Is Buy to Let Worth It?
There has been a lot of activity and change in the Buy to Let market in recent years, the government has introduced a number of things that have resulted in many people asking the question "Is Buy to Let worth it?"
So we're going to look at some of the pros and cons of being a Buy to Let landlord in today's market, exploring whether Buy to Let is still worth it, or if indeed the golden era of outstanding investment returns for private land lords is over.
Buy to Let is an investment, like any investment, it requires a certain skill set in order for it to perform optimally.
In order to achieve success as a landlord, you're going to need to possess skills in planning, researching and risk management at the very least, otherwise, you can find yourself stressed, over-worked, and no better off financially, as is the case with any investment.
Having worked in the finance industry for decades, I have met a number of Buy to Let landlords, some doing well, some struggling to hold on to what they have and some even on the verge of losing it all. It certainly isn't for everyone, but if it's done right it can yield great returns.
Whilst the government has made the current market conditions for Buy to Let seemingly unappealing, many of the fundamental opportunities of being a landlord remain unchanged, these include:
• Young people are keen to move out of their family home and live independently, but can't afford to buy their own home, so move into rented accommodation.
• More people are moving into existing rental properties due to a shortage of new homes.
• Families separating coupled with higher immigration means a greater demand for housing.
• There is still a great appetite from lenders to fund Buy to let mortgages.
• Rental income and long-term capital values in the right locations are rewarding.
However, there are risks with any type of investment and being a Buy to Let landlord is no different, these are some of the key issues to think about.
• Interest rate rises eating into profits or wiping them out altogether.
• Bad tenants - unpaid rent and damage to property
• Occupancy voids - Your mortgage debt still needs paying, but you aren't seeing a monthly income for your efforts.
• Maintenance costs - Properties require maintenance, it's unavoidable and it costs you money.
• Service charges and ground rents - Additional costs associated with your investment, all reducing your profit.
• Falling capital values - Overpaying for your property, or just poor market conditions could lead to a decrease in the capital value of your rental property.
• Managing compliance with new legislation including rules relating to deposit security, energy efficiency, gas safety, tenancy agreements and quality measures.
The good news is that there are steps you can take to combat most of these risks.
Making sure you aren't over-borrowed on your properties and maintaining a healthy margin between the mortgage payment and rental income can help limit financial damage caused by interest rate rises, keeping a buffer fund of accessible cash is also a good defensive measure.
Bad tenants can be avoided with proper vetting processes, deposit schemes and insurance. Close control of your tenants, ensuring rent is paid on time and all the time is crucial.
Occupancy voids can be minimised by conducting thorough research about your target location and offering a good quality, clean property.
Decrease the risk of maintenance costs having a substantial impact on your long-term investment by spending money on the right things from the start, worry less about the decoration and more about the essentials.
Buying flats and some houses can give you a ground rent and sometimes a service charge, make sure you know what the terms and likely future costs are. How long is the lease and will it need to be renewed? There will be costs for renewing and extending a lease. You can avoid service charges and ground rents by buying freehold property.
New legislation has to be considered and where changes to your investment's structure may be necessary, these need to considered and made in good time.
There are a number of new changes which have come in recently for landlords that own 4 or more properties, this in addition to changes in Stamp Duty Land Tax and tax relief on interest charges mean there is now more to be considered and planned for before entering in to the market, that's why it's so important to get good quality tax and finance advice from the start of your journey.
There's a growing trend right now of people looking to acquire rental property through a limited company rather than owning it personally, you should ask your accountant or tax adviser if this is the right choice for you.
Historically, declines in property value are short-term trends, and generally speaking, the value of property tends to increase over the longer term. It is worth remembering that while the past is easy to review, the future may well be harder to read. It would be a very brave person to say for sure what the future holds, so the best thing to do is plan for the worst and hope for the best.
These are just some of the pros and cons of being a Buy to Let landlord, whether it's for you or not depends entirely on your current circumstances and how well you manage your investment.
Buy to Let certainly isn't dead and there is still a great potential to make a successful return on an investment, if you can ride out the bumps in the road, plan for the long-term, buy the right properties and encourage quality tenants to stay, then wealth seems to follow.
People don’t use the phrase "safe as houses" because property is a bad long-term investment.