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How to get a (much) better return on buy-to-let property

Not all property is created equal. Investing in the right kind of property can boost returns by over 100%.

“Is this guy for real?” you might be wondering. I can’t say I’d blame you because Landlords have taken a bit of a beating over the last year or so.

First, the lovely people over at Number 10 decided to hike up our stamp duty payments. Then, I s’pose over a G&T after work, they continued chatting and decided our mortgage interest tax relief should go too.

In January they introduced tighter lender criteria for buy-to-let landlords. And – because that obviously wasn’t enough – they’re about to introduce a load more red tape for landlords to tackle, all of which are scaring property investors off.

Yet here I am dropping in on Landlord Blogger, suggesting you can still get a very attractive return on property.

But please bear with me!

Not all property is created equal. If you know where to invest your money, there are some sizeable returns waiting to be had.

Different properties offer different returns

As you probably know, different properties can be let in different ways, and each offers different rental yields. The list of options is fairly lengthy, but most people investing in residential property go for one of the following

  • A single let (the traditional buy-to-let)
  • An apartment (technically still a single let, but with important differences)
  • A holiday let
  • An HMO (a single property let to three or more separate tenants, such as young professionals or students)

The difference in return for each makes for some surprising reading.

Returns from single lets

Single lets sound like a property let to a single person. Not so.

Single lets are actually a property let to just one family unit. That could well be to a single person (and, presumably, her three cats) but it could also be a couple or a family with children. The key point is that contractually there is one tenant.

Letting to just one family unit makes single lets relatively passive investments. If you’re willing to use an agent -and thus accept a slightly lower return- single lets require very little management whatsoever (although you still have legal obligations as landlord).

On the flip side, letting to one family unit almost always artificially caps your return.

Ultimately, rents are determined by supply and demand – and demand itself is determined by household income. When letting to a single family unit, household income is typically restricted to no more than two wage earners, which limits the rent they can afford, and your yield in turn.

Yields have been a consistent 5 – 6% over the past 8 years.

Source: Mortgages for Business Complex Buy to Let Index

Don’t get me wrong, compared to even a generous saving account, a return of more than 5% might seem pretty attractive. But why stop there?

Returns from leasehold apartments

Leasehold apartments are a lot like the single lets described above, only with one key difference: you don’t actually buy the entire property. Instead, you buy the right to lease the apartment on a long-term basis from whoever owns the building the apartment sits within.

This creates the potential for maintenance issues to be outside your control.

Also, the length of the leasehold ticks down as time goes on. Renewing it is a legal right, but it costs money. Whilst the value of the property itself may appreciate, the value of your leasehold, if let to run down substantially will depreciate until you pay to renew it.

If that all sounds pretty terrible, leasehold apartments come with benefits.

For a start, they can be a little cheaper to acquire (making them more accessible to investors). Generally speaking, they’re smaller and newer so don’t always need a great deal of maintenance.

So long as the location is right (think major cities with strong economies) tenant demand can be high – which makes void periods infrequent and capital growth strong on what is, again, a relatively passive investment.

That all makes leasehold apartments a viable option if you’re just setting out but there’s a definite trade off.

If you’re lucky, yields from a leasehold apartment can outstrip those of standard single lets, but when it comes to maximising rental yields, your capital can work harder elsewhere.

Where specifically?

Returns from holiday lets

Although they’re rarely regarded as mainstream investment vehicles, holiday lets actually crank things up a notch.

Bag yourself the right holiday let and you can expect gross rental yields to jump up more than a percentage point or two.

According to Second Estates, The average income for a week in peak season is now £1,200. But remember that’s gross, and this sector is seasonal- don’t expect that week in week out. Overall however the average income from a typical holiday property is just over £22,000.

Why is this?

Management of holiday lets is fairly intensive. If you’re changing sheets and greeting new guests every few days (or, more likely, paying someone to do so on your behalf), the market is going to reward your additional effort/outlay.

Plus, the weak pound following the Brexit vote and recent election brings a double whammy bonus to the holiday property investor: More Brits on staycations (up 24% according to Sojern) and more foreign tourists attracted by the strength of their currency (up 19 % according to Visit Britain). The demand side of the equation is increasing faster than supply.

