For a decade and more, property investors have seen the buy to let (BTL) sector as a means to provide them with a reliable and upward regular income along with property gains. The proverbial win-win scenario.
Times have changed.
If you are an existing BTL investor, should you be thinking of selling up, and if you are a potential new BTL investor, should you be thinking of gearing up?
Consider a few of the pros and cons of being a BTL landlord.
Pros of buy to let
Property prices are softening: In many parts of the UK the property sector is pausing for breath and in some instances, deflating. According to Martin Ellis, Halifax housing economist “After reaching a recent peak of 10% in March 2016, the annual house price growth has since fallen to 3.3% in May 2017. House prices have fallen again over the past three months.”
According to the recent Nationwide BS data, this is the first time this has happened since the credit crunch days of 2009.
Some locations may be primed for growth: Predominantly outside of London, The Hometrack House Price Index reveals that Birmingham, Manchester and East Anglia all have the potential for future property price increases.
Generation ‘rent’ shows massive potential: Back in 2000 it was estimated that 60% of 20 to 39-year-olds living in London could afford their own home, but PWC have now reduced this figure to 40% for those who could own their own home by 2025. Those who are renting are now renting for longer: 3.5 years in 2014 and 4.3 years in 2017.
Property values rise over time in real terms: Of course, it all depends what you compare it to, but according to Zoopla average values are up 250% over 20 years and 18% higher in the last 10.
Interest rates are at or near historic lows: The cost of borrowing (or gearing) hasn’t been this low since BTL came into fashion.
Bricks and mortar are tangible assets: Unlike cash in a bank, or investment portfolios and stocks and shares, you can touch, feel and smell your BTL property – and to many investors this is an important aspect.
Cons of buy to let
Uncertainty: We are in the middle of Brexit negotiations. There is political uncertainty. The economy and job prospects are in a muddle. Large and important decisions may well be kicked into the long grass.
Stamp Duty increases: Since April 2016 there is an extra 3% stamp duty for an additional property which isn’t replacing your main residence. The 3% is flat, not tiered in band slices. For those opting for a BTL purchase (England, Wales and Northern Ireland) in the £250,000 to £925,000 range, the rate rises from 5% to 8%. On a £500,000 purchase, the cost is £30,000. https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro
Hassle: Every BTL landlord will need to deal with tenants, both the good and the bad. Being a landlord means being involved, unless you pay a management company to do it, which reduces the income yield.
Cost of purchase and sale: Compared to some alternatives, buying and selling a BTL does incur costs: Stamp Duty, estate agency, legal, capital gains tax (potentially). These all add up and need to be accounted for in the annual yield calculation.
Average rents may be falling: According to Homelet, rents charged in June 2017 were 0.3% lower than in June 2016 and have fallen for the last two months. This (brief as yet) trend was last seen over eight years ago.
The BTL tide may be turning: From April 2017 mortgage interest relief on BTL borrowing started to be capped at 20%. Insurance Premium Tax (on house and buildings insurance) went up from 10% to 12%. The Prudential Regulation Authority have imposed tighter lending rules for borrowing.
As the Roman poet Lucretius was quoted as saying “One man’s meat is another man’s poison” so whether you see BTL as a threat or an opportunity depends upon your own unique circumstances.
At Capital, we believe in being fully informed ahead of major decisions.