Buy-to-let still good investment despite setbacks to the market
WITH PROPERTY prices rising year on year, investors are increasingly attracted to bricks and mortar. Aside from your own home and purchasing a second one for occasional use, the major ways to invest are in construction companies or by renting out.
The buy-to-let (or BTL) market is now well established and forms a key part of Britain’s housing stock. It has been boosted by rock bottom interest rates and a continuing demand for rented accommodation.
The average monthly cost of renting is £874, according to Your Move, the UK letting agent. However, there is much regional variation with London rentals averaging £1,283 a month and large differences within a region depending on the size of property and location.
Apart from the rental income, most landlords look for capital growth. In the last decade, UK property has risen 17.1 per cent. By comparison, France has seen a 3.3 per cent increase whilst a fall has been recorded in both Ireland (down 31.2 per cent) and Italy (down 11.4 per cent).
Barclays predicts a 3.6 per cent increase in Yorkshire and Humberside from now until 2021.
The BTL sector has taken several financial knocks recently. In April 2016, a three per cent stamp duty surcharge was applied on BTL properties as well as second homes. Tax relief on mortgage interest payments will be withdrawn over a four-year period. This starts this year and so by April 2020 BTL landlords will not be able to deduct mortgage interest expenses when calculating their taxable profits.
Private sector rentals are covered by the Housing Act 2004. Before making a purchase, check with the local authority if it has designated the area one for ‘selective licensing’. This makes it an offence to control or manage a ‘house’ without a licence. A separate licence has to be applied and paid for in respect of each flat unless it is within the same building.
The initial question on considering BTL is how best to fund the purchase. Lenders apply a quite different criteria to residential mortgages and wish to ensure the investor is in a comfortable position to cover additional outgoings, such as maintenance expenses and periods when a property may be vacant, known as ‘voids’.
Lenders also wish to know the rental income expected. If this is likely to be insufficient to obtain the loan requested, they want to have evidence that the saver can afford to cover the shortfall. Consider using a lender that offers ‘top-slicing’ which is where the borrower’s personal income can be applied to top up any shortfall in the rent.
After the recent tax changes, take advice if the BTL property would be best held in your name or through a limited company. This can have major tax implications.
With so many variables on mortgage offers, use an experienced independent broker. They will be aware not only of the best current deal for your needs but how different financial bodies work in terms notably of survey and time. Leeds Building Society, for instance, added a new £500 cashback incentive to its BTL range last month to let borrowers have the option to choose their own conveyancer.
It offers 2.45 per cent for a two-year up to 60 per cent loan to value (LTV), 2.8 per cent up to 70 per cent and 3.25 per cent on a five-year with 70 per cent LTV. All come with a free valuation and no completion fee.
Do not overlook some of the lesser known sources, such as Metro Bank which will lend on up to 15 properties. Although it does not yet have any branches outside London and southern England, it will lend anywhere on an LTV of 75 per cent for BTL.
“Your success with buying to let depends on choosing the right property. It may sound obvious but many aspiring landlords do not take the time to think about what property will best suit their BTL plans,” says Barclays. The three key decisions are:
Who to rent to: families, young professionals, students
Location and, if to be selfmanaged, proximity Realistic rental income. Do not overlook the risk of property prices falling and how that would affect longer term goals.
Rental returns depend partly on the area chosen but also on the likely occupant. The location will also determine if the property can be managed yourself or if a managing agent needs to be appointed.
University cities like Bristol, Cambridge, Durham and Oxford have consistent student demand but private landlords now have major accommodation competition from specialist suppliers like Empiric and Unite, both of whom are investment trusts, and Watkin Jones.
Lenders who accept student BTL include Abbey, Aldermore, Leeds, Paragon Mortgages and Woolwich.
BTL pays a net five to six per cent annually for Graham Davies, a 67 year old semi-retired IT consultant, who became a BTL investor in 2012 when he purchased his Malton home which came with two flats. He has subsequently purchased five flats in Scarborough which he manages himself and organises any maintenance.
Davies has used NatWest, part of The Royal Bank of Scotland Group, for the mortgages. “I have had excellent personal service from NatWest,” he says. He calls the change in stamp duty “not particularly inhibiting and not likely to make a huge difference to BTL”.
In fact, the higher stamp duty does not appear to have cut the enthusiasm for BTL. HMRC reports that 60,000 properties were subject to the charge in the second three months of the year, up from 58,200 in the first quarter. Kent Reliance reports that just four per cent of BTL investments are incurring a loss.
A managing agent can cost as much as 15 per cent of the rental income but will have the expertise to find and vet tenants, draw up tenancy agreements, collect rents and handle ongoing maintenance and repairs.
Do not overlook making arrangements to protect a tenant’s deposit which is now a legal requirement along with regulations and inspections for electrical, gas and fire safety. Insurance is vital.
Seek specialist landlord cover such as offered by Direct Line which gives up to 10 per cent discount if there is more than one policy. If your tenant has financial difficulties in paying the rent, Direct Line will reimburse for any unpaid rent until the tenant moves out.
Ensure there is a detailed inventory which even covers minor flaws so that tenants understand what they can and cannot ask to be repaired.
Remove any unnecessary items and fittings so that the home is comfortable but basic.
“Buying a house to live in is often an emotional decision but remember a BTL is an investment, rather than a second home. Never rush and make sure you feel completely comfortable before going ahead,” tips Charles Morley, director of mortgage distribution at Metro Bank.