Airbnb has of course popularised the short term letting phenomenon and also brought it out of the typical tourist spots and into the ‘regular’ towns and cities. There are even now management companies dedicated to running your Airbnb profile and taking care of check-ins and check-outs for you.

Now, one of the major benefits of a furnished holiday let is that the mortgage interest relief (the removal of which has spoiled the party for so many) still stands. This is a significant tax benefit not to be overlooked…although you would probably be wise not to rely on that forevermore given the recent changes.

But there’s more risk with holiday lets. Such short term letting periods coupled with the potential for seasonal lulls can result in unpredictable and potentially substantial void periods.

If you’re purchasing with cash, you can run your property how you like. But, if you’re relying on a mortgage there are a relatively limited number of mortgage products that cater to the holiday property.

Most buy to let mortgages expressly prohibit short term lets, so you can’t simply purchase as a regular buy to let then pop it on Airbnb. Many apartment blocks also prohibit short term lets in the lease covenants (whether explicitly or implicitly).

Acquiring a holiday property is therefore something that needs careful consideration.

So where does that leave us?

Houses in multiple occupation (HMOs)

A house in multiple occupation is a single property that’s let to 3 or more tenants from different families – think houses shared by young professionals or students.

There is a renaissance happening in the HMO market at present. Well designed, high quality and high spec properties for discerning tenants are beginning to distance themselves from the average house share or ‘student digs’ of yesteryear.

For the most part, these tenants value the social connectivity and flexibility that come with sharing, or co-living as it is becoming known. Unwilling to settle, they rent out of choice, yet the quality HMOs they’re after are in short supply.

With short supply and high demand the market is set for higher rents, but only if household budgets allow. Fortunately for all parties, HMO household budgets are abnormally high.

That’s not necessarily because tenants are abnormally wealthy. Instead, it’s because HMOs house a wage earner in each bedroom. That might mean five or six wage earners, for example, as opposed to the one or two associated with single lets.

Per tenant they pay significantly less than they would living alone, but still that lesser amount, multiplied by the 5 or 6 tenants in a HMO, can double a property’s rental income compared to it’s use as a single let.

It’s a match that makes HMOs particularly attractive to both tenants and landlords alike:

Tenants get flexibility, companionship and lower rents. Landlords benefit from yields that outstrip those of a single let by almost 2:1.

Source: Mortgages for Business Complex Buy to Let Index

All that said, HMOs cost more to maintain, require more management and really do require you to vet tenants properly. A passive investment HMOs are not.

But for those with a taste for an active investment, – or for those willing to find and use a reputable agent – sizeable returns usually mean HMOs warrant serious consideration.

How to get a (much) better return on buy-to-let property

So let’s compare the two ends of the spectrum. Over the past 8 years a single let has returned on average 5.7%. Over the same period an HMO has returned on average 9.6%. The right holiday let will do similar.

In my eyes, you’re looking at almost doubling your return while reducing void periods with an HMO and for more information on how HMO’s reduce void periods you need to read this).

Despite unfavourable government regulation, there are still clear and sizeable returns to be made from property.

The trick, of course, is knowing where to invest.

 

This article was supplied to us courtesy of Tom Charrier who is the Director of Living Space Property who can be contacted for more information by emailing tom@livingspaceproperty.uk

Landlords: Refreshing The Way You Rent – Letproof.com

The past year has not been filled with the best news for UK Landlords; there have been an abundance of hurdles thrown in the direction of the buy-to-let Landlord and costs only seem to be rising.

Let’s begin with the tax changes; Buy-to-let landlords were hit with the announcement last year that their tax relief was being ‘phased out’ to mean now paying tax on their ‘turnover, rather than the difference between rental income and mortgage interest’ and this was expected to slow the buy-to-let market. April 2016 then saw landlords suffer a 3% increase on stamp duty. And earlier this year the Autumn Statement landed some great news for tenants and potential renters; there will be no more estate agent fees charged to tenants. This was, however, bad news for Landlords as it meant a high likelihood of them now footing the bill for these fees. But landlords are finding certain ways to deal with these changes, registering as a LTD company to lower taxes is one solution being utilised.

