Why do some buy-to-let landlords thrive while others want to sell-up?

Some landlords say buy-to-let is dead, while others see an expansionary buying opportunity. One landlord thinks it’s bonanza time, see below. 

For a couple of years now, a steady drumbeat of stories has been pushing the same narrative: buy-to-let is finished. Landlords are selling up, higher mortgage costs are crippling, new regulations are tightening, and the Government seems determined to make private renting less attractive.

Some have even argued there’s a government conspiracy to drive-out the small-scale buy-to-let landlord. Policies they feel are deliberately making it harder. Citing tax changes (like removing full mortgage interest relief), increasing regulations (Renters Reform Act), more stringent econ standards (Minimum Energy Efficiency Standards), higher interest rates, and the latest stamp duty hikes, all reasons for their inability to make a profit.

There is no doubt that a significant segment of small-scale landlords, particularly those with one or two rentals, those that are heavily leveraged and high-rate taxpayers, are selling. They are finding it difficult if not impossible to show a profit, some are even paying tax when they make losses. But that’s not the whole story.

The limited company structure

A quite different group of landlords is quietly expanding. These are landlords who have structured their holdings differently – usually using a limited company – are often full-time landlords adopting professional systems, diversifying across regions, and in many cases taking advantage of the buying opportunities created by forced sellers.

Buy-to-let is no longer the let-it-and-forget-it easy ride it once was. In particular, the Renters’ Rights Act will give tenants far more power, which has the potential to make landlords’ lives more difficult. But for those who approach it as a proper business, manage risk sensibly across a larger portfolio and work with—rather than fight—the new regulatory environment, the returns remain very strong.

That’s not to say it’s impossible for the small-scale part-time, one-or-two-property landlord to survive. Many own the properties outright with no mortgage to pay which makes a big difference. It simply means though that the challenge will be so much greater for them when there’s a perceived shift in the market towards larger, professional landlords.

Why have so many been leaving?

The changes to the tax regime have reshaped the economics of casual landlording. The withdrawal of full mortgage interest relief (Section 24) continues to hit higher-rate taxpayers hard, with many finding that their taxable income from property can often result in a loss after tax.

Combined this with frozen personal allowances and tax bands, forcing more people into higher bands, the reduction of the CGT annual exemptions, and a higher rate of tax on disposals, the net effect is quite simple: anyone running a buy-to-let as a side occupation, a nest egg for a pension for example, and funded with high borrowing in their own name, as opposed to using a limited company, is seeing their margins shredded to zero.

The compliance burden

Layered on top of this is the growing stack of compliance responsibilities—licensing schemes, safety regulations, EPC standards, and local authority enforcement capacity—and it becomes obvious why casual or poorly organised landlords are leaving or will consider leaving in the future. 

The upcoming Renters’ Rights Act, due to commence in May, introduces a stack of new rules and responsibilities, it removes Section 21, changes the balance of power in the tenants’ favour and considerably increases the administrative load. Record-keeping, evidence trails, and proper communication will matter more than ever.

For landlords who have treated their rentals as a part-time add-on to a day job will find their task becoming unmanageable without dedication to learning and application or using a professional letting agent, which will reduce any profit margin further. 

But for landlords who reach a size of operation that justifies a full-time occupation, operating through a limited company, the prospect is much more plain sailing. They chose to run their rentals as a business with standardised systems, ensuring full compliance, their portfolio size reduces risk and their tax treatment is more favourable.

The final straw for many smaller landlords has been the hike in interest rates since the pandemic. Landlords who were on rates of 1.5 per cent to 2 per cent are now refinancing at more like 5 per cent to 6 per cent. The transition often means their net yield is wiped out. Smaller, more indebted landlords are naturally the ones most affected and the ones most likely to go.

Why are portfolio landlords buying?

Forced sales a creating value opportunity. As the economy goes through a period of regulatory or economic stress, it produces winners and losers. Today, as thousands of small landlords leave, property stock is returning to the market. Often this is tired old stock, poorly managed and in need of refurbishment. The portfolio landlords with access to capital or access to corporate finance can buy up these properties at very realistic yields and turn them into first class rentals.

Office of National Statistics (ONS) and Land Registry data shows that while house prices are flattening or falling in some regions, rents have continued to rise, improving long-term return prospects. A rental shortage is here to stay for the foreseeable future keeping rental prices high.

The Limited Company

The shift towards operating through a limited company, sometimes known as a “special purpose vehicle” (SPV) has been a decisive trend. When a company owns the rental property, mortgage interest remains deductible, tax is applied to profit (not turnover), and corporation tax levels, even at 25per cent, beat effective personal tax rates for higher-rate investors.

There are several other tangible advantages of a company structure for professional or portfolio landlords. The company route aids succession planning, asset protection, and lender flexibility. For those serious operators, the company model has replaced the amateur who hold properties in their personal name.

Efficiency of scale

Landlords with 5–20 units report consistently higher profitability per property. Compliance tasks are spread across a larger asset base, landlords have leverage over pricing with tradespeople, systems are replicated, maintenance standards are kept higher, reducing void periods, tenants stay longer when management is competent and bad tenant risk is reduced across a larger portfolio.

According to data gleaned from the English Private Landlord Survey, larger portfolio landlords generate higher yields, lower arrears rates and longer tenancies than one-property owners.

A prime example

One portfolio landlord was featured in the Sunday Times “Money” section by Jack Simpson, John Pemberton, 51, from Reading already owns 15 rentals and intends to increase that portfolio by another 13 over the next couple of years. He’s a full-time landlord who started as an accidental landlord with just one property when he moved employment and he now has properties across the UK, worth in the region of £2.75 million, with loans outstanding at £700,000. 

