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Average Buy to Let makes a return of just £2k a year pre-tax

The true cost of a being a landlord: Letting platform Howsy has revealed how the profitability of the buy-to-let sector is being squeezed due to the hidden costs of being a landlord, coupled with the financial penalties handed down from the Government via changes to stamp duty tax.

In recent times, the buy-to-let market has been considered a good investment for those with the financial means to operate within it, leading to a number of Government changes to dent this profitability through initiatives such as an increase in stamp duty tax.

Despite this, landlords are still considered to be ‘raking it in’, but Howsy has found that the average landlord is left with just £2,000 from an annual return of £13,000 once the hidden costs of being a landlord are paid for.

However, with the introduction section 24 mortgage interest relief restrictions and depending on the landlord’s tax status it is easily possible for this to be taxed into a loss!

The research shows that the initial start-up costs of Stamp Duty Tax (£6,663) and agency fees to find a tenant (£811) cost the average landlord £7,475 and that’s before the ongoing costs are considered.

According to a recent survey, the average landlord experiences 23.75 days of void periods a year during a tenancy, that’s an average of £535 a year.

What’s more, 73% of landlords buy with a mortgage and each and every year will see £6,921 paid out in interest as a result. Couple these costs with an additional £1,622 in agency management fees, an average annual maintenance and repair bill of £2,077 and you’re talking £11,147 per year.

In a worst-case scenario, UK landlords may also find themselves forced to stump up for additional unforeseen costs, such as the legal process to evict a tenant. While this doesn’t happen to everyone, there is a one in 500 chance that you will have to pay for bailiffs to evict a tenant from your property.  

What’s left?

Based on an average annual rental income of £8,112 divided by the average B2L property cost of £183,278, the average yield available is 4.4% – that’s an annual sum of £8,119.

Over the last decade, the capital appreciation of bricks and mortar has also averaged an increase of 2.85% a year, £5,223 in monetary terms. That means B2L landlords are seeing a return of £13,343 on their investment.

However, leaving start-up costs and unforeseen events out of the equation, once the average UK landlord has paid the ongoing costs associated with a buy-to-let property each year, they’re left with a profit of just £2,140.

Cost HeadingsCost Amount (£)
One-Offs Costs:£7,474.54
Ongoing Costs:£11,147
Average Annual B2L Return:£13,287
Average Annual B2L Return – Ongoing Costs£2,140

Costs Explained…

Cost HeadingsCost Amount (£)Notes/Sources
One-Offs Costs:
SDLT£1,165.00Initial stamp duty owed – Gov.uk
SDLT second home penalty£5,498.34Additional 3% – Gov.uk
Agency fees (tenant find)£811.20The minimum tenant find fee according to Which?
Total£7,474.54
Ongoing Costs:
Void periods£52723.75 days a year on average according to GoodLord
Mortgage Interest£6,920.7373% of B2L landlords have a mortgage according to Which?
Agency fees (management)£1,622.40The average annual management fee according to Which?
Maintenance & Repairs£2,077.00Average cost according to Pennington
Total£11,147
Positives:
Basis:
Avg annual rent£8,112Monthly average rent of £676 multiplied by 12
Avg B2L mortgage amount£132,075According to UK Finance
Avg house price£183,278Average B2L price according to Money Supermarket
Avg LTV72.06%
Avg equity£51,203
Return:
Annual Yield %4.4%Average annual rent divided by average B2L house price
Annual Yield ££8,064Average B2L house price multiplied by 4.4%
Capital appreciation per annum %2.9%Based on average property price change per annum over the last decade
Capital appreciation per annum ££5,223Source: ONS
Average Annual Return£13,287
Ongoing Costs£11,147
Final Annual Return£2,140

Source: Property118

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Further rule changes would damage BTL market

Regulation in the mortgage market is helpful but any more interference may create problems for brokers and their clients, delegates at the FTAdviser Financial Advice Forum in London were told.

