How can investors build a buy-to-let portfolio?

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For a long time, investing in buy-to-let was seen as a sure-fire way to make money. But, over the last five years or so, regulatory and taxation changes have dented its appeal.

However, with inflation hitting a new 30-year high in January, mortgage rates still at historic lows and rental yields increasing, many investors are considering buy-to-let once again. Here are some past lessons that could help shape an investment strategy for the future.

Timing the house price cycle

Britain has seen unprecedented house price growth over the past 25 years. An investor who timed the house price cycle perfectly and always invested in the fastest growing regions would have seen double the average returns of someone investing in the slowest growing regions.

Between 1996 and today, a buy-to-let investment in the North East would have made the biggest returns, with high rental yields compensating for lower house price growth compared to southern areas. London, the region that’s seen the strongest capital growth, came third.

Crucially, we are not expected to witness the same magnitude of house price inflation over the next 25 years as we have seen over the past 25. Nevertheless, northern areas are forecast to see higher price growth until 2024, when a new housing cycle begins. From then, price growth across the South, especially London, is set to start outpacing the North once again.

Taking a long-term view is key, says Catherine Westerling, Head of Lettings at Hamptons. “Property has always performed strongly as an asset class on a minimum 10-year view, but a 20- to 25-year strategy is likely to be far more rewarding.”

Manage costs

The price an investor pays for a property makes the single biggest difference to returns. As Westerling explains. “It’s the old adage: you make your money when you buy, not when you sell.”

Recent tax changes have pushed up costs for individual landlords, particularly if they are higher-rate taxpayers, so many have put their properties into a limited company structure. There are now a record 270,000 buy-to-let companies in operation, with around two-thirds of these set up since 2016, when it was announced that mortgage interest would soon no longer be tax-deductible for landlords holding investment property in their personal name.

Leverage is crucial

The gains investors can make from house price growth are amplified significantly if they borrow as much money as they can to fund a purchase. When prices rise 10%, an investor with a £50,000 deposit and 75% loan to value mortgage will see a return of 40% on their initial investment, before the costs of servicing the loan.

In addition, reinvesting rental income back into a portfolio increases returns significantly. Nationally, the average portfolio built-up over the last 25 years on the back of rising house prices and reinvested rental income would be 55% smaller if rental income was withdrawn each month rather than reinvested.

Balance is best

The most successful landlords have a balance of geographies so they can benefit from the current high yields in northern areas as well as the longer-term capital growth from southern locations, Westerling explains.

She adds that landlords also seek to hold a mix of property and tenure types and include properties that can have value added by a refurbishment or extension. “At the end of a refurbishment an investor has increased the property’s rental value and capital value, while also improving a mortgaged property’s loan to value”.

For further analysis and expert advice, access Hamptons’ new Buy-to-Let report and sign-up to the webinar on 31st March here.

DISCLAIMER

@ Hamptons 2022 purpose of general information and Hamptons accept no responsibility for any loss or damage that results from the use of content contained therein, including any errors or negligence from third party information providers. It is your sole responsibility to independently check and verify the facts contained within this report. All opinions and forecasts within this report do not in any way represent investment or other advice. Reproduction of this report in whole or in part is not allowed without the prior written consent of Hamptons.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – How can investors build a buy-to-let portfolio? | LandlordZONE.

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Plans revealed to speed up possessions for landlords – FOUR years after consultation

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The government has finally promised to set out how it will improve the possession process for private landlords in the courts – almost four years after it first asked for their views on how to make efficiencies.

Its consultation quizzed tenants and landlords on whether a separate Housing Court was needed and Justice Minister Kit Malthouse has now announced that a policy response to the call for evidence would come later in the spring.

He says the Department for Levelling Up, Housing and Communities has committed to work with the Ministry of Justice to make the process quicker and easier.

Its report published at the time – November 2018 – revealed how some landlords reported that it took too long to get to possession order stage using a Section 21 notice as there was often an underlying reason for wanting possession, such as rent arrears.

Read the consultation document.

The main delays in the process related to enforcement; from the possession order being granted, it took a further 10 weeks to gain possession.

