Is talk of the death of buy-to-let (BTL) premature? Do we all need to get out of BTL fast – or is it still a great opportunity for the small guy to grab a fair share of the wealth pie?
To understand the current threats which face BTL it is necessary to dive into a bit of history. That should give an understanding of the bigger picture – the background to the current predicament.
1. The old days
Back in the nineties if you wanted to buy a property to rent, you had to sweet talk your bank manager and offer a chunky deposit; at least 40% in most cases.
With the new optimism signposted by the election of Tony Blair in 1997 and a marked political emphasis on growth, the banks increasingly jumped on an opportunity to make money.
DEPOSITS WHICH BY NOW HAD FALLEN TO 25% AS STANDARD, KEPT FALLING – TO 15%.
BTL mushroomed and it was the glory days for mortgage brokers who searched every nook and cranny to find people able to qualify for a mortgage, no matter how tenuously.
Why wouldn’t they? Lenders were offering them great commissions and asking very few pertinent questions of borrowers.
Before the credit crunch in 2007, 100% mortgages were available. I even heard of lenders offering the full amount to buy plus money on top to carry out improvement works – 100% plus mortgages.
By that time it was clear the party was over.
In their greed to maximise their profits and keep their shareholders sweet, banks around the world – as we all know now – had completely lost it. That was confirmed in September 2008 when Lehman Brothers filed for bankruptcy and the full scale of the world financial crisis was exposed.
2. Credit crunch
Putting it simply, the credit crunch nearly destroyed the world financial system. It brought us to the edge of a 1930s style depression.
People think politicians are dumb, but they are not – at least their policy advisers are not. Consequently, it is now patently clear that the UK government will not knowingly risk a repeat of the credit crunch.
BTL BORROWERS MUST NOW PROVIDE A 25% DEPOSIT AS STANDARD. AFTER THE CRUNCH, SOME LENDERS WERE REQUIRING DEPOSITS OF 40%. I AM CONVINCED THAT 40% IS THE SORT OF FIGURE POLICY MAKERS WOULD LIKE TO SEE AS THE NORM GOING FORWARD.
Why? My theory, which I have heard confirmed here and there, is that our government wants to eradicate any possibility of the banks collapsing again. Understandably.
One limb of this policy – and one limb only – is to shift debt away from banks and onto property investors by ramping up the deposits they must provide – by increasing their exposure in the event of a property price crash. This would apply to all property investors, not just BTL investors.
3. Bigger deposits
If every property investor had equity of at least 40%, lending institutions would be pretty safe – from that particular area of risk.
In the last house price crash, the worse year was in 2008 when prices fell 14.9% (Land Registry figures).
2007 – rise 7%
2008 – fall 14.9%
2009 – rise 4.4%
2010 – rise 0.4%
2011 – fall 1% (since 2011 prices have risen)
These figures indicate that a 40% buffer would have been ample in the last house price crash.
In fact, the 15% standard deposit which existed in 2008 did not result in catastrophe, but only because of a rapid fall in interest rates and unprecedented quantitative easing by the Bank of England.
Another line of attack by the government is in relation to “stress tests.” Since January 2017, lenders have had to carry out more stringent affordability tests when deciding whether to lend.
From September 2017, “portfolio landlords” (those with 4 or more properties) have been subject to a whole array of additional underwriting requirements – making it harder and more time consuming for them to secure mortgages.
4. Attack on several fronts
It wouldn’t be so bad if BTL landlords were only being attacked from the mortgage angle. The attack is coming from several other directions including:
- Never ending regulatory or compliance requirements – there is a very long list of these and fairly recent additions include the need to provide Energy Performance Certificates and to establish the ‘right to rent’ of tenants – aimed at identifying illegal immigrants.
- Stamp duty increases – since April 2016 BTL landlords have to pay an extra 3% stamp duty on their purchases.
- Taxation game changer in the form of ‘the Section 24 tax’ or ‘turnover tax’ – from the 2017 tax year, BTL landlords who don’t operate through a limited company will progressively lose the right to deduct mortgage interest before calculating their profits – paying more tax as a result.
- Growth of landlord licensing – an increasing number of local authorities are requiring landlords to be licensed before being able to let property in their area. Landlords have to pay a fee and, as this is a good money-earner for councils, it is reasonable to expect most councils to bring in landlord licensing eventually.
- Growth of property licensing – from 1st October 2018 the number of properties needing to be registered as HMOs will increase as licensing requirements are widened. Landlords affected will incur the expense of having to adapt their buildings to meet the new safety requirements.
5. The move to professionalism
These developments can be summed up by the “p” word – “professionalism.”
It is very clear that the government wants to “professionalise” the BTL industry, imposing greater and greater qualification requirements on landlords as well as increasing their duties and responsibilities to tenants.
This is a great way to get rid of bad landlords and boost government’s electoral appeal in these tenant-friendly times. However, it will also:
- Make it more difficult for new landlords to enter the market
- Force many smaller landlords to sell up (there is already evidence of this)
- Force individual landlords to operate through companies
- Fuel the growth of large corporate landlords.
IN THIS EVER MORE CHALLENGING ENVIRONMENT, IT IS OBVIOUS THAT ONLY THE MOST KNOWLEDGEABLE, COMMITTED AND DETERMINED BTL LANDLORDS CAN SURVIVE AND THRIVE.
6. Landlord complacency
I am genuinely disheartened when I talk to some BTL landlords. They seem uninterested in or oblivious to what is happening and what is coming. They have made large capital sums over the last decade or more and seem to consider themselves invulnerable.
They are not setting goals and objectives for the uncertain future, not planning for the financial and tax challenges ahead. They have no or no adequate budget, business plan or management accounts.
Naively, some of them think they will simply be able to increase rents to recover their reduced profits as a result of the Section 24 tax changes. They have no plan B, never mind a plan C. There could be a perfect storm brewing on the horizon, but they seem unaware of it.
They achieved their success under the old rules but are blind to the fact that the new rules are designed by government to reverse their success – fast, ruthlessly and effectively.
7. Landlords who need to quit
BTL is getting harder to get into, and harder for those already in to make a profit. But it remains an attractive viable option for many.
However the threats are clearly growing and cannot be ignored. Things seem destined to get worse, not better.
In the new BTL regime, landlords who seriously need to look at quitting include those who are not ready, willing and able:
- To take stock of their position, set goals and make plans which are regularly assessed reviewed and amended for ongoing success
- To gain knowledge by attending courses, reading blogs and books, listening to podcasts, and attending property meet-ups
- To engage a property coach/mentor or other property experts for help with profitability, strategies and accountability
- To engage professionals such as solicitors, accountants and tax advisers for landlord-specific forward-planning advice
- To assess and keep assessing the profitability of existing strategies and the potential of new strategies
- To plan for the future with a Plan A, B and C
- To become a property professional.
The successful BTL investors of the past were the fearless ones; the successful ones of the future will be the smart ones.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com