In a panel session entitled “Buy-to-let: how professional landlords can overcome tax and legislative hurdles”, Andrew Montlake, director of Coreco, and Martin Stewart, director of London Money, said the current regulatory environment was generally positive for clients.

Mr Stewart said: “Regulation is nothing for people to be afraid of. A good broker with a good moral compass will always do a decent job for their clients. I don’t mind regulation per se.”

Mr Montlake agreed, saying: “Regulation has created an environment where good brokers can demonstrate their professionalism. This shows the public you are responsible and generally I think we are in a good position.”

But he cautioned: “I don’t want more regulation for the sake of it. If it does get rid of the amateur landlords, the charlatans, the so-called ‘dinner party property investors’, then I am all for regulation that helps make buy-to-let a more professional market.

“What I fear is there may be more changes ahead, that makes things more complicated and doesn’t really focus on what the client really wants and needs.”

Both men agreed there had been a change in the mortgage market, largely driven by government tinkering with stamp duty and tighter controls to weed out bad landlords.

This was visible in a slowdown in new buy-to-let enquiries for London Money and some delegates in the room.

Mr Stewart said he was pleased to see more “amateurs” leave the market and free up housing for first-time buyers but he felt regulation could do more to raise standards further.

However, while there has not so far been a glut of housing dumped back on the market by disgruntled buy-to-let investors, a “perfect storm” could be caused due to Brexit uncertainty, new governments and unknown elements that might see more of an exodus in 2021.

Most buy-to-let lenders are regulated by the Bank of England’s Prudential Regulation Authority (PRA).

In 2017, among other regulatory changes that endeavoured to take some of the heat out of the buy-to-let market, the PRA implemented rules on how much can be lent to potential buy-to-let investors, based on how much rent was being charged.

The rule is that when making a loan, the rent must cover at least 145 per cent of the mortgage payment when the interest rate is at least 5.5 per cent.

This followed the government’s reform of the rules governing BTL, which included a 3 per cent stamp duty surcharge for second homes and cuts to landlord tax relief.

As some delegates in the room commented, higher taxes and a lack of upward movement on rents – especially in London – have meant some landlords with smaller portfolios are not making enough of a profit to continue as a buy-to-let investor.

When asked what their clients are doing, some said their clients were selling, going outside of London, creating limited partnerships or getting their residential property exposure through property funds.

“We are certainly having to be much more holistic now as brokers”, said Mr Montlake. “Professionals can really add value to clients.”

By Simoney Kyriakou

Source: FT Adviser

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Fixed rate buy-to-let mortgage rates continue to fall

The biggest fall in monthly costs was for five year fixed rate buy-to-let mortgage offers for 50 per cent of the value of a property, the data from Property Master’s August report shows.

The report, which tracks the cost of mortgages from 18 of the largest buy to let lenders, found that the monthly cost of this type of mortgage fell by £13 per month July to August and five year fixed rates for 65 per cent of the value of a property fell month on month by £5.

However, five year fixed rates buy-to-let mortgage at 75 per cent of the value of a property was one of only two types tracked to show an increase, up £29 per month.

The report says that this may reflect the attractiveness of five year fixed rate products to landlords struggling to meet new affordability regulations.

The cost of two year fixed rate buy-to-let mortgages for 65 per cent of the value of a property fell by £2 per month and for 75 per cent of the value of a property by just £1.

Two year fixed rate buy-to-let mortgages for 50 per cent of the value of a property increased by £4 per month.

Angus Stewart, Property Master’s chief executive, said: “There have been a slew of rate cuts amongst lenders along with new offers being launched that are looking very attractive to landlords wanting to expand their portfolios or needing to remortgage.

“Good news on rates may well entice some landlords back into the market by helping them offset the many recent regulatory and tax costs they have been struggling to absorb.”

