This year, the media seems to have been packed with headlines shouting about new constraints for landlords. So if you’ve been left wondering whether Buy to Let is still a good financial investment for you, you’re not alone. That’s why we thought it would be helpful to put together a summary of what’s gone well for landlords in 2016 and look at how to deal with the challenges you’re likely to face in 2017 and beyond.
What were downs for landlords in 2016?
There are two main areas where landlords have incurred costs:
1. An increase in the running costs, due to new rules and regulations that have been introduced, including:
In England, Right to Rent checks and making sure smoke and carbon monoxide alarms (where required) are fitted
In Wales, landlord registration and licensing (including agents)
In Scotland, all tenancies (not just new ones) requiring a copy of an Electrical Installation Condition Report (EICR) by and from 1st December 2016.
2. The increase in taxation. This year an extra 3% stamp duty land tax on second homes came into force and the automatic annual ‘wear and tear’ allowance disappeared. And from April 2017, phase one of the reduction in mortgage interest relief for higher rate tax payers begins, while everyone loses the ability to deduct finance costs (e.g. mortgage interest or admin fees) from rental income. The impact of all these changes could mean that some landlords will end up paying three or more times the amount of tax they’ve paid up until now.
What were the ups for landlords in 2016?
Property price and rent rises for landlords, according to Your Move’s Buy to Let and house price index, good news for landlords!
Although things have got tighter profit-wise for landlords and investors, there’s still good news - property prices have gone up in most areas this year. Some landlords have also been able to increase rents and, even though that might not have been by much, it’s helped offset some of the increased costs and taxes.
Overall, average property prices have risen in the last year to £294,351. That’s a 3% increase, equal to average capital growth of £7,861. Rents have also gone up by 8.7% year on year in England and Wales, which is an average of £887 per month - a 4.7% yield.
The second piece of good news is that tenant arrears, which cause serious problems for landlords, have now fallen well below the heights seen in February 2011, when they affected 14.6% of tenancies. Now that figure stands at 9.8%.
Scottish property price increases: 2016 vs 2015
Average property prices in Scotland rose by 2.4% in the last year, from £166,673 to £169,834 – up by £3,161. Meanwhile, rents have also risen by 5.4% year on year, to an average of £576 per month, that’s a 5.9% yield.
The third piece of good news is that some of the increased costs can be mitigated if you consider re-mortgaging and can take advantage of historically low interest rates. According to Mortgage Brain, the cost of Buy to Let mortgages fell by 8% from March to September 2016, with rates as low as 2%-3%, even on fixed rate deals. That could save you hundreds of pounds each year, which goes a long way to offsetting the rise in costs and taxation.
Looking ahead
Things haven’t stopped changing…Now’s the time to review your financial goals and plans!
As we head into the Christmas holidays, it’s well worth reviewing your property investments to make sure you understand exactly how this ‘new world’ of letting will affect you. You should be looking at what impact the recent and upcoming changes will have on your properties and profits, and decide whether you need to rethink your future plans.
If you earn most of your income at the moment from being a landlord, you’ve probably already made good money from property over the years. The main question for you might be: do I carry on investing? If you’re not sure, there was a piece of good news in the Chancellor’s Autumn Statement, which lots of investors haven’t yet been exposed to, and that’s the huge investment that there’ll be in infrastructure over the coming years. Looking at the deals that are already being struck, altogether they offer great possibilities for investors to earn good money from property going forward.
The likes of the new HS2 train line, additional Heathrow runway and Cambridge-Milton Keynes-Oxford corridor investment all present opportunities to invest in profitable Buy to Let properties – provided, of course, that any purchases are well researched. Those locations will also see additional rental demand for several years, as infrastructure projects like these need sizeable workforces, which come from all over the UK and overseas.
On top of that, most forecasters continue to suggest that, despite the Government’s apparent intention to ‘crack down’ on the growth of the Private Rented Sector via landlords, the number of people who want to rent is increasing all the time. The media often says that lots of people in the PRS are only renting because they can’t afford to buy, but the truth is that many are renting because it suits their circumstances – as our own 2016 Tenant Survey reveals.
Some tenants need the flexibility of rental accommodation, some simply can’t get mortgage finance and some are best served by the rental sector because of their employment status. Now that the Brexit vote has thrown the economy into uncertainty, a lot more people want flexible living situations. Add to these things the tougher rules around mortgage finance and the fact that many jobs now require more flexible working environments, the reality is that renting suits a growing number of people. And while the number of tenants looking for homes is likely to grow, the new legislative changes are likely to hold back the supply of rental properties. That means existing landlords should benefit well from natural market growth over the coming years.
What do you want from the property you let?
Over the years before the credit crunch, we saw excellent property returns through natural price and rental growth, year after year. But since the recession we haven’t been able to rely on this happening and different regions and even property types are now giving very different investment returns.
So, in order to decide whether it’s best for you to hold, alter or sell the property you let, you need to go back at look at your original objectives for investing, then check whether your portfolio is delivering what you need.
With the upcoming changes to the way Buy to Let is taxed, it’s wise to consult an independent financial advisor who is regulated and qualified to help you assess your financial needs – asset and income-wise – and understand how near or far away you are from achieving them.
Will property still be able to support me after I retire?
If you’ve invested in Buy to Let to boost your pension, the future looks good, thanks to the two main ways property can still deliver a good return:
1. Because you can ‘gear’ the investment (i.e. put down a deposit and use mortgage borrowing to buy a property worth a lot more than you have available in cash), when prices rise, you benefit from the capital growth on both your money and the bank’s money. And, in the meantime, the rental income helps fund your borrowing. That means you get far better returns than if you were to invest with 100% cash, although you need to recognise that it does carry more risk.
2. Market fluctuations aside, property investment tends to be more flexible than a traditional pension, because you can cash in your property investment at any age and there’s no limit on the amount of money you can release. However, you are likely to pay more tax, which is why you should always consult a property tax specialist and independent financial advisor before making any investment, to make sure it’s the right financial move for you.
Can I earn an income from just one property?
One property on its own is unlikely to make a huge difference to your income in the short term. But it can deliver great capital growth over time - especially if you gear your investment with a mortgage - which is why Buy to Let should always be viewed as a long-term investment of around 15-20 years.
Investing purely with cash usually means you’re not taking best advantage of the returns Buy to Let can deliver. So, if you do just have one property, you’re working and you have a pension, it’s worth checking what your income and capital ‘gap’ might be in the future, so you can make sure you’re investing your money in the most tax-efficient way.
If I’m letting my own home temporarily, is it worth it?
Letting a property in today’s market is complex, meaning you can’t just up sticks to a new home and let your old one to a friend, neighbour or colleague – either short or long term.
There are around 400+ rules and regulations that you and your property need to comply with to make sure you let legally and safely to tenants.
It’s quite common now for landlords to be fined anything between hundreds of pounds and tens of thousands of pounds for not adhering to regulations, for example, having up-to-date gas safety certificates and securing any necessary licences.
So, if you’re considering letting your own home or you’re letting it already, come and speak to us in your local Your Move branch so we can make sure you understand what you need to do to have a legally-let property. You should also take independent financial advice on how the latest changes to taxation could affect letting your own home.
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