Challenges of being a landlord remain
Unlike most other investments, there’s a hands-on, human element involved in buy-to-let. This can appeal more to some investors than others.
Many landlords relish the opportunity to manage a property, especially if they’re retired and have spare time.
Others won’t want to be heavily involved, which could be because they’re thinking of investing in property in a potentially more profitable part of the country, away from their home.
In these cases, they’ll enlist the help of a managing agent in the local area.
Docherty says: “A good agent will manage any problems as they arise, source tenants and complete all necessary checks and paperwork on your behalf. For an additional fee, they’ll take care of repairs and handle the rent payments for you as well, requiring minimal input from you as the landlord.”
The catch, of course, is the need to pay an agent, which could take a sizeable chunk (often up to 20%) out of rental income.
It depends on the investor’s appetite for involvement – they could, perhaps, instruct an agent to deal with finding tenants and handling the administration of getting them in, but do any repairs and maintenance themselves, which will increase overall rental profits.
But Powell doesn’t think that higher cost should put anyone off. “It’s safe to say that the market has changed beyond recognition from the early 2000s. There’s much more regulation, and the industry is operated on a much more professional basis than before.
“However, it’s important to note that this doesn’t mean it’s a ‘no-go’ for landlords, just that – as with any professional service – the experience and knowledge of a good managing agent is worth paying for.
“This is especially true when it comes to vetting and dealing with tenants. Getting things right at the outset is crucial and this is done with thorough referencing and correct tenant selection.”
By getting higher quality tenants in, it can reduce the risks to the property and drop the overall costs landlords might face from damages, or periods when the property is unoccupied (and thus making no money).
“[Finding the right tenant] can help minimise the chances of unwanted wear and tear, financial complications and difficulty enforcing legal proceedings in an event of breach of tenancy,” adds Powell.
Is property the right investment for you?
“There are many factors that can influence your long-term property investment plans,” explains Powell.
“For example, whether your investment is subject to a mortgage, how much income or profit you wish to draw from it and your exit strategy for releasing the equity later in life – these can all affect your decision making.”
He says it’s particularly important to stay on top of changes in rules governing landlords, as these will have a direct effect on potential profits.
Powell points out things like Capital Gains Tax (CGT), Income Tax, Stamp Duty and Mortgage Interest Relief have changed in recent years, affecting the amount landlords will need to pay throughout the process of owning a buy-to-let property.
For instance, while CGT has slightly dropped for some landlords recently, they’ll still need to pay an additional 3% in Stamp Duty when buying the property, and can only get tax relief of 20% on their mortgage interest payments.
This isn’t set to change any time soon, despite calls for a reform, meaning potential profits from rental property will remain lower than before the legislation came in.
There’s also the possibility of changes to the way landlords are required to act – the Renters Reform Bill was set to make big changes to things like tenancy length and eviction powers, but now looks unlikely to become law, meaning a less stable outlook for future property investors.
The current higher interest rates set by the Bank of England will also present challenges for landlords, and not just in the shape of more costly mortgages.
Buy-to-let investments are typically judged based on their ‘yield’ – the amount of income they generate in relation to the initial outlay.
With savings accounts offering around 5% interest at the time of writing, it asks the question of landlords over whether property is the right risk for them, as a ‘good’ rental yield is roughly considered at around 5-9%.
“With higher interest rates making bank saving rates more attractive, investors are generally looking for higher yields than previously – and these are not always easy to come by,” Powell points out.
He says, however, that while multi-occupancy lets and short-term ‘holiday style’ rentals can potentially generate higher yields, they could be seen as riskier as legislation changes. For instance, new rules will make it harder to convert a house to a holiday let in the future.
“Generally, property investment should be considered a long-term strategy and those looking for lower risk may settle for slightly lower returns but with steady capital growth from carefully selected homes in good geographical locations,” adds Powell.
Key takeaways
- Property investment offers the draw of regular monthly income and the potential for the property to grow in worth over time.
- Property is a hands-on investment and professional advice can be invaluable.
- Careful attention must be given to your long-term property investment plan – including how you’ll access the equity, if you need it in later life, and being aware of any tax bills your purchase may bring.
