Choosing the right place can be crucial for a buy-to-let landlord
ASIDE FROM your home and buying shares in a property company or fund, there is an excellent alternative way to gain from the rising value in bricks and mortar. Using your judgment for an aspiring district and selecting a site which will appeal to the right tenants can be a successful investment formula.
‘Buy to let’ (BTL) is now an established savings vehicle. Hamptons International calculate that £59.1bn was paid in rent last year, even though average rents rose only 0.4 per cent.
Its monthly index is based on 90,000 properties let and managed by Countrywide, the UK’s largest estate agency chain.
If well chosen, tenancy payments can handsomely cover BTL costs, allowing the saver to both enjoy a steady income flow and benefit from the upward movement in property values. However, it should be seen as a long-term commitment and not easily liquid if a sale needs to be effected quickly.
The private rented sector provides for 5.5m households. Yet BTL took a major knock when higher stamp duty of three per cent on second homes was imposed in 2016, combined with the reduction in mortgage interest tax relief and the removal of the wear and tear allowance.
The latter means that landlords can no longer deduct 10 per cent of rent from their profits to cover damage. However, claims for purchasing new furniture are allowed.
The sector has 130,000 fewer BTL investors than three years ago which is seven per cent of the market. This reflects both the stamp duty changes as well as socalled ‘accidental’ landlords who failed to sell their homes and have opted to rent.
With affordability for tenants a recognised issue, many landlords have either not raised rents recently or only by a small proportion.
Halifax, part of Lloyds Bank, say the average property now costs £223,691, reflecting a 2.5 per cent rise in December but a 2.9 per cent fall in January. The Land Registry says UK house prices rose 3.3 per cent last year.
However, on the plus side with rising employment, growing real wages and continuing low inflation, BTL investors can expect more young tenants to move out of parental accommodation. The uncertainty over Brexit will encourage greater numbers to rent rather than purchase.
Savills estimate private landlords hold £1.5 trillion worth of stock and Hamptons International say they bought 11 per cent of all homes in January, boosted by the number and size of available BTL mortgages on offer.
Prospective landlords need to obtain specialist advice. One key area is the handling of tenancy deposits with a staggering 91 per cent revealing to the rental website urban.co.uk that they are not complying with the legal process.
From June, the maximum deposit will be five weeks’ rent for properties let for less than £50,000pa.
Selecting the right area for your BTL takes skill. According to property portal One and Only Pro where landlords can research the highest yields by postcode, Salford in Manchester can pay 12 per cent. A flat with three bedrooms which costs £130,000 can bring in £1,300 monthly.
Rental yields are averaging 5.9 per cent outside London and 4.7 per cent in the capital. Whilst voids should be allowed for in the budget, the vacant letting period time can be used to redecorate. Use an agent to seek two or three year tenancies rather than less which will reduce expenses such as for advertising and obtaining references.
If rent should be in arrears, interest can be charged up to three per cent above the Bank of England rate. Such costs as cleaning and valuation cannot be passed on.
There must be annual inspections by a gas safety engineer for smoke alarms, carbon monoxide detectors and to ensure soft furnishings carry fire labels.
Following the Grenfell fire tragedy, expect electrical installation condition reports to become compulsory.
Those considering BTL should realise that a local authority licence needs to be obtained for a home in multiple occupation which is let to five or more people from two families.
The space is legally defined, such as a minimum 70 sq ft for one person over 10 years age and 110 sq ft for two people. The licence runs for five years and the cost set by each council.
Ensure the property has an energy performance certificate (EPC) which runs for 10 years. The rating can be raised by having a smart meter installed and fitting LED lightbulbs.
For those who like the idea of BTL but lack the money or time required, there is an alternative. Darius McDermott of Chelsea Financial Services suggests the ‘home investor’ fund.
He says: “This is the only fund in the UK that invests solely in residential property. Launched in 2012, it invests in private rented sector housing”, notably two and three-bedroom flats or houses which offer tenants comfortable living and low energy bills.
The fund managers often purchase clusters of new homes to keep maintenance and valuation costs low and are in a better position to negotiate sizeable discounts from housebuilders.
For a BTL mortgage, seek a specialist broker who knows the market. One of the leading loan providers is Paragon Banking, formerly the National Loans Corporation.
It launched its first BTL product in 1995 and today its focus is on professional landlords with more than three properties. They accounted for 87.5 per cent of Paragon’s loans in the last
quarter, up from 66.7 per cent a year earlier.
When selling a BTL site, consider both the capital gains tax and inheritance tax implications. If you have not lived in the BTL property, no claim for Principle Private Residence relief can be made to eliminate the CGT liability.
Where gains fall into your basic rate band, the rate is 18 per cent and 28 per cent above instead of the usual rates of 10 and 20 per cent.
To reduce the CGT liability, take into account all allowable costs such as legal fees, stamp duty and estate agency charges. Any capital expenditure like an extension is permitted.
For those with four or more properties, consider establishing a limited company.
This allows loan interest to be offset but the best rates will not be available. Profits will be subject to 19 per cent corporation tax but there will be extra expenses in terms of accountancy, audit and legal fees.
Existing properties cannot be transferred into a company. Instead they must be disposed of at market rates, creating a CGT liability on profits.
A practical final tip: provide tenants with a process for handling any problems. Invite repair requests with supporting photographs via email or WhatsApp. Progress can be tracked by both sides using Rentr and HeyLandlord apps.