In our opinion, landlords have always needed to take a long-term view, but, in the current market conditions, investments horizons may be needed to be stretched even further.
Unfortunately, the media has a lot to answer for in suggesting that property investors can make money in the short term.
Anti-landlord sentiment in the media portrays landlords as wealthy people living the high life and “snapping up” properties right left and centre, thereby depriving first-time buyers of a home. Meanwhile programmes like “Homes Under The Hammer” are actually more about property development, rather than being a landlord. (It’s important to understand the difference …).
Either way, true wealth generated from BTL comes for thinking long term, not looking for any form of instant gratification.
Over the past 15 years or so, house prices have averaged around 10% growth per annum, making a healthy return for landlords, particularly those that use bank finance to leverage their own funds.
However, capital growth is merely speculation and cannot be guaranteed. Most property indices suggest that capital appreciation will be subdued over the coming years due to fears over Brexit, the economy, and political uncertainty.
So that myth that a property doubles in value every 10 years is probably well and truly busted! It might take 20 or 30 years to achieve that going forward.
The other side of the income generation is cash flow.
This is actual money in the bank and net cash flow is the difference between the rental income and all the expenses associated with a property, such as a mortgage, insurance, repairs, maintenance, lettings agents fees etc.
With the advent of Section 24, which reduces the amount of mortgage interest landlords can off-set again tax, plus increasing regulation and legislation, such as landlord licensing, margins are going to be squeezed further and rising interest rates will only increase the strain on maintaining positive net cash flow.
Some landlords say that they get into property purely for the capital growth it enjoys. But, you need to be able to remain in the game long enough to enjoy that capital growth, and that means focussing on net cash flow and ensuring that your rental property pays its way after all expenses.
Unless you have significant other income, or are buying for cash, achieving positive net cash flow should be your main focus and that is why many landlords are looking to the North of England where yields are typically higher, not to mention that the 3% stamp duty surcharge does not bite so much due to lower property prices.
Capital growth is just the cherry on top of the cake, but high yielding areas tend to achieve lower capital appreciation, so it’s important for landlords to understand this and find a balance that is right for them over the lifetime of property ownership.
Having said that, buying a property in need of refurbishment is a way to “force” the appreciation, and many landlords are finding this buy/refurb/hold strategy to be working well in the current market conditions.
The method here is to buy a property below market value (typically with cash or bridging finance), add value through refurbishment and/or development, and then take out a BLT mortgage on the property and rent it out, to re-cycle your cash, rather than selling the property.
If you get the numbers correct and run a tight ship on the budget, this can also lock in a comfortable equity cushion that could assist in reducing risk.
It is worth remembering that rental income is relatively ‘passive”, particularly in respect of tenanted properties working for you 24/7/365, and a lettings agent undertaking the day to day management of the tenant and the property.
If you work with a reputable agent, like ourselves, we can help minimise voids and also reduce costs with our fee structure.
The good news is that analysis from mortgage lender Kent Reliance claims that long-term property investment can still deliver significant returns for landlords through rent and capital gains, despite recent regulatory and taxation changes impacting on profits.
Over the course of a 25-year investment, Kent Reliance’s analysis suggests that a basic rate taxpayer investing a typical 30 per cent deposit of £73,908 in buy-to-let would generate a total profit of £265,500 after all costs and taxes.
Accounting for the impact of inflation over the period, this represents a profit of £162,000 in today’s money or £6,475 every year.
If you combine that with the news that more and more lenders will consider lending to older people, then the investment time frame can stretch beyond the typical 25-year mortgage term.
Paragon have recently announced some new products for borrowers aged up to 99, up to 75% LTV, and there are a small number of lenders who have no upper age limit for borrowing.
But clearly, the earlier you start your investment career, the longer you will have to build a profitable business over time, and also enjoy the benefits.
Another long-term forecast bodes well for landlords.
The latest Hamptons International Research - Buy to Let Index Spring 2018 - estimates that there will be six million households renting by 2025. That compares to 4.7 million or 19% of households, today. I other words, demand for rental properties is only going to increase.
This will ensure that rental yields remain robust in the long term, and, even if property prices only rise 3 to 5% per annum, this is still a better return than having money sitting in a savings account earning 1% before tax!
What all newbie investors should consider is that the days of speculation and property prices rising ever upwards are gone. Buy to let is definitely now a long-term business endeavour, requiring commitment and a professional approach, including input from a mortgage advisor, a tax advisor, and a reputable lettings agent.
The billionaire investor, Warren Buffett, recently gave his annual address in the USA and dropped this little nugget:
You don't have to be an expert, you just have to consider how something will perform over a very long time frame and how it might be able to face challenges.
In the context of property, a good quality house in a good school catchment area with excellent transport links is likely to perform better than a one bed flat in a big city centre where lots of new developments are going up. Just by counting the numbers of cranes on the skyline can sometimes tell you if there is going to be a danger of over-saturation.
Of course, none of us have a crystal ball, but property can still be profitable going forward, provided that you take a long-term view and commit to maximising the performance of the property over time, ensuring it is maintained and repaired and given a facelift every 8 to 10 years.
And of course, having a roof over your head is never going to go out of fashion, shelter being one of the basic needs of all humans.
A lot can happen over such an extended time frame as property investment, but ask any experienced investor, and they will likely tell you that, in hindsight, they wished they had bought more.
Buy soundly from the outset, maintain your asset, and take a long-term view and, chances are, you may one day feel the same.
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