Rumours of its death have been greatly exaggerated but there have been a lot of changes in buy to let in 2017. From the cut to mortgage interest tax relief to changes to stamp duty on second homes. Mortgages are more difficult to come by and legislation is becoming increasingly complex. Many see these changes as representing the end of buy-to-let landlords. But, for my part, I see a market that is very much alive and kicking.
- Is The Buy To Let Market Dead?
- Rental Demand
- Buy-To-Let Legislation
- Taxation Changes
- Mortgage Interest Tax Relief
- The Next Ten Years
- Buy-To-Let Mortgages
- Putting It All Together
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Is The Buy To Let Market Dead?
Investing in buy to let has changed a great deal over the last few years and a lot of landlords have been struggling to keep up.
In 2016 there were some significant changes in buy-to-let legislation that impacted financing.
There were some property tax changes as well.
Combined, these changes have caused some landlords to wonder whether investing in buy-to-let can be profitable at all.
Certainly, today’s would-be landlords are a lot less sure about entering the buy-to-let market.
And, a lot of the conversation happening today in the industry is around whether buy-to-let remains a viable investment strategy.
My view is that the buy-to-let market is still very much alive and kicking.
When I look at the market today, even with all the changes, I see a lot of opportunities.
So, this is what I want to look at today in this article; the reasons why buy-to-let is still a solid investment strategy in 2017, in spite of everything that has changed over the last few years.
Buy-to-let has become more difficult and more expensive for property investors and landlords.
This is because of changes that have either happened or are coming, in the areas of tax, legislation and finance.
But, I believe that buy-to-let is still a viable investment strategy.
The primary reason I believe this, is because there is still a healthy rental demand for buy-to-let properties.
There are still would-be tenants who need somewhere to live.
So, in terms of demand, the buy-to-let market is not going anywhere.
If anything, the demand for buy-to-let property has recently been increasing considerably.
This isn’t just because there is a lack of supply (there is, in fact, a severe lack of supply for buy-to-let properties) but also because people’s requirements are changing in such a way as to make buy-to-let properties more necessary to their lifestyles.
People Are Becoming More Transient
The economy in the UK has changed dramatically and is continuing to change.
These days, people’s careers and lifestyles require them to be more and more flexible.
And, people don’t necessarily want to buy a house and live in the same area for forty years like they did in previous generations.
There are more and more people moving around and not just for work (although this is a big factor) but also because they want to.
Because people are moving around more and making more choices about where they work, live and what they spend their money on, the dynamics of our society are changing. And this is having a big impact on the housing market (as renting increases in popularity and homeownership declines).
The statistics and figures we look at all point to the same thing. Namely, that there is so much rental demand, that it looks highly unlikely that the buy-to-let market is about to disappear.
The Only Thing That Is Constant is Change
The only thing that is constant is change. This is as true for the buy-to-let market as it is for any industry.
And that’s ok. What’s important is how you as a landlord, or as an investor, react to those changes; how you modify your approach in order to factor those changes in.
So, for instance, new landlord tax rules might threaten the profitability of your property business model.
This could mean that you change tack and start reconsidering the types of property you tend to invest in. It could mean that you start looking for opportunities in new locations. It could change the amount that you are willing to pay for a property. It might change the amount you charge your tenants for rent.
But as a concept, as an idea and as a strategy buy-to-let is not dead, nor will it be anytime soon.
But, there will be big changes. There have been big changes recently. And these changes are in three key areas: Legislation, tax and finance.
Buy-to-let legislation has been changing slowly over the last few years but recently the pace of change has ramped up in some areas. Where this really matters is in the area of landlord licensing and property licensing.
Rules around landlord licensing can be different across the country.
In Wales, new and widespread licensing rules have been introduced for all rental properties.
Local authorities across England have also changed their landlord licensing requirements but only for certain types of property.
For instance, HMOs might require a specific license or, if there is a certain area where the council feels there is too much rented accommodation or that they need to improve the quality of homes, then they might decide to address the issue through licensing.
What Property Licensing Achieves
Property licensing might or might not be the right approach. People have different views on this.
What licensing does do, when used correctly by local councils, is force landlords and investors to improve the quality of their houses, over a period of time.
So, if a property owner knows that a licensing enforcement officer or an HMO enforcement officer might be coming round to do an inspection then that might be all the impetus they need to do a little, needed maintenance work on the property.
Improving Housing Stock In An Area
A lot of landlords have very high-quality housing stock but there are some that don’t.
It is those landlords with low-quality housing stock that councils seek to identify through the licensing system, so that housing standards in a given area, are made better.
I don’t see this approach as being a bad thing.
Sometimes, the legislation can be restrictive and certainly, it can dictate which properties will work as a buy-to-let.
