Section 24 is the reason for rocketing rents – not landlords

Currently you would be hard pressed to find an investment opportunity that would provide the mortgage interest rate. Historically property investment set a 5% profit threshold as a reasonable return. Local housing allowance rates are set at the lowest 30th percentile of the so called market rents. An example being £825 pcm for a 2 bed property with a value of £170,000 would return a profit of 5.82%. To be clear, this is the figure derived from the total sum of rent that is paid annually as a percentage of the value of the property. As previously noted, the problem with market rents is that it is dictated by landlords who want to receive their % return and still have an additional income. Difficulties arise when they invest in low quality property that has not been adequately maintained and is sold below the level of similar properties that are of good quality. The EPC rates are low due to no investment and hence the low purchase price. The mortgage payments are high because they have not invested in the up front cost of the property so there is no buffer. The truth is the investment was not a viable option from the very start and the risk taken would be the same as any shares investment. The difference is, and this seems to be forgotten, the landlord is receiving a high rate of return due to the tenant paying for the landlord property. If the landlord can not cover the cost of investment that can ensure a minimum 5% return that reflects interest rates then there business plan is broken and it is there problem no one else's. Market rents is a fallacy that is predicated on profit and the main factors that determine what is used to determine the level of rent charged is the sites on which it is advertised. The main advertisers are letting agents who base their income on the percentage of the rent that they advocate. It may be time to reevaluate the approach to market rents and those who are able to function in the market as landlords of private rented accommodation.

Reply to the comment left by Robert Antonio at 18/11/2024 - 17:13
I agree with a lot of what you say BUT bear in mind that a lot of the issues of today (EPC , S24 etc) weren't around when properties were bought 10+ years ago.

Reply to the comment left by GlanACC at 18/11/2024 - 17:37
A major problem is lenders decided to change their lending criteria, which is making it almost impossible for many existing investors to re-mortgage.

Reply to the comment left by NewYorkie at 18/11/2024 - 18:52
Bear in mind lenders have to adhere to the stress tests required by the PRA. Higher rates means criteria becomes tougher. There are lenders who will take account of surplus earned income to cover shortfalls and perhaps some who use the £4£ remortgage carve out which doesn’t require stressing but does require an aggressive risk appetite without understanding the full financial picture of the landlord.

Between 2020 and 2024, LHA in my area rise by less than 11%.

Seeing as LHA is based on rents, it’s fair to assume that rents rose by less than 11% when inflation rose by more than double that amount. Or LHA is woefully inadequate.

“Keziah Hall, chair of the Acorn Brighton Union, told BBC Radio Sussex that several factors including second homes, a high student population, and an influx of commuters are all pushing rents up in Brighton.”

Did I miss the impact of massive net migration contributing to increased demand? Maybe the influx of commuters in Brighton is because they’re being pushed out of London by the need to house migrants.

Reply to the comment left by Cider Drinker at 19/11/2024 - 09:03
I don't know how immigration affects Brighton [I'm sure it does, as with everywhere else!], but a big factor is the impact of the pink £. I don't know why commentators won't say it when the LGB community agrees.

Reply to the comment left by GlanACC at 18/11/2024 - 17:37
It is right to say that S.24 was introduced in 2015 and EPC's in 2007. Plenty of time to see the equity build up in a property paid for by through rental income. In some business models 15 years would have seen a mortgage paid in full and all the rent would be profit and cover the cost of the EPC and structural maintenance that would should be a cyclical requirement. Local housing allowance rates were frozen between January 2021 and May 2024 so there was no increases during this period. Profiteering on market demand is the decision on the individual landlord. Problems will arise when desperate people can no longer sustain the rent levels and default in payments leading to arrears and eviction costs. They are unable to afford the means to decorate, furnish or tend to the property. This has an impact on the aesthetics of the property and the appeal of the local area, resulting in lower property values. Higher rents and low appeal result in high voids and loss of income. All contributing to a spiralling debt and stress for the "landlord" and their inevitable decision to cut their loses and get out of the business. As a landlord of 20 years experience with 6 properties between C and B EPC ratings, no mortgages and long term happy tenants I suppose I am not the right person to judge; but some times we need to consider the bigger picture and the role we all play in the PRS and realise that for the majority this is not the right option and never was.

Reply to the comment left by Robert Antonio at 19/11/2024 - 10:49
Section 24 was announced in 2015, phased in from 2017, fully implemented by 2021.
And guess what, the SAME tenants that were paying cheap below market rent in 2015 are STILL living in SAME house. Why should they be hurt?

So if Landlord paid his mortgage off in full, should he then do the tenant cheap rent just cause he can? Risk going to prison cause tenant took battery out smoke alarm, when he get maybe double leaving the money in a bank?

My EPC's are D and have new boiler new windows new doors.

Reply to the comment left by Mick Roberts at 19/11/2024 - 11:08
Seems the points raised about affordable rents and long term tenants is correct. No mortgage means full rent is now a profit from which to cover the tax liability and maintain the value of the property through maintenance. My point on the investment in low value property would be correct in this instance based on the need to renovate to such an extent but only achieving a D rating. It could be an opportunity to explore possible grants for insulation or the implementation of the recommendations in the EPC to raise the rating as an investment in your asset. In relation to investments I would be interested in any options to obtain 10% interest rates as you have been able to find and agree this would be a better business option. Hard wired smoke detectors are now required in all rental properties in Wales and regular planned inspections are good practice to identify risks early and provide a defence in any legal challenge. I agree that cheap rents would reflect the quality and standard of the property and ensure long term tenants who can afford to look after the property for the long term. I agree that this would then be a sustainable model.

Reply to the comment left by Robert Antonio at 19/11/2024 - 11:54
Yes I've had the grants, now getting mould & condensation.