Source: Simple Landlords Insurance

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Half of current landlords would not go near buy-to-let now

Half of current landlords would not enter the buy-to-let market for the first time now.

Rather than invest, they would stay out of the market, citing government intervention, regulatory changes, economic uncertainty and a lack of returns.

Out of 738 landlords asked for their opinions, 40% said they would still invest in buy-to-let, saying it provides better returns than other types of investment and they believe property can still deliver capital growth.

Only one in four landlords said they intended to increase rents over the course of the next 12 months, while a majority of landlords believe they are renting out at least one of their properties below market rental value.

Half (51%) called for the Government to U-turn on policies designed to squeeze private landlords – specifically, the 3% Stamp Duty surcharge on the purchase of buy-to-let properties, and the phasing out of mortgage interest tax relief.

The landlords were taking part in a poll commissioned by mortgage lender Foundation Home Loans.

By ROSALIND RENSHAW

Source: Property Industry Eye

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Landlords seek u-turns on tax relief

A majority of landlords believe future government u-turns on the increase in stamp duty and cuts to mortgage interest tax relief could provide a “significant stimulus” to the buy-to-let and private rental sectors, latest research by Foundation Home Loans reveals.

Over half (51%) of landlords argued that both measures to be addressed in order to help build greater confidence in the sector.

Jeff Knight, director of marketing at Foundation Home Loans, said: “It doesn’t seem surprising that the two biggest impacts on landlords over the past five years – stamp duty increases and cuts to mortgage interest tax relief – are seen as the biggest factors holding back the market.

“Clearly, such measures were always going to have a real influence and they have undoubtedly resulted in a large number of so-called amateur landlords either selling up, or not being able to go ahead and add to portfolios.

“We now have a sector which is much more in line with professional and portfolio landlords; utilising limited company vehicles to ensure they retain their tax relief, and where appropriate, adding to their portfolios via these structures.

“Because of this, the move towards greater levels of limited company business is likely to continue for many landlords, as I expect a u-turn is very unlikely despite fiscal loosening likely to be a strategy adopted in the very near future to stimulate a weakening economy.

Meanwhile almost a quarter (22%) suggested remaining in the EU would give the biggest boost, whilst 14% said securing the UK’s withdrawal from the EU would be the most helpful.

Four in ten landlords said they would still be willing to make their first investment in property, arguing that buy-to-let remains a good long-term investment.

According to the research however, 50% of landlords said that due to government intervention and regulatory changes, they would not choose to make a first investment decision now.

Only on in four landlords said they wanted to increase rents in the next 12 months, whilst a majority believe they are renting out at least one of their properties below market value.

Knight continued: “There is a continued appetite to be active in this sector and a recognition of the strong demand for quality properties from tenants.

“That being the case, and with a perhaps more sympathetic government ear, we might anticipate that demand for mortgage advice and buy-to-let mortgages will continue to grow, although many are clearly worried about the current economic uncertainty and what might happen in a post-Brexit world.

“The other positive here is the long-term view taken by many landlords and the fact over four in 10 would still invest today if it was their first property.

“Given all the demographics and the underlying demand drivers for the private rental sector, advisers are still likely to see a steady stream of landlord clients seeking to remortgage and/or purchase, for many years to come.

“It continues to pay to be a specialist in this sector and Foundation is here to help advisers develop their buy-to-let propositions for the demand that is clearly still out there.”

By Jessica Nangle

Source: Mortgage Introducer

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Bradford Landlord Fined For Failure To Repair Buy To Let Property

A Bradford landlord has been fined £2,500 for failing to repair one of his buy to let investment properties that had a leaking roof.

Bradford landlord, Mohammed Majeen Khan, failed to comply with a notice from Bradford Council ordering him to improve the property he owned.

Tenants of the Great Horton property, a family of six, had complained to the Council after Khan had failed to replace damage to the building’s roof, leading to water leaking in and damp spreading.