There is a need for change in the way buy-to-let landlords are able approach letting their properties. Cutting out any unnecessary fees and costs is becoming vital to ensure profits. Letproof.com has been built on this premise; to improve the experience for landlords and tenants, because while all of this signifies hard times, the market is still there for buy-to-let landlords. The demand for rental properties is high, partially as a result of a slight decrease in those investing in buy-to-let. However it is also largely due to the fact that renting is proving to be increasingly popular. Populations are rising and the trends and attitudes toward renting have changed. Renting has become a popular lifestyle choice, and popularity is predicted to continue.Happy friends meeting at cafe with laptop

The market is also looking up for buy-to-let investors, the build-to-let scheme offers fresh encouragement to rent and a whole new area of investment opportunities. London Rental yields are predicted to rise in the New Year. Despite seeing a significant decrease over the past 2 years, 2017 will experience the benefit of fewer buy-to-let landlords entering the arena this year and a high demand for rental properties continuing.

A change is needed in attitude and practice. Letproof.com is offering an alternative to the traditional practice of letting properties via an agent. Letproof.com is a platform enabling landlords and tenants to connect directly, without the middlemen. A new concept that gives both parties more control over their letting experience, fewer costs and offers support and flexibility.   The platform is free for tenants and starts from only 10p a day for landlords. By signing up, tenants are free to search for their perfect home, and via the direct messaging feature, can contact landlords about their favourite properties.letproof-logo

In changing times in the rental market, Letproof.com may be one way to ensure lower costs and more control over your buy-to-let investments.

For more information on Letproof visit their website http://www.letproof.com

 

Tax Changes and the Buy-to-Let Landlords

Over the next three years the amount of tax owed by many buy-to-let landlords will double or even triple as a direct result of the changes that are being phased in from April 2017. Landlords who have been enjoying four-figure net annual profits could sadly end up facing large losses – and it is thought that if interest rates rise, then this will make the situation even worse.

As a Landlord in the United Kingdom today, you can’t help but feel slightly battered by the Government and rather than being praised for helping to provide accommodation when there is clearly a shortage in the UK of decent housing, Landlords are being hit hard with tax changes and law changes.

If the Government keep demonising Landlords, we feel that more Landlords will have no choice but to sell up and invest their money else where and seeing as though the Government can not keep up with the demand for housing, it seems ludicrous that they insist on battering the Landlords, who are indeed only trying to help.

To read the article from the Guardian in full click here.

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Top 10 places to buy-to-let in London, according to Portico Estate Agents

Over the past 5 years, all 32 London boroughs (and particularly those in central London) have experienced substantial property price growth, fuelled by a combination of record levels of overseas investment and historically low interest rates.

Whilst it is true that the recent reduction in the availability of interest-only mortgages and increases in stamp duty for the most expensive properties may mean that this trend will not be sustained indefinitely, it is certainly the case that, at the moment at least, central London property prices are at an all time high.

However, whilst property prices have increased substantially, rental prices have broadly continued to track earnings growth. As a result, rental prices have not increased at the same rate as property prices and yields have steadily declined in central areas for at least the past five years that we have been tracking them.

– See more at: https://www.portico.com/yields

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How many “Buy-to-Let” Properties do you own?

We came across an article featured on Simple Landlords Insurance and in the article they talked about how many properties landlords in the UK had in their portfolio.

We have one property in our “portfolio” and this was an inherited property making us “Accidental Landlords”. At one stage we would have considered adding to our “portfolio” but with recent changes to tax etc, we are less inclined to think that adding is a good option.

According to the statistics in the article the number of landlords with only one property dropped from 78% to 63% in the past 6 years. We wonder if this figure will remain static for a few years now, as people (like us) that would have bought another property on the back of an existing property, hold back on their plans due to having to pay significant increases in stamp duty.

Also the article talked about landlords seeing renting out property as a “nest egg” rather than a business and we are inclined to agree with this statement. In a landlord meeting we attended in April we met with many landlords who did indeed have one property and who did not consider themselves to be in business with that one property. We guess that the more property you own, the more work you do and therefore the more likely you are to feel that the running of the properties is akin to running a business.

To read the article in full please click here

A revolutionary way to let a property or a recipe for disaster?

