Risks and rewards that buy-to-let investors need to be aware of for 2015
Kate Faulkner uncovers the risks and rewards buy-to-let investors need to know in 2015
As in my previous blog, it looks like the main forecasters show that property price growth is going to be positive but low in 2015. Taking this into consideration and bearing in mind other news on buy to let, here are the risks and rewards that buy-to-let investors need to know.
Be realistic about what capital growth your property will generate
Prior to 2004, the view that ‘property prices double every 10 years’ was broadly accurate, but it hasn’t really been the case, apart from particular areas and properties, since this time. Restrictions in mortgage lending, more people turning to renting rather than buying, affordability issues and a change in the view that high property price rises are a ‘good thing’ have all led to a market where prices are likely to be restrained for now.
As such, it’s important to gear investment carefully rather than invest in cash, in other words, buy with a mortgage. To ‘stand still’ when you own a property outright financially means your property’s value has to increase with inflation, which over the long term is around 3% per year – and currently many properties aren’t doing that.
Gearing will help to mitigate the risk of low property price growth versus inflationary pressures.
Ensure rents, where possible, increase in line with inflation
With an economy expected to continue to grow and, for the first time, wages predicted to increase in excess of inflation, one thing landlords can, and should be, looking forward to is increasing rents.
This is especially important if rents have been static for some years now. Interest rates are expected to increase at some stage in the future and this in itself doesn’t mean landlords can just increase rents – tenants can only pay what they can afford from their wages. Just because your costs go up, it doesn’t mean you can just pass the higher bill onto tenants.
So the sooner you start to increase rents, even by a small amount, the more likely you are not to have to hike rents up substantially in a single year – this mean you run the risk of increasing them so much you end up losing a tenant and being completely out-of-pocket as no-one can afford to rent your property.
As a landlord you’re justified in adding small increments around inflation levels, and although a 2% increase each year might not sound worthwhile, think about the impact of applying this increase over a five-year period.
If you rent out a property at £500 per month, 2% increases each year would mean rents of £552 today. If you don’t increase it by this much, you’re losing money in real terms every year as the cost of living increases. So if you keep rents at £500, what’s really happening is that your purchasing power with that rent is decreasing. If you haven’t increased rents over five years, a £500 rental income would actually only be worth £452 per month by the end, assuming a 2% inflation rate: a big difference, for a small change.
Ensure you are up to date with local and national legal changes
One of the essentials for landlords staying abreast of the market is to be on top of rules and regulation changes which are introduced annually. And 2015 is no different.
At a local level, you need to know about initiatives typically introduced by local authorities:-
Local accreditation schemes
There are lots of these being introduced or already existing, and they’re worth joining. There are, for example, the London Rental Standard and the Essex Landlord Accreditation Scheme, and making sure you subscribe to these or similar schemes will help you stay legal in your area.
In some areas such as Newham, Manchester, Nottingham and Oxford, there are initiatives which either already exist, are being implemented, or are currently under consideration. These especially affect Homes in Multiple Occupation and mean you have to have a licence – however many rooms you let out individually.
A licence typically costs hundreds of pounds a year, or landlords are charged for a five-year period. You can’t let a property legally without one.
Local Housing Health and Safety rating system
This is quite complex to understand, partly as it is interpreted differently at local housing officer level. Basically a landlord has to rent a property which is safe for tenants to live in. It covers matters such as damp and mould, through to carpets which could cause slips and trips, especially if loose on the stairs.
Make sure you know what is required, and if you have a chance to talk to local housing officers at events they run for landlords or via accreditation schemes, this is a good way to ensure you’re aware of your obligations.
Nationally, changes such as the revised immigration checks coming in mean that, if you manage your properties yourself, you need to keep up to speed with what happens to the trial currently being carried out in the West Midlands.
And if your properties are spread across the UK, it’s important to know what’s happening in Scotland, Wales and Northern Ireland as well as England – as the individual countries are rapidly developing different rules and regulations and introducing them at different times.
Finally, for landlords, keeping up with proposed housing policies for 2015’s May election is vital. Many new policies are being put forward, including proposals which will affect landlords and tenants.
These are directly proposed for the private rental sector (PRS), and include changing the rules on Section 21 to prevent retaliatory eviction, where a landlord evicts a tenant for, for example, asking for repairs. There are others that will affect how much you can increase your rent by through proposed ‘rent controls’, and some which even consider increasing Capital Gains tax.
All of these aspects can impact upon your decision to sell, expand or keep your property portfolio the same; as a result, it’s worth spending some time over the coming months to consider the risks and rewards of your property investment, so that you make sure 2015 is a good year for your property and portfolio.