When Bradford Council officers visited on June 26 2018 they found a number of issues with the property in addition to the leaking roof. These included the absence of a working fire alarm system, the absence of any linked smoke detectors, and an inadequate number of working electrical sockets.

There were also other issues, including cupboards missing doors and the property was found to be a generally poor state.

The Bradford landlord failed to respond to a number of requests through to late October. He was given a two-week extension, to November 13, to carry out the work, but when the Council inspected in late November the works had still not been done. Another inspection in March found no work had been completed.

Further to the latest visit a prosecution of the Bradford landlord was brought by the council.

Khan, of Aireville Road, was not at court – Magistrates were told that he had phoned the court earlier in the morning to say that although he wanted his day in court, he woke up that morning to find he was not able to move his foot.

However, council prosecutor Harjit Ryatt pointed out that Khan had made similar last-minute calls before important meetings in the past.

He said: ‘Historically when asked to attend police interviews things have followed the same pattern – half an hour before the interview he’ll phone up to say he’s at a hospital appointment or has fallen ill. That is his modus operandi.’

Hearing this, magistrates agreed to go ahead with the case in his absence.

Bradford and Keighley Magistrates Court found Mr Khan guilty in his absence. Along with costs – the Bradford landlord will have to pay a total of £3,490.

Source: Residential Landlord

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More landlords opt for limited companies

Purchasing a buy-to-let property through a limited company is now more than twice as popular as buying as an individual, as more landlords are seeking out the most tax efficient methods.

Research from Precise Mortgages showed more than half of landlords (55 per cent) plan to use limited companies to buy properties in the year ahead — more than double the 24 per cent who intend to buy as an individual.

The findings also showed the number of landlords using limited companies to expand their portfolio was on the up, from 44 per cent at the end of 2018 to 53 per cent in the first three months of 2019.

Limited companies were the most popular among landlords with a portfolio of 11 or more properties — as 71 per cent of landlords in this sector used them for purchases — but it was also the dominant choice for those with 10 or fewer properties (51 per cent).

By comparison, only 27 per cent of landlords with 10 or fewer properties chose to buy as an individual.

The buy-to-let market grew rapidly after the financial crisis but has since taken a beating as a number of tax and regulatory changes have hit landlords’ pockets.

How the rules changed:

An additional 3 per cent stamp duty surcharge, introduced in April 2016, was closely followed by the abolition of mortgage interest tax relief for landlords.

Landlords then took a further hit when a shake up of rules by the Prudential Regulation Authority meant buy-to-let borrowers were now subject to more stringent affordability testing.

The changes to mortgage relief have been phased into the system since April 2017, but by April 2020 landlords will be unable to deduct any of their mortgage expenses from taxable rental income.

Instead, they will receive a tax-credit based on 20 per cent (the current basic tax rate) of their mortgage interest payments.

Following the changes, landlords who were higher or additional-rate taxpayers would now only get refunds at the 20 per cent rate, rather than top rate of paid tax.

On top of this, landlords could also be forced into a higher tax bracket because they would need to declare the income that was used to pay the mortgage on their tax return.

Based on a property yielding £950 in rent and a £600 mortgage per month, the landlord’s income could drop by about 57 per cent after the rule changes, from £2,520 to £1,080, as shown in the table:

Tax yearProportion of mortgage interest qualifying for 20% tax credit under previous systemProportion of mortgage interest qualifying for 20% tax credit under new systemTax billPost-tax and mortgage rental income
Prior to April 2017100%0%£1,680£2,520
2017-1875%25%£2,040£2,160
2018-1950%50%£2,400£1,800
2019-2025%75%£2,760£1,440
From April 20200%100%£3,120£1,080

Source: Which.co.uk

Due to the tax shake up, limited company status is more attractive to landlords as changes would not affect them and they can offset mortgage interest against profits which are subject to corporation tax instead of income tax rates, which is cheaper.