Older buildings, for instance, can make fantastic rental houses but they can also need a lot of work doing to them. Older houses may not be as energy efficient as they need to be.
With older buildings, instead of renting them out as they are, it might be better if they were taken on by a property developer and refurbished; converted into more usable accommodation.
If buy-to-let legislation encourages this, then it is no bad thing.
Improvements in energy efficiency are happening all the time and there is a lot of new technology and techniques being brought into the building trade and the housing market more generally that are remarkably simple to implement, that ultimately make the running costs of a house cheaper both for the tenant and the landlord.
Licensing and legislation force landlords to be more proactive in making sure their properties are up to standard.
Working With Local Lettings Agents
The easiest way that a buy-to-let landlord can make sure that they are complying with local legislation is to work with good-quality, local lettings agents.
Lettings agents will have the experience, the company structure and the skill-set in place to make sure that properties under their care are managed properly, ticking all the boxes required by the property license.
Personally, I wouldn’t get too worried or hung up on licencing. It isn’t something that is going to disrupt the buy-to-let market too much, although there are times when it can be done very badly.
When Property Licensing Is Done Badly
In some cases, it is possible to make a strong argument for the fact that licensing simply isn’t necessary. Also, there are plenty of examples where local authorities aren’t doing licensing properly.
Most of the time, this is a case of the council not delivering what they should be doing. This might be because they don’t have the resources; they don’t have the staff necessary to go out and view a lot of properties.
In some cases, the council might just be trying to make money from licencing, rather than trying to affect a positive change.
But that’s a separate issue.
Licencing in general I think can add some stability to the housing market and it can certainly be a way by which housing stock in a given area can be improved.
There were some significant tax changes in 2016.
One was a change to stamp duty, where a premium was added to stamp duty on a second home or investment purchase over and above what you would have paid for a property, previously.
The second was a change to mortgage interest tax relief which, to cut a long story short, impacts higher-rate taxpayers who are highly leveraged; who have large amounts of mortgage finance invested in property.
- Gov.uk – Higher rates of Stamp Duty Land Tax (SDLT) on Purchases of Additional Residential Properties
- Gov.uk – Changes to Tax Relief for Residential Landlords
Without wanting to seem too controversial, I don’t see either of these changes as seriously impacting the buy to let market in such a way as to stop it from being a viable investment strategy.
The increase in stamp duty will affect anyone purchasing additional residential properties whether that’s buy-to-let, houses in multiple occupation or any other property where the end-game hinges on a rental strategy.
But, what is important to realise is that, as an investor, your competition is other investors. Whatever the change that is brought in, it is an even playing field where you are competing like for like.
Changes in stamp duty and mortgage tax relief make due diligence when buying property much more essential.
And, that isn’t necessarily a bad thing.
For some investors, these changes will make them much more conscious of the price they are paying for their properties and at whether the deal makes sense overall.
So, they will be looking at the purchase price, the buying costs and any other fees involved and then carefully calculating future rental yield, to make sure everything stacks up as it should.
The Best Buy-To-Let Areas
In this climate, choosing the best buy-to-let areas is more important than it has ever been because in some areas of the country these tax changes will have more of an impact than others.
High-value locations, where the rental yields are low, but the stamp duty and purchase prices were already high, moving forward, probably aren’t going to be good places to invest.
Ultimately, however, they probably weren’t the best places to invest in property anyway.
Rental yield is very important in a property investment and if it’s low, then you should probably be looking somewhere else.
But don’t worry, there are plenty of good opportunities in the UK for investing in property.
Capital Growth or Cash Flow?
Investors, buying houses primarily for capital growth are probably following the wrong strategy if they are pursuing buy-to-let.
Of course there is nothing wrong with property growth but my advice would be to focus on cash flow and rental income first.
A solid rental yield is the cornerstone of success.
Mortgage Interest Tax Relief
There has been changes to mortgage interest tax relief insofar as the interest rate relief has been cut.
Who Will Be Affected By The Cut In Interest Rate Relief?
This cut in interest tax relief is going to have a big impact on a lot of existing landlords who are going to be considerably out of pocket but it isn’t going to effect everyone.
Many landlords own their properties outright. Some landlords have very low mortgages when compared to the value of properties that they own.
So, the types of landlords who will be most affected by the the changes in tax relief will be those landlords who have a large amount of housing stock and a large amount mortgage finance to go with it.
This is to say, about 20% of the landlords of the UK, with the remaining 80% being largely unaffected.
Also, it is important to point out, that this change is going to be introduced slowly over a number of years, so its impact on the housing market will be fairly gradual.
Impact On Tenants
Undoubtedly this change to buy-to-let tax relief will mean that there will be tenants who will see their rent increase.
There will also be tenants who will be served notice on their properties when their landlords find that their properties are either not making any profit or even making a loss.
Residential property will no doubt be sold on.