The research also found some backlogs and bottlenecks in court administrative procedures due to pressure on court resources caused by lack of staff, closure of courts, a high workload and outdated IT.

However, much has happened in the past few years, with Covid-related court delays pushing the possession process into many months rather than weeks and the government promising to get rid of Section 21s in its upcoming Renters Reform Bill.

In a Parliamentary written response, Malthouse also said the Home Office had no plans to introduce a policy relating to police data sharing relating to eviction of tenants through the courts – however, there is already a well-established national database of rogue landlords.

But as LandlordZONE has reported in the past, very few landlords ever make it onto the dataset. Latest government data released in August last year showed just 43 are listed.

LandlordZONE has asked the Ministry of Justice for an update on when the initiative will start.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Plans revealed to speed up possessions for landlords – FOUR years after consultation | LandlordZONE.

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EXCLUSIVE: Portsmouth landlords battle council ‘ineffective’ HMO licensing

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Portsmouth’s landlords have urged their council not to go ahead with plans for an additional licensing scheme covering more of the city’s HMOs.

Its current scheme covers 1,400 larger HMOs but it plans to extend this to about 2,000 three- and four-bed houses in a bid to improve standards and rid the sector of rogue landlords. A consultation launches on 23^rd May.

Portsmouth’s first additional licensing scheme ran from 2013 to 2018 but was not renewed after doubts about its effectiveness.

Last year, LandlordZONE reported that despite heralding its current licensing scheme’s success, it had fined just seven landlords and agents in 2020.

Portsmouth and District Private Landlord Association believes additional licensing would not help resolve problems around HMOs.

Chairman Martin Silman (pictured) tells LandlordZONE that it will have no effect on noise, parking and anti-social behaviour because smaller HMOs generally don’t create these problems.

Instead, with additional licensing focused on squeezing out the smaller rooms and raising standards across the sector, prices will be pushed up, while landlords will ask whether it’s worth continuing to have smaller HMOs.

“The number of small, nice homes for three or four nurses or dockyard contract workers will decrease and the number of mega-HMOs will rise in response to the high demand and high prices that this will create,” says Silman.

Knock-on

“This has a knock-on inflationary impact on both local rents and local house prices which increases the pressure further for more affordable rents and affordable homes.”

Some councillors have also voiced support for city-wide selective licensing of the whole PRS and while Silman believes the evidence does not support this, he fears this could be the next step.

The council has estimated it will need to employ the equivalent of 18 extra full-time employees to help manage the new additional scheme, which would be funded by new fees of between £829 and £883 for a five-year licence.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – EXCLUSIVE: Portsmouth landlords battle council ‘ineffective’ HMO licensing | LandlordZONE.

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Rent control campaigners hit by HUGE setback as Spain ends ‘disastrous’ experiment

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Rent controls have been scrapped in the Catalan region of Spain after they failed to make housing more affordable.

The caps were imposed in a bid to rein in soaring housing costs, but instead the law made property investment in Barcelona less attractive as yields dropped due to lower rental incomes while house prices continued to rise.

Its government has now declared the rental law as unconstitutional.

The news is pertinent as many parts of the UK are currently pushing for similar constraints on the private rental sector; Bristol is bidding to become the first city to introduce rent controls, while London mayor Sadiq Khan continues to campaign for similar powers, Jersey’s Reform Party has proposed measures and the Scottish government is also consulting on proposals.

Spain’s property hotspot, Barcelona had attracted many second-home buyers and investors during the last few decades, according to Mohammad Butt (pictured), Barcelona office director at Lucas Fox estate agent.

He says: “This is great news for Barcelona, as the end of rent capping will allow investors to fully capitalise on purchasing in an international city which offers an attractive and safe return on their investment.”

He added that the European Central Bank had indicated a possible interest rate increase in order to regulate inflation.

“Now is the time to be requesting a mortgage whilst rates remain low,” says Butt.

“The return of foreign investors with the lifting of travel restrictions and quantitative easing programme within the EU has been the main driver for the Spanish recovery and real estate market.” 

Read more: The history of renting in the UK and rent controls.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Rent control campaigners hit by HUGE setback as Spain ends ‘disastrous’ experiment | LandlordZONE.

