What five things in the future could affect your buy-to-let returns?
Property expert Kate Faulkner looks at the five factors that can make or break your buy-to-let investment.
Buy to let is a form of financial investment - and one that you lock your money away in for a long time, normally 15-20 years.
During that period of time you are likely to have some great years and some not so good year.
As a result it's worth knowing in advance what you can do to mitigate buy-to-let investment risks that can help make or break your investment in property over this period of time
House price fluctuations
In an ideal world, property prices would just gently increase by above inflation every year. If wages then rose in line with inflation, we would have a much healthier property market.
Interestingly, when you average out property price growth from 2000 to 2014, property prices do achieve this. Their average growth is around 4-6% per year in most areas across the UK, although higher in London. Unfortunately this average growth rate was made up of one year of astonishing 20-30% price increases, coupled with a few years when prices fell by 20% or more.
So as an investor, WHEN you buy and sell your property does matter.
To mitigate the risk of price falls, it is always worth keeping a reasonable deposit level. According to the Association of Renting Letting Agents (ARLA) Buy to Let Index, this is around 40% of the property’s value. This helps you to be able to afford to finance your property when prices are rising and even if they fall.
Cost of regulation and enforcement
Whoever forms the new government in 2015, they are likely to continue to increase the rules and regulations landlords have to abide by. This does help to protect tenants, but at an increased cost to good landlords and letting agents.
One of the main areas that landlords tend to miss is abiding by the Housing Health and Safety Rating System (HHSRS). This includes making sure a property is warm, free from damp and cold and the gas and electrics are safe.
Tenants are becoming more aware of their rights to a home which is well maintained, and if they report you to the Local Authority for not doing so, the Local Authority is likely to come out and check your whole property complies, which in some cases has ended up with landlords having to make tens of thousands of pounds’ worth of repairs.
To help make sure you abide by ever-changing laws, join a landlord association, Local Authority accreditation scheme or use a self-regulated letting agent such as National Approved Letting Scheme (NALS), Royal Institute of Chartered Surveyors (RICs) or Association of Residential Letting Agents (ARLA).
Most tenants will take great care of your property, but unfortunately there will be some that won’t. In some cases too, a tenant or a friend they have may get hurt due to your property, such as an outside wall falling on someone. Finally leaks always happen at a time that is most inconvenient for everyone.
One way to protect yourself from these horrors is to make sure your insurance is fit for purpose. Protecting yourself against accidental and malicious damage and having public liability insurance is a great way to do so.
Energy efficiency of your Buy to Let
From 2016, tenants will be able to request energy efficiency measures on your rental property – and unless there is very good reason, you won’t be able to refuse them. By 2018, it may not even be legal to rent out properties which have Energy Performance Ratings of F and G (unless listed).
With energy bills likely to continue to rise in the long term, and with the gas and electricity probably being the next highest bill for tenants after their rent, it is worth making sure your property at least meets the ‘average’ rating of a ‘D’ to make sure you can always legally let it out.
When you buy a property to invest in via buy to let, understanding the tax you pay on rent and the tax you pay if you want to sell the property – or pass it onto your children - is essential. Although there are some tax saving measures you can take, inevitably you will have to pay something.
The problem for landlords is taxes can change twice a year - with each budget. Sometimes this can work in your favour such as an increase in your personal allowance; and of course the stamp duty changes in December 2014 are another good example. A property worth £126,000 would attract a 1% tax on the whole property (£1,260) whereas now it’s 2% on the amount above £125,000, ie £1,000 x 2%, just £20. That’s the good news.
Over the next few years the tax buy-to-let investors pay is likely to increase. For example, the Liberal Democrats want to increase Capital Gains Tax, Labour are suggesting that landlords who don’t maintain their properties will be taxed more, the Conservatives are proposing to raise the inheritance tax threshold and the Greens want to take away the tax you can deduct from mortgage interest payments, which will definitely affect your buy-to-let returns.
How do you protect yourself from these changes? Secure a good property tax expert – which is not necessarily the same person as your accountant. And, if you intend to pass your property portfolio to family, make sure you have inheritance tax planning and an up-to-date will.