Buy-to-let: put your house in order

BUY-TO-LET IS still a sound investment — but go into it with your eyes wide open. Landlords are the life-blood of the private rented sector. However, buy-to-let investors have been challenged by a range of fiscal, regulatory, market and political challenges over the past few years. These include the introduction of the Deregulation Act 2015, three per cent stamp duty land tax surcharge and the phased removal of mortgage tax relief.

These changes have not only placed even greater responsibility on landlords, with amateur and accidental landlords at most risk of making a mistake, but left many questioning their place in the market.

Yet despite this, it is not all doom and gloom for investors aspiring to a buy-to-let property. There are still worthwhile investment opportunities for UK landlords if they rethink their approach, according to Paul Shamplina, founder of Landlord Action and brand ambassador for Hamilton Fraser.

Shamplina’s company, Landlord Action, has been one of the leading tenant-eviction companies for the past 17 years.

He features in Channel Five’s Nightmare Tenants Slum Landlords, uncovering the darker side of buy-to-let, and what landlords should do when things go wrong.

He says: “When you purchase a buyto-let property, the profitability of the venture is affected by many things — whether you take on a mortgage to fund the purchase or buy with cash, the size of the deposit, where the property is located and the strength of demand for rental accommodation, as well as the cost to manage, maintain and insure the property.

“However, one key factor remains — tenant demand is only likely to increase in the long-term. With this in mind, now is the time for landlords to be more selective with their purchases, think long-term and do their due diligence when it comes to finding the right tenants.”

Here are three ways landlords can adjust their approach to buy-to-let:

SET UP A LIMITED COMPANY The tax-relief changes will hit landlords with buy-to-let mortgages only if their property is in their own name. By selling properties to a specially set-up company, owned by them, landlords can avoid paying tax on these expenses altogether.

“As a business, you are able to claim the costs of running buy-to-lets as an ‘allowable expense’, effectively writing off the cost of mortgage payments, wear and tear and maintenance, letting agent fees etc,” says Shamplina.

Of course, to transfer existing properties into a limited company, landlords would have to effectively sell and then buy back their properties, meaning they would pay both capital gains tax and additional stamp duty, legal fees and mortgage costs, as well as being liable for corporation tax on profits at a rate of 20 per cent. ADJUST THE FINANCIAL STRUCTURE

Some landlords are looking at ways of bringing down their loan-to-value on borrowing, to reduce their monthly mortgage payments.

“Ways to do this might be by using an existing injection of capital from elsewhere or selling a property within an existing portfolio and rebalancing the equity across the other properties,” says Shamplina.

REPOSITION INVESTMENTS London and the South East have been worst hit by changes to buy-to-let, mainly because property prices are so high compared to incomes and rental inflation has been cooling. Many tenants in the capital have reached the limit of what they can and wish to spend on renting. Restrictions on the amount buyto-let landlords can borrow, following new Bank of England rules on affordability, have also made high-value low-rental-yield properties more of a financial struggle for landlords. Where yields are highest, in cities such as Sheffield, the new rules have much less impact.

According to a report by totallymoney.com, investors can expect a gross yield of just over 11 per cent in Sheffield; 10.43 per cent in Aberdeen and 9.18 per cent in Bradford city centre.

“Landlords with existing portfolios may want to reposition some of their investments towards regional cities in order to benefit from high yields and ongoing regeneration in cities like Manchester, Leeds, Birmingham and Sheffield.”

Although this will also trigger capital gain and mean paying three per cent stamp duty surcharge, in the long-term it could make affordability more viable for landlords.

Shamplina concludes: “Before making any decisions to invest in a buy-tolet property, it is best to speak to an independent financial adviser who can give regulated advice to check that the sums add up.

“But remember, the purchase is only the first step. Once a landlord makes the commitment, they must then be prepared to carry out thorough due diligence to ensure they find reliable trustworthy tenants who will pay the rent on time and stay in the property as long as possible, with the average length of a tenancy now being two years. Landlords must also be prepared to manage and maintain the property correctly to avoid disputes.”