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.
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.