Disruption In The Buy To Let Market
Over a short period of times, maybe three, four years, there is going to be some disruption in the buy-to-let market cause directly by this cut to mortgage interest relief. That is, unless, something else happens to counter-balance this change.
But remember, it will only really affect investors that a highly leveraged with mortgage finance.
Those investors may find that their properties no longer make financial sense.
Because, if there isn’t enough rent coming in to cover the mortgage, maintenance, letting agents, and the tax that will need to be paid, then the landlord will have to give notice to the tenants and sell.
There will be an impact but personally, I think it will be short term.
Also, there are options for getting around the problem of a potentially increased tax bill. For instance, buying property through a limited company or simply making sure that your mortgage is not too high when compared with the equity you have in the property.
Greater Stability In The Housing Market
I think, in the long-term, the cut to mortgage interest tax relief is not necessarily a bad thing, as I see it as something that could provide greater stability in the housing market.
To take a more general view, it is better for investors when the market is stable.
I, certainly, would much prefer a stable market over an erratic one where house prices rise and fall in dramatic fashion.
With that in mind, there is need of a legislated change to the property market to try and tempt investors away from focussing on growth in house prices.
Of course, capital growth investors are concentrated in London and London is very different to Manchester, the North West, the North East or the Midlands.
It can be very hard for people when there is legislative or tax changes that affect the whole of the UK where the intended benefits of those changes are more geographically specific but that is just the way things are.
Besides, geographically specific changes (particularly when they are brought in in London) tend to affect the whole industry anyway. There is a ripple effect.
The Next Ten Years
Over the next couple of years, we will see buy-to-let landlords, that have large amounts of housing stock, highly impacted.
Looking further forward than that, in five or ten years, then what will the housing market look like then?
I think it will be more stable.
All of the changes coming in will take some time to implement. They will take some time to take effect.
If you think in terms of the next generation or the next decade… Yes, these changes are going to fundamentally change the housing market.
They will make it harder for some landlords.
But, ultimately, when the dust has cleared, I think what we are going to be left with will be a more stable market structure.
It’s hard to see that currently, I understand that. And, there will be people reading this that will think I’m completely wrong. People that think that what is happening is going to be a disaster for landlords and tenants alike.
I don’t want to play down the impact that these changes will have on the portfolios of some investors.
But I am trying to look at the bigger picture. In a number of years’ time, I see the market as being a lot more stable as a result of these changes.
And going back to the beginning of this article, buy-to-let is not dead. There is too much rental demand, driven by a need by tenants to live flexibly.
We’ve looked at property legislation and licensing. We’ve looked at stamp duty on second homes. We’ve looked at the cut to mortgage interest tax relief. And we’ve looked at how these things are going to impact investors and landlords in 2017 and beyond.
But there are also changes coming in with mortgage finance.
I’m not a mortgage broker and I always recommend that you speak to someone that is to get an idea of the kind of mortgage that will best suit your circumstances.
What we are are learning – through conversations with our brokers – is that there are some fairly big changes happening in the mortgage industry as well.
The buy-to-let sector is expanding in terms of the investment strategies that are available.
As a result of this, there are now many more options, in terms of the mortgage products that are available.
This is great. More flexibility with mortgages can mean more opportunities for investors; more ways of approaching investing in property.
But there’s a flip side to all this which is that, at the same time, there are now more restrictions; more limitations placed on what banks are allowed to lend out. And, there are additional requirements these days as well.
My view, again, is that these changes are essentially a good thing as they help bring some stability to the housing market.
We don’t want to return to 2007 and 2008, where people were very highly leveraged and the market was awash with risky loans and mortgages because of a general feeling that property, as an asset class, was just going to continue to grow.
Whatever else happens in the market, we know that there will be peaks and troughs in property, like there are with any other asset or commodity.
Placing more restrictions on who can borrow money, whilst also making mortgages more flexible, should help bring more stability to the market and mean we can avoid those wild swings.
Yes, it will mean that some investors have to put in more collateral into their projects because the finance available to them is more limited.
But, in terms of the bigger picture, it will mean that there are fewer investors that are leveraged to too high a degree with risky loans.
Putting It All Together
There are certainly many changes that have happened and are ongoing in buy-to-let and the property industry more generally.
But there are still loads of opportunities in buy-to-let and in straightforward vanilla buy-to-let.
We, certainly haven’t been put off from continuing to add these kinds of properties to our portfolio and we are still getting loads of enquiries from other investors, who are interested in our buy-to-let deals.
So, is buy-to-let dead in 2017? No, far from it.
If the location is right and the rental yield is right, buy-to-let can still work very well.
I don’t see buy to let disappearing anytime soon, although the changes are coming.
Yes, you may need to tweak your portfolio to adapt and survive, but you can also thrive going forward.