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0:02 AM, 5th June 2024, About 3 weeks ago 6
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A recent article in The Times, using research from Savills, argued that renting out property in the last 10 years has become less profitable for landlords.
Among the reasons given was the price of property increasing from £161,404 to £236,311 – and the average deposit size nearly doubling.
Also, stamp duty has gone from 1% to 3% which has added to the upfront costs to become a landlord to £77,892.
Landlords also have to contend with the issue that rental yields have hardly changed in 10 years.
However, Marc von Grundherr, a director of lettings and estate agent, Benham and Reeves, disagrees.
Here, he explains why today’s buy to let sector still offers opportunities to landlords.
In recent years, UK landlords have been bashed by government policy. They have been seen as ‘fair game’ in a political war that seeks to attract tenants as voters at the expense of those investing in the private rental sector.
There is a certain irony to this approach given that around 1.1m tenants in the PRS receive some form of housing benefit and therefore those landlords that own these properties are, in effect, providing an element of social housing that the government has not.
In a flurry of attacks, various Chancellors have removed tax relief, increased capital gains tax, added stamp duty costs, granted amnesty to non-paying tenants during covid, clogged up the court system to the detriment of repossessions and then sought, now unsuccessfully, to prevent landlords from taking possession of their properties at all by way of the failed Renters (Reform) Act.
This is all in addition to the hike in interest rates that has led to buy to let mortgage costs being significantly higher than they have been for a number of years.
Property investors have every right to feel downtrodden.
But being a landlord is still lucrative in spite of Whitehall’s attempts to dampen the sector.
Let’s look at some of the facts.
Not every landlord has a mortgage, in fact, more than a third (38%) do not. Therefore, increased interest rates affect some, but not all.
At 5.25%, the Bank of England base rate is not high by historical standards. The average rate over the last 100 years has been 5.25%.
The majority of landlords are experienced enough to know this, and so current borrowing rates are more ‘normal’ than ‘high’.
House prices have increased by 54% in the past decade and by 152% since 2000. That’s +6% per annum in the latter case, a more than decent return. (PS: Inflation has run at an estimated average of 4.4% for the past five years, and so property outperforms it.)
Rents are up 31% since 2014, an annual increase of 3%. Not to mention tenant demand is higher than ever.
The number of new homes built are lagging way behind demand. The annual deficit is around 100,000 homes resulting in a ‘product’ that is at its most scarce in relative terms than ever before.
Alan Sugar, Donald Trump, the Duke of Westminster, Ellen DeGeneres, Jeremy Renner, Arnold Schwazernegger, Robbie Fowler… famous names that have all made their fortunes through property, not just the business that they are better known for.
Capital appreciation, higher rents, lack of supply and heavy demand from a population that is growing by around 1m people each year. These are all huge positives.
But the real gravy for landlords is that their rental yields are far higher than the statistics show. Why? Because traditional analysis looks at yield as ‘the annual rent vs the value of the property today’ whereas many, many landlords have owned and held their portfolios for years and therefore today’s higher rents as a percentage of the original purchase price show ACTUAL yields at a far higher level.
Fact: Most landlords have been such for 10 years or more – and so a 5% annual yield today is actually 7% if the property has been owned since 2014 as most have.
Reasons to be cheerful? Against a backdrop of negativity in the sector, I rather think so.
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Cider Drinker
8:57 AM, 5th June 2024, About 3 weeks ago
I’d say that interest rates affect all landlords and I dispute the yield versus purchase price methodology.
For me, gross yield is rental income divided by how much I’d have in the bank if I sold the property.
So, for a house valued today at £110k might, for example, give me £100k in the bank after selling fees and CGT. If the rent is £6k per year that is a gross yield of 6%.
Net yield, of course, is much lower. Let’s assume no mortgage and £1k in allowable expenses. That’s a tax bill of £1k for a basic rate taxpayer and £2k for a higher rate taxpayer. So, the net yield is 4% for a basic rate taxpayer and a miserly 3% for a higher rate taxpayer.
Landlords can get better returns in hassle-free savings accounts. Savings accounts can be ISAs where no tax is paid, they are free from the risk of non-payment and your money can be accessed easily should you choose to spend it before you die. There is no house to trash and house prices falls don’t affect savings accounts.
The numbers I used in my example could be disputed but the truth is that higher interest rates definitely make BTL less attractive to mortgage-free landlords. Arguably more less attractive as there is more personal moneys invested in the property.
Reluctant Landlord
9:12 AM, 5th June 2024, About 3 weeks ago
Buy to let will be dead in the water if Labour's plans see the light of day...
if you can't get possession of a property even if you want to sell because the landlord has never lived in the property previously then the B2L markets stops dead there and then!
Cider Drinker
9:35 AM, 5th June 2024, About 3 weeks ago
I agree RL.
When properties become vacant, they’ll be sold. Some tenants may be persuaded to leave one way or another. Perhaps by increasing the rent as often and as high as possible.
This is good news for Shelter as the loss of private rented properties will mean their (cough) charity will prosper.
K Anon
9:40 AM, 5th June 2024, About 3 weeks ago
silly article, its a reflection of if you got in a decade ago then it might have been worth it.
Re Cider drinkers post above, 3 or 4% better off elsewhere now+ avoiding a lot of potential hassle. Personally I'm looking at stocks, Lloyds bank for example is 5%. BAT (tobacco) is nigh on 10 !
Andy
11:18 AM, 5th June 2024, About 3 weeks ago
Who estimated inflation at 4.4% average - the BoE? Find me someone who thinks their general living expenses have only risen 4.4% a year.
I agree, rate changes affect all landlords, with or without debt; per CD's first comment.
I prefer knowing return on equity rather than the article's traditional yield ref. And capital growth is nice but not to be expected.
Reluctant Landlord
11:34 AM, 5th June 2024, About 3 weeks ago
Reply to the comment left by Cider Drinker at 05/06/2024 - 09:35
...and they could all become vacant a lot sooner than anticipated too if Labour get in and they start on Day 1 picking on the PRS...
I am sure there are many LL's out there with pens poised on S21's ready to sign and send while they still have time...