Browsing through our endless emails from Google alerts we came across an article from Simple Landlords Insurance which caught our eye – “An estate agent is paying tenants first year’s rent” and it got us thinking…. Is this a revolutionary way for landlords to let their property or is it a recipe for disaster?

It looks like it could be a win – win situation for Landlords as they get their 12 months rent upfront and their property back in its original condition at the end of the tenancy, but could this idea be open to abuse?

The “cynic” inside us says yes.. it is a strong possibility that “rogue tenants” could abuse this system which could ultimately leave the estate agency out of pocket. Granted their are rent protection schemes in place that they could pay for, but they only work if the tenants are employed and guarantors could be also used if the tenant is unemployed / on state benefits.

Estate Agencies and Letting Agencies in the UK whether online based or high street based, need to keep ahead of the competition and what a competitive market it really is. We applaud agents that come up with great incentives to entice us landlords to use their services, but the business side of our head as opposed to the landlord side, thinks that letting agents should be a little more careful about the offers they use to entice landlords in, because it may mean they have a short lived life in the land of the letting agency. We would rather us landlords have a great service from a great letting agents than see our letting agents go bust after a year and then us have to search for another one to replace them.

Click here to read the article in full

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The UK decides to vote “Leave” but what now for UK Property

The dust has settled over the weekend and we have had time to adjust to the decision to “Leave” the European Union. Whether you voted to “Remain” or whether you voted to “Leave”, we are now facing a long period of uncertainty that will have a major impact on many of the personal decisions we make moving forward.

It would seem from the articles that we have read over the weekend that although we have made a decision as a country, it is actually how things will affect us personally that are concerning most people, which is ironic being that many people voted “Leave” for non-personal reasons.

From the viewpoint of the Landlord in the UK, we are facing a huge period of uncertainty as far as the housing markets are concerned and because no country has ever left the European Union, it is difficult for anyone to actually predict what will happen to property prices or the buy-to-let markets.

However, we do know that in the hours following the announcement that we would be leaving the European Union, shares in Housebuilder’s (Persimmon, Barrett and Berkeley) dropped by more than 20%, so does this mean that the housing market will fall dramatically?

Only time will tell, but Miles Shipside, Rightmove’s director and housing market analyst, stated: “Markets typically dislike uncertainty” and being as that is what the UK now faces it, it seems highly probable that house prices could lower as we pass through the two year period of uncertainty.

As for the Buy-to-Let sector, if property prices fall then investors can enjoy the benefits of purchasing property at lower prices, but given the recent changes in Stamp Duty, it may not be as simple as it would have been prior to the stamp duty increase. So yet again we face uncertainty as to how things will play out and we will just have to play the waiting game!

For more information on how the Property Markets will be affected click here 

UK Landlords will invest less due to tax changes

Since the Government announced last year that tax relief on rental income would be decreased and that stamp duty on buy to let purchases would be increased there has been a significant fall in new acquisitions by new and existing Landlords in the UK over recent months.

In response to the changes to tax , Landlords in the UK are opting to upgrade their existing properties and making the portfolio they have even better, rather than looking to buy more property to expand their portfolio.

A report from Paragon Mortgages  shows that only 9% of respondents intended to purchase a new buy to let property in the next three months, which is a figure that is down 14% from the previous quarter.

Now that they changes to stamp duty have been enforced it would appear that more Landlords within the UK are aware of the changes. According to the report, 76% of the respondents were aware of the changes and what the implications are for them personally.

Landlords are now also spending less of their rental income on mortgage repayments, which means that the average net rental yield is remaining at 4.7% for the third consecutive quarter.

John Heron who is the Director of Mortgages at Paragon said;”The Private Rented Sector is facing the prospect of a great deal of change as a result of the significant shift we have seen in fiscal and regulatory policy. Some Landlords are responding to this uncertainty by planning fewer new purchases and investing in their existing portfolios”

By purchasing less property and investing in your existing portfolio, we feel that this can only be an improvement for tenants. The Government changed the rules to allow more individuals to purchase property, rather than having all the housing stock eaten up by Landlords, so with Landlords buying less property and instead opting for improving their existing properties, we can see this as a positive  step.

Individuals that wish to purchase their first property can do so, as there will be more housing stock available and for those that wish to remain as tenants, they will have their rental property improved by Landlords looking to invest in making their portfolio nicer.