Think that Buy To Let is not worth the hassle?
Here are some reasons that might make you think again about the Buy To Let sector:
First, the negative news:
3% stamp duty premium on second homes makes the initial purchase more expensive as it applies to all SDLT bands. Obviously this hits potential investors hardest in those areas of the country with the highest property prices, namely London and the Southeast.
Last year the Prudential Regulation Authority made buy-to-let lenders' affordability checks tougher and increased the paperwork needed from portfolio landlords.
And then in April 2017 the Government via HMRC began to remove landlords' ability to deduct mortgage interest from rental income before working out their tax liability. Starting with higher rate tax payers this is a phased reduction and will end completely for all taxpayers by 2020. In some cases this will make rental properties unviable and landlords are starting to divest themselves of these before losing out. On the other hand this doesn't affect cash buyers, so could be seen as targeting landlords that have leveraged their portfolios to buy more properties fueled by the availability of cheap credit.
The net result of these changes is that the buy to let market is slowing, with reductions in mortgage completions of 26% in 2017 according to the estate agent Savills.
However, this doesn't paint the whole picture.
Buy to let mortgages taken out through companies are not included in official sector lending figures (though this will change as of the third quarter this year) and there was a surge in investors buying through limited companies since April 2017. One source stated that 77% of all mortgage advances in the sector during Q1 2018 were through limited companies.
In addition, as lenders try harder to retain existing customers (they are finally waking up to the well proven business notion that retaining existing customers is far cheaper than attracting new ones) they are improving the offers they make to existing borrowers whose loans have come to the end of their term and stop them remortgaging elsewhere. The value of the mortgages of those that stay with the same are not included in the new lending figures for the BofE.
Another reason to look on the upside for the sector is demand for rental properties is still strong. Put simply, not enough new homes are being built to satisfy demand. With potential buyers having to save greater deposits, renting remains the only option for many and the flexibility that goes with renting is attractive to many younger people who may well be moving to different locations for work.
And whilst buy to let returns are not what they once were, investors need to think where else would offer similar or better rates of return. Average yields after inflation fell from 4.3% in the second half of 2016 to 2.3% in the same period of 2017 according to research in the sector by BM Solutions.
With property prices stagnating, the annual increase in asset value that landlords used to enjoy as a 'bonus' has declined, reducing the ability to borrow against existing assets to enlarge their portfolio. However, for landlords with large borrowings, reducing the size of their portfolios in order to lower the impact of tax changes maybe a suitable option. Another might be to consider other locations to invest in, with the North East, North West, Yorkshire and Humberside and Scotland all offering rental yields well in excess of 7% compared to London's 4.6%.
Selling one or two London properties and replacing them with three or four other cheaper properties in one of these higher yield areas could leave landlords with less borrowings and higher monthly yields. Of course, renting out property some distance from where you are based is likely to lead to other costs and difficulties, but the right opportunity could still prove lucrative.
In conclusion then, whilst tax changes have favoured landlords operating through limited companies, buy to let properties still provide a sound opportunity to secure efficient gains for now and the longer term.
If you are thinking of buying or selling properties in the buy to let sector, than consider using our quote engine to get instant, no commitment quotes for conveyancing services at http://www.buy2letconveyancing.co.uk.