Interest coverage ratios on limited company applications are also lower than for most individual landlord applications, according to Precise.If landlords who are higher rate taxpayers hold properties directly in their own name, in some circumstances this additional tax can wipe out all profits.John Goodall, chief executive at Landbay

Alan Cleary, managing director of Precise Mortgages, said: “Despite the challenges in the market, professional landlords have still managed to grow their portfolios over the past year with the use of limited companies, and it will continue to be the most preferred purchase route particularly for those with larger portfolios.”

Mr Cleary said the increased use of limited company status was further evidence of how the buy-to-let market was changing and demonstrated how brokers and their clients needed “expert specialist support” when buying as a limited company or considering switching.

Traditional buy-to-let mortgages have also become more popular, according to the research, as nearly seven in ten (69 per cent) landlords now intend to fund their next portfolio purchase with such a policy, compared with 62 per cent at the end of 2018.

David Hollingworth, director at L&C Mortages, said: “With the changes to tax relief on mortgage interest being felt by many landlords that pay higher rate tax, there’s likely to be more considering the use of a limited company as they seek to grow a portfolio.

“Being able to set the cost of mortgage interest against income within the limited company will be the main draw and corporation tax is charged at lower rates.

“Tax advice should be a crucial part of the landlord’s decision to use a limited company and help them understand the practical considerations of setting up and using a company as well as the potential for personal tax when withdrawing income from the company.”

Mr Hollingworth added the growing number of mortgage options for those using limited companies would also help to give landlords more choice to improve the rates on such specialist products.

John Goodall, chief executive at Landbay, said he was seeing a significant increase in landlords who were borrowing within a limited company.

“If a landlord holds their buy-to-let properties within a company structure they will be taxed on profits in the usual way, and the interest they pay will be treated as a cost.”

The market has also seen a number of landlords leave the buy-to-let space due to the changes and in May, as research from Arla Propertymark showed the number of landlords selling their properties had increased by 25 per cent.

The number of new landlords coming to market also took a hit and the number of new buy-to-let purchases dropped 9.1 per cent year-on-year in March.

By Imogen Tew

Source: FT Adviser

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Rent Price Rises Hit Record High For Buy To Let Investors

The number of buy to let property investors introducing rent price rises to their tenants hit a new record high in June.

More than half of letting and management agents (55 per cent) witnessing landlords making rent price rises. This is a 22 per cent increase from May which was a previous record high.

The latest ARLA Propertymark June Private Rented Sector (PRS) Report also showed that year-on-year the number of tenants experiencing rent price increases is up from 31 per cent in June 2017, and 35 per cent in June 2018.

The record level of rent price increases is thought to be mainly because of the introduction of the tenant fees ban forcing landlords to recover costs through higher rents.

Letting agents had an average of 199 properties under management per member branch in June, a decrease from 201 in May.

However, demand from prospective tenants increased marginally in June, with the number of house hunters registered per branch rising to 70 on average, compared to 69 in May.

Despite fears of a mass exodus by landlords in the private rental sector, the number of buy to let investors exiting the market remained at four per branch, the same figure seen in June 2018.

ARLA Propertymark Chief Executive, David Cox, commented: Unsurprisingly, rent costs hit a record high in June as tenants suffered the impact of the tenant fee ban. Ever since the Government proposed the ban, we warned that tenants would continue to pay the same amount, but the cost would be passed onto tenants through increased rents, rather than upfront costs.’

He continued: ‘In addition to the repercussions of the Tenant Fees Act, the proposed abolition of Section 21, coupled with the Mayor of London’s recent call for rent controls, will only cause the sector to shrink further. In turn this will increase pressure on the sector because it will discourage new landlords from investing in the market, causing rents to rise for tenants as less rental accommodation is available.’

Source: Residential Landlord

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More lenders are offering limited company buy-to-let mortgages

More than half (59%) of all buy-to-let mortgage lenders offered products to landlords who use limited companies as borrowing vehicles in Q2 2019, Mortgages for Business has found.

