Has George Osborne killed the buy to let market?
Is this the end for the buy to let boom?
You know when something has become ubiquitous when it is lampooned in Private Eye and the Daily Mail starts scaremongering about it.
Buy to let has been all over the news these last few weeks, firstly the Bank of England weighed in with warning on July 1st that the boom in buy to let investments could pose a risk to financial stability, and then the chancellor reduced mortgage tax relief on buy to let investments to the basic rate of tax. If you want to know more about the tax implications of the change in mortgage tax relief, read Phil Jones informative blog here
Why has buy to let suddenly moved up the news agenda? The answer is complicated and is made up of several elements not least of which is down to George Osborne himself. But first we have to go back to the crash of 2008.
When the financial system imploded the buy to let housing market went with it. The number of buy to let products on offer went from over 300 to 2. Mortgage brokers were telling us of applications being refused with 50% deposits, arrangement fees in the tens of thousands, and outright hostility from some lenders, but more worrying for the economy was the loss of first time buyers. This market to use a technical phrase “fell off the cliff. Usually when house prices fall first time buyers are the spark that reignites the market. But not this time, banks and mortgage companies had lent irresponsibly in the boom and this led to the financial crisis. Lending to first time buyers was no longer a business to be in. Without first time buyers, there are no second time buyers and so on up the chain. House builders need first time buyers to buy starter homes or the properties they have taken in part-exchange. So therefore without first-time buyers there was a lot of available affordable housing stock, and who took up the slack? Existing buy to let landlords.
With potential first time buyers staying in rented accommodation, rents started to rise above inflation and with interest rates at historic lows, buy to let properties started making good profits and landlords started looking to re-invest their profits, and where better than more buy to let properties. Lenders slowly realised that experienced buy to let landlords were a safer bet than first time buyers and returned to the market.
With buy to let landlords on the whole in the same market as first time buyers, they snapped up the stock that first time buyers couldn’t buy and then rented them back to the people who couldn’t buy them. Buy to let was back, and then……………..
The end of the need to buy an annuity announced in George Osborne’s 2014 made buy to let the “de rigeur” pension plan for any 50-something, and the market really pushed on Everybody wanted to jump on the buy to let wagon, and we got to where we are today with the chancellor having to introduce tax reforms in order to “level the playing field”.
Do the new tax regulations mean the end of buy to let as part of an investment strategy?
As a letting agent you will not be surprised to hear that my opinion is no it doesn’t, but buy to let never was a cast-iron money making scheme. The successful landlords bought wisely and treated their buy to let portfolio as a business, the unsuccessful ones were the ones jumping onto the bandwagon because they read about it in the Sunday papers or because their mates were. So how do you become a successful landlord.
- It’s a business stupid – Successful businesses have a robust business plan, they know their market, they tailor their product to their target market, and they have cash flow projections. A buy to let investment is a business so it needs to be treated as such. Get yourself a business plan and stick to it
- It’s not about you – It’s about your tenant. I hear this phrase time and time again: I could live there myself – and it fills me with dread. Are you the target market? If no, why buy a property you would like. It doesn’t matter if you couldn’t live in the property or that you don’t like it, will it be attractive to your market? If yes then it is a possibility, if no walk away
- Never trust an estate agent – Remember an estate agent is a sales person and will have targets to hit. It is his job to make the property you are viewing as attractive as possible, and that could mean pitching potential rent at the high end of the rental spectrum. Before you make an offer get a second opinion on the potential rental. We will do this for you for free
- You can’t buck the market – After I could live there myself the second scariest phrase we hear from landlords is: The mortgage is x so I need y in rent. Your mortgage does not set the rent, the market does. If you need a higher than market rent to pay your mortgage, then it is not the right property
- Don’t be afraid of commitment – The longer you have a buy to let investment the more profitable it becomes. Jumping onto the buy to let bandwagon to make a quick buck is a sure fire way to fail. Have a 5-10 year strategy
- Follow Ellis’ law of Buy to Let – If after taking all the above into account your property also conforms to Ellis of buy to let success then you should be ok. Ellis’ law states that a buy to let property will only succeed as an investment if it conforms to the following four conditions
- How much rent will I get? – Pretty obvious but surprisingly often ignored
- What voids can I expect? – Occupancy is king. Empty properties earn no money.
- Will I get capital growth? – Whilst history is no guarantee of future performance, it is an indicator. Most property websites offer historical price details so you can see how your potential property has performed
- Does it have bailoutability – I invented this word, and it means what it says. If you need to sell your buy to let quickly, is there a market for the property? Would it sell quickly?
As a potential landlord you need to make sure your proposed property hits the above criteria and then and only then should you consider investing your savings/pension in what is still a risky investment.
7. Don’t fly solo – People who invest in the stock market money without taking advice are more likely to lose money than those who take professional advice. The same goes for buy to let investment. Talk to an expert. Accommodation Unlimited offers a buy to let personal shopper service where we help you find the right property for you at the right price and the best part is that it’s FREE. So if you are thinking about buy to let but are not sure where to go next, why not call Accommodation Unlimited for a no obligation chat