Ten years on, would I still go into buy-to-let mar­ket?

Sheffield-based in­vestor and for­mer Prop­erty Woman of the Year Shona Dav­i­son re­veals the pros and cons of buy­ing to let in to­day’s prop­erty mar­ket.

Yorkshire Post - Property - - PROPERTY -

TEN years ago, as a young grad­u­ate liv­ing in the South of Eng­land, I bought my first buy to let prop­erty. It was in my home town of Sheffield as I couldn’t af­ford the south­ern house prices at the time. This ten-year an­niver­sary has prompted me to think about the changes I have seen in the pri­vate rented sec­tor over the years. If I were start­ing all over again, would I still be so keen to be­come a land­lord?

One of the most important as­pects when in­vest­ing in a rental prop­erty is the maths. In 2001, it was not dif­fi­cult to find a prop­erty in Sheffield where the fig­ures stacked up. An­nual rental re­turns of nine or ten per cent of the prop­erty price were easy to achieve. Although prop­erty prices have more than dou­bled in our re­gion over the last ten years, rents haven’t kept up, so re­turns are now gen­er­ally lower.

At the be­gin­ning of 2001, the Bank of Eng­land base rate was six per cent. We are now in a pe­riod of record low in­ter­est rates with base rate at just 0.5 per cent for over two years. Many land­lords have been ben­e­fit­ting from these low in­ter­est rates on ex­ist­ing buyto-let mort­gages and so for some of us prof­its are up com­pared to 2001, de­spite the lower rental re­turns.

That’s not to say the last few years haven’t also pre­sented chal­lenges for land­lords. Al­most overnight, 90 per cent of lenders with­drew from the buy-to-let mort­gage mar­ket. It has been par­tic­u­larly dif­fi­cult for port­fo­lio land­lords, those with a num­ber of prop­er­ties, to gain ac­cess to fi­nance. Although more mort­gages have been avail­able over the last few months and loan to val­ues (LTVs) are in­creas­ing again, it is still much more dif­fi­cult to bor­row com­pared to a decade ago and in­ter­est rates of­fered don’t re­flect the fact that base rates are so much lower.

Even ex­ist­ing land­lords who are able to get mort­gages have been find­ing it more dif­fi­cult to raise the de­posits for new prop­erty pur­chases. In the past, re­mort­gag­ing has been the pre­ferred tax-ef­fi­cient way of rais­ing de­posits to buy more. The fact that rates may be lower on ex­ist­ing buy-to-let mort­gages com­pared to new ones, can mean that the fi­nan­cial con­se­quences of re­mort­gag­ing are ex­tremely high. The fall in house prices has com­pounded the prob­lem, re­duc­ing eq­uity, while at the same time as mort­gage lenders are ask­ing for higher de­posits.

Many land­lords are cur­rently ben­e­fit­ting from an in­crease in de­mand, by be­ing able to ask for higher rents and ex­pe­ri­enc­ing fewer empty pe­ri­ods. The higher house prices and tighter lend­ing con­di­tions mean that first-time buy­ers are find­ing it in­creas­ingly dif­fi­cult to get on the prop­erty lad­der. For some this makes rent­ing the only op­tion. For oth­ers who are con­cerned about the un­cer­tain eco­nomic out­look, rent­ing has be­come the pre­ferred op­tion, be­cause of the reduced risk com­pared to tak­ing on a mort­gage. It per­haps isn’t sur­pris­ing then, that a re­cent sur­vey by the Na­tional Land­lords As­so­ci­a­tion (NLA) showed that 52 per cent of land­lords re­ported an in­crease in ten­ant de­mand dur­ing the sec­ond quar­ter of 2011.

When start­ing a buy-to-let busi­ness, it is es­sen­tial that you are aware of and com­pli­ant with all ex­ist­ing leg­is­la­tion. This can be chal­leng­ing, although join­ing a land­lord or­gan­i­sa­tion such as the NLA (which pro­vides an advice line and on­line Land­lord Li­brary) or at­tend­ing reg­u­lar branch meet­ings, can cer­tainly help.

Those who en­ter the buy to let mar­ket now will likely find get­ting fa­mil­iar with the leg­is­la­tion even more time con­sum­ing. Over the last decade, we have seen many new laws come into force. These in­clude the in­tro­duc­tion of En­ergy Per­for­mance Cer­tifi­cates (EPCs), the re­quire­ment to use a ten­ancy de­posit scheme, the need for li­cences to rent some prop­er­ties and the in­tro­duc­tion of Ar­ti­cle 4, which means some new shared hous­ing will re­quire plan­ning per­mis­sion.

An in­crease in leg­is­la­tion means that well-in­ten­tioned land­lords in­cur ex­tra costs and have to work even harder to run their busi­nesses com­pli­antly. This can re­duce the ap­peal of be­com­ing a land­lord.

So if I were a young grad­u­ate now, would I still want to be­come a land­lord? I be­lieve I would. It would take me longer to save up my first de­posit, more time to be fa­mil­iar with the leg­is­la­tion and I’d have to search a lot harder for a prop­erty where the fig­ures added up – but I be­lieve these are bal­anced by many pos­i­tives. One of which is the fact that I en­joy pro­vid­ing my ten­ants with a home.

Fi­nan­cially, the mar­ket is now less for­giv­ing of mis­takes, so buy­ing the right prop­erty at the right price is even more crit­i­cal. If you are in it for the long haul, own­ing and rent­ing prop­erty is still an ap­peal­ing propo­si­tion, but the days of mak­ing a quick buck have long since dis­ap­peared.

DO THE MATHS: Shona Dav­i­son bought in­vest­ment prop­er­ties in her home town of Sheffield. But prop­erty prices have more than dou­bled since.

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