Its Buy to Let Mortgage Index showed the number of providers serving corporate buy-to-let borrowers has been growing steadily since the cut in mortgage tax relief was introduced.

Steve Olejnik (pictured), managing director of Mortgages for Business, said: “The Index points to some good news for landlords, particularly those using limited companies who now have a greater choice of lenders than ever before, to help them finance their rental properties and access to better rates.

“In particular, we’ve seen the options increase at the more specialist end of the market, and we’re delighted that the number of lenders in that space is growing.”

The restriction of income tax relief on mortgage interest has meant that limited companies can be a more tax and financially efficient method of operating property portfolios than the self-employed route which was used predominately by landlords in the past.

In addition, the findings are also reflected in the total value of buy-to-let mortgage applications completed in the quarter at Mortgages for Business.

By value, more than half (52%) were from landlords using limited companies.

Furthermore, the gap in pricing between the average buy-to-let mortgage rate (3.1%) and the average rate available to limited companies (3.7%) diminished by 0.02% when compared to Q1.

Lenders’ margins over the cost of funds fell slightly to 0.54% from an average of 0.55% in Q1 2019.

While this is not a huge cut, it demonstrates that lenders are really having to squeeze margins to remain competitive.

Low loan-to-value products fared the best, with margins dropping below the 0.5% mark (0.48%) for the first time since Mortgages for Business started tracking costs and fees back in 2013.

There was an increase in the proportion of fee-free and flat fee-based products, up to 20% and 38% respectively.

This was to the detriment of percentage-based fees which fell to 40% despite having peaked at 48% at the end of 2018.

Mortgages for Business said this is a positive outcome for borrowers, who tend to dislike percentage-based fees and another sign that lenders are vying for business in a challenging market.

Flat lender arrangement fees, sitting at £1,504, fell slightly quarter on quarter which bodes well for landlords in need of finance.

By Michael Lloyd

Source: Mortgage Introducer

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Buy To Let Property Investors Spend Over £3k Per Year On Investments

Buy to let property investors in the UK spend over £3,000 per year on their properties on average according to new research by LV General Insurance.

The insurance company found that landlords collectively spend a total of almost £4.7 billion over the year, equating to £3,134 each.

The spend was found to include renovations and refurbishments (£370), replacing/repairing (£370), fixing structural damage (£313), decorating (£265) and garden maintenance (£203).

Extra spend also came from damage caused by tenants, with carpets the most likely thing that landlords had to spend out for to replace, repair or clean, as reported by 66 per cent of landlords asked.

Damage to walls was next at 45 per cent, white goods (27 per cent) and doors (24 per cent).

Landlords therefore spend the most money replacing/repairing flooring (£322), white goods (£298), other items (£256), cleaning at the end of a tenancy (£178) and removing forgotten items (£149).

The amount of spend required varied across the UK. The South West saw the most money spent on repairing damage made by tenants (£3,461), whereas landlords in the North West spend the least on repairing damage (£2,738).

Tenant disputes were another thing that landlords often had to spend out on. Although 46 per cent have never experienced a tenant dispute, almost a quarter (23 per cent) have disputes at least once a year, with 6 per cent even quoting once a month.

The most common causes for tenant disputes are delayed rent (43 per cent), damage to property (41 per cent), cleanliness (33 per cent), disputes over bills or deposits (10 per cent), pets (9 per cent) and sub-letting (7 per cent).

Managing director of LV General Insurance, Heather Smith, said: ‘Finding the right tenant is crucial. Although the majority rarely experience tenant disputes, it’s clear that, when they do, the disputes are challenging and potentially costly.

‘Our research found that 13 per cent currently don’t have landlord insurance, meaning they are missing out on things such as cover for accidental damage by tenants, loss of rent if the property becomes uninhabitable, and contents cover.’

Source: Residential Landlord