Mr Pemberton says he looks after his tenants, manages the properties well and has never needed to evict, so doesn’t see the new rules under the Renters’ Rights Act as a threat to his business. What’s more he has been able to improve his profitability by converting rentals to 3–5-bedroom houses in multiple occupation (HMOs).

One five flat HMO cited earns between £500 and £800 per flat per month whereas if the property was rented out as a single rental it would achieve just £1,000 per month maximum. Mr Pemberton now finances his portfolio using a “home equity line of credit” provided by Selina Finance to buy more properties which he does privately or at auction.

 A home equity line of credit (HELOC) is a flexible, revolving loan secured by the property allowing the borrower to borrow up to a set limit as needed. It’s a bit like a credit card where you pay interest only on what you use during a draw period, followed by a repayment period. This makes it ideal a cash buyer advantage or for auction purchases where you also need to be a cash buyer, and for ongoing expenses like improvements.

HELOCs are acceptable for limited companies as the loan is secured against the property not the person, but inexperienced property investors would have difficulty getting approved without a successful track record of property investment and management.

The new buy-to-let model 

The professional buy-to-let landlord operates within a limited company structure with a larger 5 to 20 + property portfolio. This operation is run as a full-time business, not as many small-scale landlords do, as a pension plan. John Pemberton says he manages his 15-property portfolio averaging just 7 days of working per month, while his portfolio earns him around £12,000 per month.

Landlords like Mr Pemberton run proper operations with systematic tenant screening, proactive property maintenance, planned refurbishments to maintain rental value and attract good tenants. They do accurate bookkeeping and record keeping for compliance tracking and maintain tenant communication to reduce disputes.

Geographical Diversification

Another way that John Pemberton has improved his returns is by buying across the country where higher yields are available. The North West, North East, West Midlands, South Wales and parts of Scotland consistently offer stronger yields than the South East and London where prices are high. Mr Pemberton’s properties are in Crystal Palace (his original home), Pembrokeshire, Hampshire, Lancashire, Manchester, London and Cheshire. These kinds of professional investors focus on the numbers first, not necessarily proximity to home.

Technology is helping 

Managing tenanted property at a distance does present its problems but fortunately technology has come along to help. The last decade has seen the development of cloud-based property management systems, automated rent collection, digital compliance tracking, and online maintenance reporting. Landlords who adopt these tools can reduce their admin and travel time while improving tenant satisfaction, a key factor in keeping voids low and occupancy levels high.

Managing risk 

Professional landlords are careful not to overstretch themselves with finance. Sensibly managed leverage helps the landlord grow the portfolio. The days of rolling the dice with a highly leveraged 90 per cent LTV mortgage are long gone. Successful landlords constantly stress-test their new acquisitions at around the 7 per cent interest mark. They factor-in conservative longer void periods and account for higher refurbishments and maintenance costs. They also keep conservative cash buffers for meeting unexpected regulation demands or repairs.

The Renters’ Rights Act

The need to evict for well organised landlords is rare, so the abolition of Section 21 is not the existential threat it might seem. Regaining possession if it becomes necessary is a process-driven, exercise workable for organised landlords who document everything. They need a clear evidence-based pathway to obtain a possession order, for when genuine eviction cases arise. But as the risk is spread across the whole portfolio this is easily manageable and should have a minimal impact on overall income.

Rather than a threat, professional landlords should see strict compliance as a competitive advantage. As the new Act comes into force, as licensing and enforcement tighten, professionally run properties stand out. Councils will increasingly target poor operators – rogue landlords - with their new powers. Through other means like landlord databases, tenants will increasingly seek out reliable landlords. Regulation, if enforced as it should, will result in the thinning out at the bottom end of the private rented sector (PRS) benefitting those who remain.

The long-term fundamentals

Chronic undersupply isn’t going away. Government housing targets are not being met but instead missed by large margins. Housebuilding levels remain consistently below need, while net migration and increased household formation in the UK add further pressure. This supply-demand imbalance drives up rents - a trend that stands out in the ONS, Zoopla and HomeLet figures over the past 24 months.

Rising Barriers

Those with already proven track records of investing in and managing rental property have a huge advantage while regulation, taxes and higher interest rates and difficulties getting mortgages and loans mean entry-level landlords are discouraged. As supply shrinks, experienced landlords will face less competition and rising rents. Those who know how to operate within the rules are well placed to thrive.

Even with higher interest rates, leveraged property still generates competitive long-term returns relative to bonds or cash. Property also remains one of the safest and most effective hedges against inflation long-term. 

For those experienced landlords who are financing at sensible levels, yields still stack up. And for cash buyers or low-geared investors, today’s market is still unusually favourable.

Buy-to-let can still work, but only if you do

That’s the harsh message for today’s casual landlords. Buy-to-let has unquestionably become tougher and requires method and more work. The days of buying a flat in your own name, sticking it on an interest-only mortgage, and banking the income and capital appreciation are gone.

But for professional operators, those who take it seriously, manage it as a business by building systems, maintaining properties, engaging well with tenants, and using company structures, today’s market presents significant opportunities.

Landlords leaving the sector are creating the space and opportunities. Regulation is raising standards. Yields are still rising in many regions as demand continues to outstrip supply and will for years to come.

Buy-to-let isn’t dead, amateur landlording is.
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[Main image credit: Anna Shvets]