Over recent years, as successive governments have tightened lettings legislation and increased the tax burden on landlords, some with investment properties have reduced their profits. And now, with the cost-of-living crisis, mortgage rates at their highest level for well over a decade and the Renters (Reform) Bill making its way through Parliament, some landlords are understandably beginning to wonder if it’s still worth having a rental property.
That decision is a very personal one, which will depend on the following:
Your cash flow: month on month, does your property still deliver the profit you want or need?
Your financial objectives: are you dependent on monthly profit to supplement your income, or have you invested more for long-term gains?
What would you do, and how would you secure a return on investment if you sold your properties?
If you went into buy-to-let with the intention of holding the property for the long term, it’s likely that the property will still deliver good returns over time versus or alongside other types of financial investment. So, if you’re not dependent on a certain level of monthly profit, it may just be a case of riding out any short-term reduction in cash flow.
How are prices and rents doing?
As far as rental income is concerned, the figures are currently robust. Average rents continue to rise in most areas, and year-on-year increases have again hit record levels since the series began in 2006.
For the 12 months to May this year, ONS data shows that England (excluding London) is +4.7%, Wales +5%, Scotland +5.4%, and N.Ireland +10% (year to March 2023).
And data from Zoopla shows that rents for new lets increased by 10.4% in the year to April (9.1% excl. London).
But will and can this level of growth continue? Average UK rents as a percentage of earnings are now at their highest level for more than a decade (28.3%, versus a 10-year average of 27%); nevertheless, more than half of renters are reporting that paying their rent is ‘somewhat’ or ‘very’ easy, with only 15% saying that it’s ‘very difficult’.
In addition, spending 30% of earnings is considered affordable, so ‘on average,’ there is still some room for rents to rise more, but this is very location specific.
As a result, we expect rental growth to slow but certainly not stop – particularly given the ongoing chronic supply shortage versus demand in most of the UK.
Looking at average property prices, although Zoopla reported in June that sellers had to accept offers that were, on average, 3.8% below the original asking price, we have to view that in the context of the excellent house price growth that we’ve seen over the past few years.
Rightmove has reported that asking prices went up by 6.3% in 2021 and by another 5.6% in 2022, and their data for the last five years shows the average asking price has increased from just under £310,000 in June 2018 to around £375,000 in June 2023.
So, even with prices predicted to fall by up to 5% by the end of 2023, most landlords should have seen good enough growth before the pandemic for that not to be an issue. And, of course, property investors have to appreciate that the market has cycles and doesn’t just keep going up without a break!
So, in terms of rental income and capital appreciation, the figures look good, but what’s undoubtedly proving an issue for many landlords is increased expenditure. General inflation means the cost of maintenance, repairs and other goods and services relating to the operation of rental properties have risen, and those who have buy-to-let mortgages will either already have seen monthly payments increase or will do when they next refinance.
Around 40% of landlords own all their properties outright, while 24% own some outright and others with a mortgage. Only a third have mortgages on all their properties. The same report suggests that the average non-portfolio landlord has mortgage borrowing of around 55%.
In comparison, it’s just 44% for landlords with four or more properties - and with that kind of equity, landlords should be able to access relatively reasonable interest rates. And our own Landlord tracker revealed in June that Landlords generally remain optimistic about the market: 68% plan to maintain their portfolio, and 6% plan to expand it.
So, broadly speaking, even though mortgage rates are currently rising, the majority of landlords may not find their profits too badly impacted.
What about the Renters (Reform) Bill – is it bad news for landlords?
Our view is that the vast majority of landlords, who already let in a very professional manner and look after their property and tenants well, shouldn’t be negatively affected as and when the Bill passes - assuming the contents don’t change much.
And this has been reinforced by our own Landlord research, which suggests that “The majority said that the Renters Reform Bill does not affect their approach to property investment. Asked, ‘Will the bill change your approach to property investment?’, 40% said ‘no’, compared to 33% who said ‘yes’ (27% are currently undecided).”
There will be a fee for signing up to the Ombudsman and the new portal, but the Government has made assurances this will be ‘proportionate and good value’. And we don’t anticipate the other changes – even the removal of Section 21 evictions – will make a considerable difference to landlords, who rarely choose to evict a tenant without a good reason, and that’s still going to be possible under strengthened Section 8 grounds.
But if you are still unsure whether to hold on to your rental property/ies or sell up, here are five steps that should help you make a decision:
Check your cash flow. Put together a detailed breakdown of all your ongoing expenditures – and for annual costs such as the gas safety check, average the cost over 12 months – and check that your property/portfolio is still making money.
Know the property’s current value. Check what capital growth you have had recently, as this may compensate for any loss in income or monthly profit.
You can get a rough idea by looking at the price of similar properties online, but for a much more accurate market valuation, just get in touch with your local branch, and we’ll be happy to visit and appraise the property.
Work out your break-even point based on 7-8% mortgage rates. Currently, two and five-year fixed rates are available at around 5-6% (int. only), based on 65-75% LTV, but reverting to a standard variable rate of 8-9%.
So calculate how much you would be paying with your current level of borrowing if rates rose to 7-8% - would you still be making an acceptable level of profit, or could you finance any losses until mortgage rates fall? Two-year and Five-year comparisons can be made here.
Could you refinance at a lower LTV? If your property has increased in value significantly since you last remortgaged, you may be able to secure a better interest rate by refinancing at a lower LTV. That could mean your mortgage costs stay about the same or fall, even if your borrowing doesn’t change.
Is the property still meeting your investment objectives? For example, if your investment priority was capital growth so you could realise a lump sum for your retirement, as long as the property still covers its costs, there may be no pressure to sell.
Of course, regardless of what’s happening to average prices and rents across the UK, local markets can vary wildly – even from one end of town to the other.
So, before making any decision, we’d recommend you speak to local property experts, to understand exactly what’s happening in the immediate area and what we believe is likely to happen to the rental market over the coming months.