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TRENDS: Tomorrow’s landlords will be more invested in holiday lets, says new research

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The future of landlording is to have a more bucket-and-spade flavour than at the moment, new research among younger wannabe investors has discovered.

One if five UK adults have thought about buying a short-let holiday property in the UK to rent out, spurred on both by travel restrictions during the pandemic but also growing awareness of the ecological effects of plane travel, says Suffolk Building Society.

Those keenest to consider such an investment are younger people between 18 and 34 years old, half of whom either live in London or the West Midlands.

Holiday lets

The building society says this increased interest in holiday-let properties is mirrored within its own lending team, with both the volume of, and total value of, completions for new holiday let purchases doubling between 2020 and 2021.

It also says that this new cohort is evenly split between those inspired by Covid to get into holiday lets, and those who had always planned to.

Devon and Cornwall are the locations that most wannabee holiday-let landlords were considering, followed by the Lake District, Peak District and Yorkshire Dales.

“It’s easy to understand why the idea of owning a holiday let is so attractive,” says Charlotte Grimshaw, (pictured) who heads up Suffolk Building Society’s mortgage broker division.

“As people were limited to holidaying in the UK, often within an area they know and love, their eyes were opened to the opportunity of increasing their income, as well as enjoying a property for personal use too

“However, intermediaries should also advise their clients to take the time to understand the market, and check out the competition before falling in love with a property that isn’t viable in terms of lettings.” 

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – TRENDS: Tomorrow’s landlords will be more invested in holiday lets, says new research | LandlordZONE.

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Changing Places toilets

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Thousands of severely disabled people who need specialised facilities when they are out and about will benefit from over 500 new Changing Places toilets in England.

The Chancellor confirmed in his Spring Statement over £23.5 million has been allocated to 191 councils across England to install life-enhancing Changing Places toilets in public places and tourist attractions

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How can landlords afford to upgrade their properties to EPC band C by 2025?

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Like almost all industries the housing market is increasing its efforts to tackle climate change.

Households account for 40% of the UK’s carbon footprint and the government has forced landlords to move more quickly than others, and from 2025, all properties in the private rental sector will need to have an EPC of C or higher to be let to new tenants.

Also, lenders are increasingly offering ‘green finance’ for sustainable properties, encouraging landlords to increase sustainability.

For example, banks have said that borrowers will only need a 10% deposit on loans of up to £25,000 for a ‘green advance’, while others are offering a green cashback scheme worth £500 for eco-upgrades until March 2022.

So, with the chancellor reducing VAT on energy-saving features in the Spring Statement it is certain that ‘green’ investments are going to become a lot more prominent.

Read more about the Spring statement.

Eco privilege

That said, the cost of renovations could price out many landlords, leading to ‘eco-privilege’ in the market.

Thus, with fines of up to £30,000 for non-compliance, many landlords will need to pay thousands to renovate their properties to achieve an EPC rating of C or higher.

For affluent landlords who can afford to renovate outright, this will not be a huge issue and could be a benefit as they will be able to access favourable mortgage rates and other ‘green’ finance options.

But landlords who cannot afford to make the changes will be left with less affordable loans and an already problematic affordability crisis could become a lot worse.

Problems bridged

The bridging sector can assist landlords in accessing favourable ‘green’ finance options and limit the effects of ‘eco-privilege’.

Such loans can bridge the gap between the beginning of a sustainability refurbishment project and the acquisition of a ‘green’ finance solution.

Whether they are used to purchase a property at auction then renovate it before a landlord finds a long-term financial solution, or because a landlord simply needs to free up capital to pay for the renovations, bridging loans can empower a wider range of landlords to access ‘green’ finance for their long-term financial needs.

Fairness of the market can be protected, and the industry will become more sustainable overall.

In the build-up to the introduction of the new EPC regulations, it is vital that landlords plan a timeframe for their renovations and carefully consider their financial options.

Lenders with experience and expertise should assist landlords in doing this, and those who can successfully navigate the next few years can expect to capitalise on the benefits of ‘green’ finance options.

Author bio: Paresh Raja (main pic) is the founder and CEO of Market Financial Solutions (MFS), a London-based specialist lender that provides bridging loans and buy-to-let mortgages.

