Given the amount of coverage in the media with headlines heralding the demise of Buy-to-Let (BTL), many may feel the answer is – NO!
However we are quite sure that investing in residential property, to let it out, can still offer an excellent investment option.
First let’s look at the basics;
It is true to say that it is not for everyone and before going any further you must take expert advice from your financial planner or tax advisor. Even seasoned landlords must do their homework. You need to look at BTL as a long term investment based on the rental return and not just rely on short term capital growth, unless you can find a property that requires work where you can immediately add value.
Always look at the yield the property gives: - This is the annual rental income as a percentage of the purchase price. Currently a good yield will be in the region of 4%. You must also build in the ongoing running costs such as insurance, service charges and agent’s fees. And also consider what impact an increase in mortgage rates may have on your return. Although recent indications from the Bank of England are that rates may not rise this year as previously thought, they will certainly rise at some point.
You should allow for voids: - This is when the property is empty between tenancies. It is advisable to allow for a six week void period in your calculations. Although in the current market this is more often days rather than weeks. You must also have a contingency fund available for emergencies and potential decoration costs that aren’t covered by insurance.
Good maintenance and keeping the facilities and décor up-to-date will make your property a good place to live. This will mean better tenants paying a higher rent and less void periods between tenants. Unless you have the time and inclination to deal with the problems that do arise with any property, employing a good agent to handle the letting and manage the property will be money well spent. Look for those that add value, like the security of a rent guarantee, as you have no control over your tenants’ employment.
The increase in stamp duty for second homes including BTL will add thousands of pounds to your up-front costs. If BTL is the right choice, you still have time, just, to complete a purchase before the 1st April deadline. This is also the perfect time to sell your BTL property and take advantage of the increased demand.
But why do we believe that BTL will remain a very good option for certain investors after 1st April? The private rented sector is, and will remain, an integral part of the UK housing market. This is partly because for many, it is simply impossible to buy, despite the incentives Government are offering such as “Help to buy”. But also because there are a significant number who choose to rent as a lifestyle choice.
One should also consider the population of the UK, as it is predicted to rise 10 million by 2037 and single person households are forecast to increase 61,000 by 2021.
Therefore demand for good quality property to rent is not going away any time soon. That said, the supply is likely to slow down considerably due to the Government’s latest measures which are deterring small and medium sized BTL investors from entering market.
North and North West London, do in particular, remain sought after areas to live in, amongst all the other great advantages, the schools are outstanding and the transport links are excellent. This leads to demand far in excess of supply, which in turn leads to strong growth in capital values as well as rents.
With the shortage in supply and no letup in demand, it is quite probable that rents will rise at a higher rate than in recent years and this increase in yield together with a steady rise in capital growth are set to counter any negative impact of the changes that will come into effect from 1st April.