice before you exchange contracts.”
She said the potential yield on a property can be easily worked out, and advised investors to do this. Simply multiply the monthly rent by 12, divide by the purchase price and multiply by 100 to get your percentage return.
She said that in Plymouth, for instance, most landlords are looking for a return of between seven and 10 per cent.
“That’s what I’d recommend a landlord to look at,” she said.
Joe Gardiner, head of brand and communications at credit eligibility firm TotallyMoney, said it may even be worth considering setting up a company to buy the investment.
He stressed forthcoming changes to mortgage interest tax relief could result in significantly higher tax payments but said landlords who own properties as a limited company will instead pay corporation tax – currently 20 per cent – on only their profits.
“Always seek out an independent financial adviser or accountant to help,” he said.
Buy the right property
What sort of BTL do you want? A house? A flat? And in what condition? Rundown and ready for investment, or sparkling new? And who do you want to house in it? Students, families, workers? Is it appropriate for them, and, indeed, what the market demands?
“It’s about making sure you make the right purchase at the right price,” said Mrs Courtier. “Everyone wants good quality accommodation, you should always buy well.
“My personal favourite is family homes for housing benefit customers, or low wage earners,” she said. “Two or three bedroom, where they can get their children into a good local school.
“Ex-local authority properties are excellent value for money. They are so well built, with schools and shops and bus routes nearby.”
Mr Vernon said student houses can provide a good return, but can be a headache for an inexperienced landlord, even if a management company is involved. A lower return on a purpose-built flat or terraced house could be easier on your time.
Plus, there is competition for the student pound, which may make shared houses harder to let out. He warned that student properties could be for sale because the current owner can’t let them.
“A lot of universities are investing in large, purpose-built towers,” Mr Vernon said.
He also advised potential BTL landlords to “haggle over the price of the property,” before buying.
Mr Gardiner, however, advised purchasers to look at local market demand. He said that if it is from renters, in particular, it might be a good idea to acquire a family home and then seek planning consent to turn it into a home in multiple occupation (HMO), delivering larger monthly returns from a greater number of tenants.
But he warned: “HMOs involve strict licensing and safety regulations and much greater maintenance in addition to the costs of conversion.
“Nonetheless, this is regarded as the most profitable BTL investment, and using a lettings agent means they, not you, have to know the regulations and manage tenants.”
Buy in the right area
Think about where you are going to buy. This could be tried-and-trusted area, or an up-and-coming one – but it need not be close to where you live.
However, facilities and amenities will be important.
“Ex-local authority properties are excellent value for money. They are so well built, with schools and shops and bus routes nearby,” said Mrs Courtier.
“So it’s not about area it’s about what it has for your customer base.”
Mr Vernon concurred. “Letting to the family market is good,” he said. “A lot of people want to be in a good area for schools, for instance.”
But if you are thinking of the student market your property may have to be very close to the university.
“It used to be that anything within a golden mile of the university was good,” Mr Vernon said. “Now it’s 100 yards.”
He said potential landlords should consider looking further afield too.
“You may not have to live where the property is,” Mr Vernon said. “Quite possibly you may never have to go there.”
Mr Gardiner said it’s advisable to look towards high-yield areas. Many surveys show the best yields are in the north of England, with low capital values and strong rents.
TotallyMoney analysed more than 500,000 homes across 2,700 postcodes, finding the bulk of the 25 highest yields (ranging up to 12.63 per cent) in the north.
None were in London or the south east.
“Locations with strong employment stats and transport links and substantial student populations, typically provide the best returns,” he said. “But always check local agents to assess on-the-spot market conditions.”
Target the right tenant for you
It really matters what sort of person you want as a tenant – or as Mrs Courtier calls them: a customer.
Are you going for students or families or single workers? If it’s students, are you looking for the shared house crew, or someone more studious, a post-grad for instance, wanting a one-bed flat? And what about holiday makers? But remember: they are all people.
“There are only two types of tenant: good or bad,” Mrs Courtier said. “It doesn’t matter if they are working or on housing benefit if they are good customers.
“My personal favourite is family homes for housing benefit customers, or low wage earners. I do not want a high turnover of customers.”
Mr Vernon said the migrant worker market, often in HMOs (house of multi occupation), tends to offer greater returns – but at a price.
“There can be a lot of movement, in and out,” he said. “And there can be loss of control, you can get other people staying in the property, and sub-letting.
“You won’t get that if letting to a single professional or a family.”
Mr Gardiner suggested considering short-term lets.
“Letting out a property Airbnb-style for a few nights at a time can be an excellent income supplement if done between longer-term tenants,” he said. “On a rent-per-day basis returns are higher than for traditional buy-to-let but you must inform lenders and insurers and arrange someone to hand over keys, clean the property, provide fresh linen as appropriate and be on call in the event of emergencies.
“Remember most local authorities have a maximum – usually 90 nights per year – that homes can be used for short lets before they require planning consent for this kind of use.”
Get the best mortgage deal
Get your timing right. Entering the BTL market when mortgage rates are favourable is a good idea – and there are good BTL mortgages available at the moment with some lenders prepared to advance cash without fees and with no minimum income provided you have a 25 per cent deposit. But shop around and ask for advice.
“Mortgage deals have never been so good,” Mr Vernon said. “There are even great deals on a 20 per cent deposit.”
Mr Vernon said the recent tax changes, particularly to do with stamp duty, have been an issue for potential investors, but added: “I don’t think they have really affected the market, you are only looking at an extra three per cent on a second property. In Plymouth, on a £175,000 purchase you are talking about £2,500 stamp duty, that’s not make-or-break.
“There are also changes to mortgage tax relief, which is being axed, but that is complemented by the great rates out there.”
But have you the cash for the deposit? Is it available now?
“Some people save money, some are left money, some have equity in their house,” said Mr Vernon, who advocated shopping around for a mortgage.
“Get the best deal available, not the first one offered. Get the right mortgage product and if it’s paid in 15 to 20 years you could have an income you could live on.”
Mrs Courtier advised avoiding interest-only mortgages and said: “Go for a repayment mortgage.”
Mr Gardiner said investors should optimise their borrowing, and once they have a mortgage not be afraid to seek a new deal.
“Monitor the mortgage rate for each BTL loan you have and check how far through the initial deal you are,” he said. “If you have finished the initial deal you will be free to switch, probably at no cost.”
But again he stressed: “An independent financial adviser is a good idea.”
Beware of the pitfalls
BTLs are governed by laws and regulations and landlords should be aware of these or face serious penalties. And they should also consider how much involvement they want with a property, or whether they should put it in the hands of a management company.
“Consider how hands-on you want to be,” said Mr Vernon. “Do you want someone ringing you up on Sunday night about a leak?
“Could you do the running repairs yourself?” he asked. “Or you might want a lettings agent to part manage it. For a 24-hour management service you will have to pay. So factor in the management costs.”
Mrs Courtier said regulations cover everything from smoke alarms to heating systems, and advised potential landlords to bone-up on the the housing health and safety rating system (HHSRS), the a risk-based evaluation tool designed to protect against potential risks and in dwellings.
“Make sure you are up on legislation, for example smoke alarms must be fitted on the top and ground floors,” she said. “Make sure the electrics are safe, and people can fall foul of buying properties with inadequate heating.
“The property must be fit for purpose for the people living there and their visitors,” she stressed.
“And if you buy something challenging you may have to invest more. Don’t go for properties with large gardens, people don’t have to skills or the time to look after them. If you do, consider a regular gardener.
“Also, you want a minimum void period. And always have at least three-months rent in an emergency fund, if something goes wrong
“You have to reinvest all the time.”