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – How can landlords afford to upgrade their properties to EPC band C by 2025? | LandlordZONE.

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Law of unintended consequences emanating from Holyrood

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Some of the more onerous restrictions which were imposed on landlords in Scotland in the first dark days of the pandemic are about to be rescinded at the end of the month, and it might be assumed that this would be a good thing for the private rental sector.

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The No1. property investor skill you need

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If you want to become a more successful property investor, you need to get really good at finding great deals in your investing area.  This is the most important skill you need to learn.

Most people search online

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Rental reality… Belvoir advises on how the market is performing across the country

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The Belvoir Rental Index has been producing unique, valuable data for landlords and investors for the past 12 years and is a fantastic free resource for anyone who is interested in the PRS. Recent rises in advertised rents have been significant, and the Rental Index revealed that in Q4 2021 rents increased by 10.5%, year on year, versus Q4 2020. However, when compared to the average rent in Q4 2019 the increase is a little lower at 9.5%. This suggests that over a two-year period, rents increased by just over 4.5% per annum for 2019 and 2020, so the rent rises over a two-year period are a little higher than inflation over this period. 

Looking forward, most of Belvoir’s franchisees are anticipating a rise in house and flat rent inflation, although some expect rents for flats to be static in the first part of Q1 2022. Room rents are anticipated to either remain the same, or due to the pressure of tenants now desiring their own space because of the pandemic, there could even be an oversupply, and this could result in some falls. 

With Covid restrictions finally lifting more tenants in general may be looking to move on, and this could allow additional stock to come onto the market, enabling more people to move into the homes they desire.

Regional trends

Belvoir’s Rental Index is also able to look at advertised rents in specific regions, and this provides incredibly useful information for landlords who want to know the true picture of what is happening in their area. In Q4 monthly rents varied from £599 in the North East, £680 in the North West, £719 in Yorkshire, through to £1158 in the South East and £1545 in London.

As well as the Rental Index, Belvoir also conducts a quarterly survey of offices across the network, which can add further detail to what is happening in specific territories.

Three quarters of all offices across the Belvoir network reported a rise in rents for flats in Q4, with almost a quarter reporting static rents. Belvoir Brighton was the only office to report a decline in rents for flats and houses. When it came to houses, not a single office reported a decline in rents. When asked to predict how flat rents were likely to perform in Q1, there was a 50:50 split of Belvoir offices predicting an increase or static rents, with just Belvoir Brighton predicting a decrease.

Property shortages

Q4 revealed a continued shortage in all properties, especially two, three and four bedroomed houses. Natalie Boardman of Belvoir Tunbridge Wells says: “Stocks are low, as more landlords are exiting the market, which puts upwards pressure on rents.”

Tenant occupancy

Tenants continue to occupy properties for extended periods. Belvoir offices reported:

25.8% of tenants remain for 13-18 months

Just under 39% remain for 19-24 months

32% of tenants rent for over 24 months

There were no tenancies for less than a year.

Tenant arrears

Belvoir offices reported that rental arrears remain low:

Just under 10% of offices reported zero rent arrears – an increase versus Q3 21

Almost 65% of offices reported less than three renters in arrears – an increase versus the first three quarters of 2021, all of 2020 and most of 2019

Just under 19.5% of offices reported 4-10 tenants in rent arrears – a decrease compared to the first three quarters of 2021, all of 2020 and most of 2019

6.5% of offices reported 11 or more tenants in arrears – the lowest level since Q4 2019.

Eviction numbers also remained low, with 61% of offices reporting zero evictions and almost 23% reporting a single eviction in Q4. Offices that did carry out evictions reported that these were mostly due to landlords selling their property, or the result of anti-social behaviour.

Property sales

Belvoir offices seeing up to three landlords selling properties increased to 61% in Q4. The number of offices with zero landlord sales fell to around 3%.

Voids

In Q4 one-week voids fell to almost 23% in Q4, compared to almost 40% in Q3.

To read the Belvoir Q4 2021 rental index in full, visit https://www.belvoir.co.uk/rental-index/

©1999 – Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® – Rental reality… Belvoir advises on how the market is performing across the country | LandlordZONE.

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