According to recent research, the majority of landlords are making a profit from their BTL portfolios despite the Government’s tax hikes, but BTL investment is at an all-time low.
The research shows that 84% of landlords are making a profit from their lettings activity of landlords and 44% rate their expectations of their own letting portfolio ‘good’, or ‘very good’ for the next three months. However, 83% of landlords have found obtaining buy to-let finance more difficult in the past six months and just 16% of landlords intend to purchase at least one more property in the next 12 months – an all-time low. (*Source: Rent Check Report, BDRC Continental and Allsop LLP).
This slow down in BTL investment in evident in the latest mortgage figures, with lenders reporting a 42% fall in loans to landlords as tax changes take their toll. The Council of Mortgage Lenders said lending in March 2017 was £21.4bn, down 19% on the year before, almost entirely due to landlords withdrawing from the market.
According to Armistead Property, tighter Bank of England lending rules combines with rising taxation on rental income, has made the BTL market far less financially attractive than it was two to three years ago.
Peter Armistead, Director of Armistead Property comments: “Britain’s two million landlords are facing assaults from both the taxman and the Bank of England. Many landlords are being forced to put a hold on expanding their portfolios, due to the tougher mortgage criteria for BTL loans. The mortgage restrictions are very bad for landlords and pose a major threat to BTL investments.
“For those landlords that can secure mortgages, they may experience falling yields and monthly profit margins will be squeezed. Now more than ever, investors need to make sure they have a solid business plan which is risk management focused.
“Investors need to carefully assess any purchases and make sure the properties they already own are operating very efficiently. If a property is under-performing, then there are a few things to consider, such as managing the property yourself, rather than using an agent; ensuring all the maintenance is up to date; and carrying out renovations to improve the yield.
“If investors are acquiring buy-to-let properties, it is vital that they purchase below market value in the right area. This may mean taking on properties that require refurbishment. As long as all the refurb costs have been accurately factored into cashflow with a contingency budget, then investors have the potential of higher yields on ‘nearly new’ properties.
“As a seasoned property investor, I have built a successful, mid-sized portfolio of buy-to-let properties in South Manchester. The most important lesson I have learned is that landlords need to treat their property as a business. Treat it seriously and get yourself surrounded by a great team of professionals who are better than you.”
Below are some guidelines on what landlords should always be focused on in when building a profitable portfolio:
1. Real profit: The most important lesson is that the real profit is made when property is bought, not when it is sold. If you can buy a £’s worth of property for 80p, then you can super charge your returns. Do not however think that this will be easy and do not think that someone else (for example an investment club) will hand you these deals. They won’t. You’ve got to spend the time and do the hard research, until you find the real bargains out there.
2. Buy for cashflow: Property is an asset rather than a liability. An asset puts money in your pocket every month. When investors ignore cash flow and invest primarily for appreciation, they’re no longer investing. Instead, they are speculating on higher prices, which is akin to using tarot cards to plan your finances.
3. Invest for the long term: Once you have found a property that can be purchased below market value and that cash flows nicely, then you can invest for the long term. Buy and hold is the corner stone of many rich investors’ strategies. Despite the occasional short term fluctuations in the UK property market, the long term trend is up, due to the fundamental reason that demand is greater than supply. Don’t wait to buy property. Buy property and wait. Think long term, but act on short term opportunities. Property is forgiving over time and can bury mistakes.
4. Have a cash buffer: The investors who get into difficulty are often the ones who do not have any spare cash to access in case of emergency. As an investor you will find unexpected costs and so you must have some spare cash to cover these instances. The size of this buffer depends on your personal level of risk. Cash reserves trump cash flow.
5. Opportunities always exist: There is never a wrong time to buy real estate. When times are good, people complain about the deals they have missed. When times are bad, they claim they ‘ buy at the top’ thinking that prices will fall and therefore it’s not a good investment. The lesson I have learned is that you can build wealth in any real estate market, good or bad. The only constant is change. When the market changes, it brings new and different opportunities. You just have to be on the lookout for them.
6. Action and discipline: Once you have your plan then you need massive action and discipline. Look at the top sportsmen. You need this type of discipline to be a successful investor. You need to put in the hard work and the hard hours, do a huge amount of research and then when you have the plan that’s right, you need to take massive action.
7. Avoid big risks: Never risk too much at any one time or on any one deal. In real estate deals, so much lies out of your control. Remember risk and reward are directly related. However a lot of the risk can be removed by doing huge research and work.
8. Research the local economy: Never pursue an investment strategy in real estate without closely monitoring the local economy and local real estate market where you are investing. Property investment is a local game. No one ever bought a house in the whole of the UK. Forget the national price indexes. Focus solely on one or two areas and get to know them like the back of your hand. In order to invest successfully in an area you must know it intimately. The more areas you invest in, the less intimately you can know them, and the more likely you are to miss a change in tempo there, or an important new development in the local market.
9. Buy in an up and coming area: Ideally buy your first property in an area that is about to come up, in order to benefit from higher than ordinary capital growth. Eg new transport links. The higher the yield, the less expectation there is in the market of capital growth. You will need to find the right balance for you by researching the sales and rental market in your chosen location.
Author: Peter Armistead is a property investor in South Manchester. He has developed and sold over 400 properties and has a portfolio of over 100 properties in Manchester. For further information, visit www.armsteadproperty.co.uk