It’s common knowledge that now is a difficult time to be a buy-to-let landlord. But, with so many different stories cropping up across the media, it can be tough to know who to believe. That’s why property expert Kate Faulkner has assessed the top ten trends that all investors must know right now…
“Whether you’re a novice or accomplished landlord, you should know these things – if you don’t, your investment could crash and burn,” she insists.
Read on for Faulkner’s analysis and some expert top tips.
Let’s start with some of the most difficult statistics to understand:
- Natural capital growth is slowing
As a country, we love finding out what the average house price is and marvelling at how much it’s grown over the years. But, with several house price indices available, who should we trust? Firstly, you must be aware that you could be looking at different average prices – some look at the whole of the UK, while others report only on England.
What’s more, companies measure house prices in different ways. For example, property portal Rightmove records the marketed price, which suggests that, when values appear to drop, sellers aren’t confident and, therefore, it’s a good time to buy. Nationwide and Halifax, on the other hand, take only mortgaged properties into account, which ignores a whole third of the housing market (over 50% of homeowners own their property outright).
The official UK House Price Index uses official Government data to track how well your property is doing by looking at the price paid for a home. As a landlord, if you assess these statistics and find that you’re not doing as well as the average homeowner, you can rethink your strategy.
So, are house prices growing as fast as they have been? Faulkner explains that, when we look back to 2005 and smooth all of the ups and downs out, average house price growth has been around 2-3%, which is what it is now. Between 2000-2018, however, we were seeing figures between 6, 7 and 8%.
Despite what many companies will tell you, property isn’t delivering what it used to, so Faulkner advises offering a price that builds capital growth from the beginning of your investment. You also can’t rely on natural house price growth, so add value to the property and look at sold prices on the same road for useful data, to really understand how a property you own or are thinking of buying performed in the past.
- Prices to grow in line with wages
You may have seen figures outlining expectations for house prices in relation to wages for the next five years, but you should also focus on the past and use this to assess what your property might be worth in the future.
Faulkner points out that buy-to-let can be better than financial investment because you can borrow funds; it’s rarely wise to invest long-term in cash, she adds.
- Rents mean stagnant wages for landlords
The media might have you believe that rents are soaring, but Faulkner points out that there are no statistics to prove that. When looking at the last ten years, rents have risen by an average of 2% per year.
Furthermore, stories stating that it’s cheaper to buy than rent are a “load of rubbish”, Faulkner claims. She notes that many studies assume buyers have a 25% deposit, which is incomparable to the realistic 95% mortgage. Also, when you consider that inflation has increased by 3%, while rents are up by just 2%, it’s clear that many landlords have, in fact, taken a “massive wage cut”, which hasn’t been reported in the media.
Faulkner knows of landlords who haven’t put their rent prices up for as long as their tenant has been in the property. She argues that, if you don’t increase rents in line with inflation (while remaining competitive), you are giving yourself a wage cut, which is difficult to maintain and doesn’t help the tenant. If a tenant’s landlord hasn’t changed their rent price for years, the tenant is used to cheap rent and will get a nasty shock when they move. Rents are expected to move in line with inflation, meaning that they should have risen by 3% every year, rather than 2%.
- Local economics will dictate returns
If you’re not looking at the local economy of the area your property or potential property is located, it’s important that you start doing so, Faulkner insists. You have got to understand the local economy of the location you’re interested in.
If you don’t understand local wages, jobs or lifestyles, you won’t invest in the right type of property or area, she explains.
- Financial returns could beat property
The dangers of using cash is that you put in 100%, which, from a tax perspective, could be better being put into a financial investment. The Government has been “very cruel” by increasing taxes on buy-to-let, while reducing taxes on financial investment, because that is where it wants you to move your money.
There may be better tax advantages of financial investments, but purchasing a property with a mortgage typically delivers a much better return, as long as property prices are rising. If you’re looking at investing in cash, however, there is not necessarily much difference between property and financial investment.
- Buying, selling, investing and owning will change
There are now more than 20 Government proposals to change what and how we buy/sell property, including:
- Voluntary agreements between buyer/seller to avoid gazumping
- Faster and fixed times for searches/leasehold information
- Educated and qualified agents
- Transparency of referral fees
What’s clear is that the regulation, and enforcement of regulation, of landlords and letting agents will increase. The Government is already closing down rogue landlords and agents through its database, but attitudes must change so that the Government sees landlords as the solution to the housing crisis, not the problem.
- Local plans will dictate supply vs. demand
Faulkner suggests taking a look at your local council’s plans for the next five years, to determine how supply and demand will change in your property’s local area. Understanding and assessing this material is really important, as your council’s documents can be goldmines of information on the future of the property market.
- Property demand is changing
A change in population has the greatest impact on economics and property investment than anything else. According to a report by the Resolution Foundation, nearly one in seven Britons will be over 75 by 2040. This means that the days of letting to young people and selling to first time buyers/second steppers may be coming to an end.
While landlords may be getting used to letting properties to families, they should be preparing for what tenants of the future will be looking for: Smaller homes? Warmer homes? Ease of access to public transport? Homes for those with disabilities?
If you understand the population that is renting homes, you will be better equipped to invest in the properties that they will require for the future.
- The builders are coming
At the same time, the build to rent sector is booming. Faulkner pointed out that there are currently 117,893 build to rent units either completed or planned across the UK, while a further 63,955 have planning permission. This is because the Government is no longer backing buy-to-let landlords; it’s backing the companies that will build 100+ properties, by subsidising these schemes.
Build to rent homes usually have fancy extras, like a concierge or a gym, so it’s a good idea to let your property before these luxurious offerings come onto the market.
- Taxes will remain complicated
Property tax is, inherently, complicated; it can change at every Government Budget, for instance. This is why you need a specialist property tax advisor; they won’t be able to help you once the changes have been made, but they can help you mitigate before the changes are brought in.
Taking just one example – Stamp Duty – we can see that the Government has a 30-page document explaining how the tax is charged, which is tough to understand when simply investing in England. If you’re looking at investing in the rest of the UK, you have different policies to understand. This is why expert advice is essential; it can save you a lot of money.
Although Faulkner’s points may seem dreary, she explains that property is only gloomy when you don’t think ahead. Looking ahead to the future, it seems that landlords will be in for a treat: we’re experiencing population growth that we’ve never seen before; more households are renting; extra demand will be coming your way. But, in order to succeed, you must first do the work to find a property that will deliver a healthy return.
Faulkner has the following top tips for investors:
- Don’t listen to salesmen when investing – you must understand whether they’re being accurate.
- Take financial advice first, then decide whether a property is right for you now and will be in the future.
- Get specialist tax advice.
- Assess a property yourself before buying, or get a Royal Institution of Chartered Surveyors professional to value it for you.
- Keep up with changes to legislation.
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