Buy-to-let future is optimistic, but landlords still need to mitigate the risks
Despite the optimism surrounding buy-to-let investments, Kate Faulkner warns that returns aren't guaranteed
There is currently much optimism in the air about investing in buy to let. Property price reports suggest property values are continuing to rise, albeit at a slower rate, and recent research from Direct Line for Business shows a third of retirement savers will consider investing in buy to let.
But any investment has its ups and downs. Although buy-to-let can deliver the 13% annual return that the research found retirees were hoping for, unfortunately things can and do go wrong. This means returns can be reduced or even wiped out altogether.
So if you’re investing, you need to be constantly aware of what can hold back your returns, and where possible, to make sure you do what you can to mitigate those risks.
There are three main ways your returns can be affected:
- Lack of rental income due to the tenant not paying the rent, or the property being empty
- The property value can fall due to poor economic and market conditions
- Problems or damage to the property can eat into profits
And for those who want to leave property as an inheritance gift to family, future taxation changes can make the gift worth a lot less than when initially invested in.
Maximising your rental income
Some good news is that although tenants are likely at some stage during your life as a landlord to not pay their rent on time, or not pay at all, it is fairly simple and cost effective to mitigate against. Most landlord insurance will cover you for legal expenses to recover the property from a tenant not paying rent and it will also pay to recover rental income you’re owed.
What is tougher, though, is ensuring rental income comes in throughout the year. On average, according to the Association of Residential Letting Agents “Buy to Let Review Q4 2014” in the North East, rented properties are typically empty for 24 days a year while in London (excluding prime central) it’s 14 days. If you rent out a property for an average of £500 per month in the North East, that equates to a loss of rent of £394.50 per year. And if you rent a property for a £1,000 a month in London, it’s £526 a year.
The best way to mitigate against voids is to make sure your property is in good condition so tenants are encouraged to stay for longer (the average stay according to the same report is 20 months). And even if they do leave, the property is more likely to be snapped up within days by new tenants.
For more information on how to maximise your rental income, visit our Landlord Knowledge Centre.
Ensuring your buy to let grows in value
Since 2000, property prices have, on average, increased in value each year by around 5-6% outside of London, and by 8% in Greater London*. However property forecasters such as Savills suggest prices will rise over the next five years by 1% - 3.5%** each year.
Rather than buying a property to let and hoping property prices will increase naturally, it’s better to make sure you buy a property you can add value to by renovating it or adding an extra room. Then you can treat any natural price growth as a ‘bonus’.
Protecting your property from problems and damage
Most landlords fail to put enough money aside to keep their property in tip top condition. Over a 15-20 year period of ownership, costs of re-wiring, damp proofing, replacing the roof and windows, as well as regular replacement of the kitchen and bathroom, can add up to tens of thousands of pounds. So always have a plan of what you’ll need to spend and when.
Other problems such as boiler breakdown or damage from burst pipes, storm or fire damage can occur which mean you don’t just need to get them fixed, but you also may need to re-house your tenant during the repairs. And things can get even worse – some landlords are targeted by criminals who take over your property for activity such as setting up a cannabis factory.
Fortunately this is exactly what your specialist landlord insurance can cover. But do make sure things like criminal and malicious damage are included as they can happen and if you’re not covered, it can cost you tens of thousands of pounds and several months in lost rent.
Passing on property to family
With so many people planning to pass their property onto their children, it’s important to do it in the most tax-efficient way. Not all landlords appreciate the need to make sure properties are bought jointly under ‘tenants in common’ and are then placed into trusts. This needs to be explored to help make it easier for your children to inherit the property. Seeking specialist tax advice is essential so that when the inevitable happens, as much as your wealth as possible, including your property, is passed on.
For more information on maximising your income and minimising your risk, visit the Landlord Knowledge Centre.