Is the buy-to-let market losing its value in the face of rising interest rates and other economic and political pressures? Steve Parry, director of Q Commercial Finance, looks at some of the issues.
For years, the buy to let market has offered investors a solid financial return for their hard-earned cash.
Across the country some 2.65million of us are landlords, using investment in bricks and mortar to safeguard our futures. Just last year Q arranged around £12million of residential buy to let mortgages from our offices in Wellington and Shrewsbury for a wide variety of investors looking to make their money work as hard as possible.
But a raft of economic and political changes means some of the shine may be coming off the buy to let market.
You don’t need me to tell you about rising interest rates and the impact they are having on all our finances, but they are just one of a range of factors which are putting the squeeze on buy to lets.
A Capital Gains Tax raid next year will see the exemption bar lowered to just £3,000 – costing the average landlord around £2,600 if they sell a home that has shown any significant increase in value.
A rental reform act will give new rights to tenants to challenge landlords on rents and substandard housing, while changes to the EPC rating system could also make renting out some homes more costly.
Throw in changes to personal taxation, a falling property market, the need for higher deposits and an energy crisis which is making everything much more expensive, and suddenly the buy to let market is looking a lot less attractive than it was.
Indeed, I can tell you from my own experience, that having looked at buy to let as a possible way of investing some spare cash just recently, I walked away. It simply was not worth the effort and would have tied up my investment for too long with too little in the way of return.
Look at the following example – based on an actual property – and you might be able to see what I mean.
The property – a two-bed semi in Telford – would have cost £150,000. The minimum deposit on the property would have been £37,500, leaving me to find a mortgage of £112,500.
Taking a 25-year mortgage on a typical five-year fixed rate deal, my ballpark monthly repayment would have been around £743. Monthly rent – based on a generous six per cent yield – would have been £750, ten per cent of which would go straight to the managing agent.
Add in insurance at £20/month, the annual boiler service and maintenance and other costs, and there’s not a huge amount of money to be made. Then, if I leave my investment to mature and house prices go up, the new capital gains tax rules clobber me for a big slice of it and I might face even bigger costs bringing the house up to new minimum EPC requirements.
Of course, rents may well increase as demand for rental properties continues to grow, which will improve the situation, and some of the tax issues don’t apply if the property is owned under a limited company
But all in all, now is a good time to consider other options for making the best use of your cash.
There is plenty of choice.
You might prefer to have a go at property development. Developing can bring some handsome returns, particularly if you don’t mind rolling your sleeves up and getting stuck into some of the work yourself to keep costs down.
Joint Venture property investments – where you team up with other investors – can also provide attractive returns over a relatively short period, potentially between 18 months and two years.
Buying refurbishment properties for renovation is very much in vogue too – turn on your TV and see how long it takes before you find a programme about ‘flipping’ properties to see what I mean.
And, of course, if property isn’t really your thing, there’s a world of other investment options which might be worth considering.
Whatever you decide, get some professional advice. Here at Q we can talk you through all the options, show you how they fit together and what the outcome might be for you. We can discuss pros and cons for each and help you arrive at the investment decision which best matches your need for a return against your aversion to risk.
Will you be grateful you turned to a professional financial expert for advice?
I’d bet the house on it.