Buy to Let Investment:
Has the recent negativity about buy-to-let been overdone?
People have always turned to residential property as a good solid investment that they can understand; a means of supplementing their income and their future pension. But will this change in the future, will people look to other types of investment?
So what’s changed? Two things really: first the tax regime has been altered so that for many people the income returns from letting property are not as lucrative as they were. Secondly, the regulatory regime is changing fast, making it more onerous on landlords to comply with the lots of new rules being introduced – in short, it takes a lot more effort than it did in the past to manage rental property well.
Let’s face it, change was needed: first buy-to-let was running away with itself; people were going crazy building large-scale portfolios of rental property, all based on borrowed money, leap-frogging from one property to the next by withdrawing cash as values increased and buying still more – some made a fortune, others went bankrupt because they just got carried away.
There could only be one end to all this, so the government acted. Secondly, the media and homelessness charities constantly highlight the predicament of the vulnerable tenant, set against the “greedy” and, admittedly, an army of rogue landlords. This had to change as well, so the government regulated.
But that’s not to say that buy-to-let is dead and buried, as many of the more hyperbolic headlines would have us believe. Buy-to-let mortgages are easily obtainable at record low interest rates, basic rate taxpayers are largely unaffected, there are ways to avoid the higher tax rates for portfolio landlords, and there’s record demand for rental accommodation. Returns (rental yields) from letting property still far outweigh the paltry interest rates available from even the best internet savings accounts.
There is plenty of evidence to suggest that the majority of landlords still view buy-to-let as a money-making asset class, says John Goodall, chief executive of specialist buy-to-let lender Landbay quoted by ftadviser.com, but there are still undoubtedly some who feel that now is the right time to exit the market.
But while people are selling opportunities are created. There’s bit of contrarian investment wisdom that says: the thought that investing is done in exactly the opposite way to the crowd, buying when most people, including all the experts, are pessimistic, and selling when they are actively optimistic. The best values are often found in the markets that were once hot and have since gone cold.
There’s more than one tax and regulatory change to have hit landlords’ profits over the past few years, including the removal of the 10% “wear and tear” allowance, a 3% stamp duty surcharge for second properties, and of course the dreaded Section 24 mortgage tax relief cuts, all of which put a drag on income.
But the buy-to-let market is probably in better shape than many people might think, says John Goodall. The Landbay lender says there’s always been a churn in the market. Of course there are some people selling up property and getting out of the market but that’s always been the case.
“At the moment, the highlight is on those selling rather than those buying. But those buying do still exist. Some small buy-to-let investors are getting out but it’s still only a small fraction,” he thinks.
As evidence, Mr Goodall cites UK Finance’s figures which show that the buy-to-let market grew from £237bn to £243.9bn over the course of 2018 — an equivalent growth rate of 2.7 per cent.
The changes are more likely to scare off amateur landlords with one or two properties, and inevitably the industry may be headed towards a more professional industry – attracting those landlords who are willing to understand the rules and regulations, keep their costs low, finances in control and manage tenancies efficiently.
Yes, it’s no longer possible to let in a casual let-it-and-forget-it way, but with a little effort, a bit of homework and due diligence on the part of the average landlord, and the profits are still there. What’s more, property has proved to be an excellent store of value if inflation returns, and long-term values only go one way.
Standards are rising, the industry, like most others, is getting more competitive, which can only be a good thing for the consumer (tenants), but there’s money to be made for those who are willing to run their lettings efficiently.
Mr Goodall concludes: “I think it’s far better for the tenants to think their landlord is committed to it and that they are not just in it for the short term.”