George Osborne's recent Budget will be a further unsettling factor for the buy-to-let market, a market already hit hard by changes in tax and regulation. It should be remembered, though, that recent tax allowance changes aren't instantaneous and will not be fully implemented until 2020. Some have suggested that we will see an increase in rents; however, I would suggest that if higher rents were possible we would already see them in place.
Ultimately, I do not see this as the death knell to the buy-to-let market some have been predicting. This market has enjoyed a recent surge due to the return of available loan funding. Not every landlord is thinking purely in terms of yields in any case, with many taking a long-term view and looking for capital growth.
On the plus side, demand for rental property is currently high, and in certain areas and sectors, this is unlikely to change significantly in the short to medium term. The cost of borrowing is still low and there are still good investment opportunities available. If you do make the decision to enter this competitive market, the two key words to keep in mind are "research" and "budget".
The key to any good business is knowing your market and understanding sound business practice. The buy-to-let market is no different. Research and learn about your market; investigate the difference between gross and net yield; understand the purpose of your investment, i.e. yields or capital growth; and keep in mind the standard investment caveat "the bigger the return, the bigger the risk".
Make sure you know where the potential "voids" (periods without rental income) are likely to be and their impact on your investment. Research where to invest, the difference in the sectors and their associated costs and risks. Make sure you understand how cash flow can affect your business. Don't underestimate the potential for change.
The following should be considered but it is not an exhaustive list:
- Tax can come in all forms. The recent tax changes announced by George Osborne, whilst significant to some, form only part of the picture;
- The cost of borrowing can change and, whilst unlikely, this can be fast and significant;
- Regulations and statutory requirements are revised constantly and you will have to keep yourself up-to-date with these;
- Demand for rental property ebbs and flows as we have seen with the recent recession. This can have a dramatic impact on both capital value and rental return;
- The amount and style of the developments in an area might shift demand away from your property;
- The weather can impact on your property. General weathering might be anticipated but flash flooding or storm damage can be an unexpected cost;
- Insurance companies can alter their policies, premiums and excess payments from year to year;
- The quality of the tenants and how they treat the property can increase costs and a few months' non-payment of rent to some could be catastrophic;
- Professional advice can be invaluable, however, over time fees can increase. These include legal costs of purchase, legal advice on leases and evictions, accountancy advice, etc;
- HMO requirements may change and the associated costs of preparing a property may increase;
- The number, style and cost of safety checks may change;
- Changes to the demographics and employment availability of an area will influence this market; and
- Even the overall economic climate can have an unsettling effect on this market.
Here I would note that, if you are new to the market, a good letting agent can make a huge difference to dealing with these issues and minimising voids, particularly if you are relatively remote from the property.
Assuming you have done your research, it's time to get serious and budget. Think of this as a business. Budget for everything, and once you have done your sums, do not go above your budget and do not overspend on your repairs or refurbishment works. Any overspend will directly impact on your return and profitability.
Your deposit will be much smaller than your global budget figure, as there are a number of factors that will eat into your funds, many of which will be required long before you receive your first monthly rent.
Again, whilst not exhaustive, the following guide may assist:
- Purchase costs: These include the deposit (25% minimum required); legal fees; surveys including roof and specialist reports (if applicable); and mortgage arrangement fees;
- Ongoing costs: These include mortgage repayments; management fees; tax; certificate renewals; mutual repairs/factoring charges; a programme of maintenance to your property; insurance; contingencies; and
- Preparing your property for rental: Energy Performance Certificate; Electrical Installation Condition Report; Land and Buildings Transaction Tax (LBTT); smoke alarms; HMO licence (if applicable); furnishing the property; decoration required; legionella testing; portable appliance testing and gas safety certificate.
Most of these costs are self-explanatory, but the difficult one is contingencies. It is here that you must build in a cushion to allow for unexpected costs - from the failure of the boiler to changes in the tax system. On the income side of the equation, be sure to allow for an appropriate period from purchase to leasing when there will be no income and, remember, over time there may be other voids. I would emphasise here that, whilst the tax on interest payments has changed, there are numerous other items that can be offset against tax, so appropriate advice should be sought.
Look at the long term
The buy-to-let market can still be a really good investment option, even with the Chancellor's recent announcement on tax allowance changes, provided you have properly researched the market and fully budgeted to include a contingency fund. You must be prepared to take a long-term view, however; keep a business head at all times and, last but not least, never overspend!