Any investment that promises a decent return is likely to be accompanied by some degree of risk. Property, especially in this part of the country, is arguably the safest option. Does that make buy-to-let the obvious choice for people with access to money or credit? If so, how do they get started?
The proportion of home-owners in the UK is falling in all age groups except the over 65s. That can only mean more people are renting.
Among younger people the fall in home-ownership is the most pronounced. According to the latest DCLG* English Housing Survey, 58% of 25 to 34yr-olds owned their own homes in 2004; in 2014 the figure was 36%. The average age of a first-time buyer now is 37yrs.
Renting in HP4 is on the rise across the generations. Lewis Herbert, lettings manager for Knights Lettings, said: ‘In the past few years I’ve seen a massive increase in renting from an older generation, more middle-aged, mature people and pensioners.
‘At one stage it was the younger generation who found it hard to get on the housing ladder. Now the reasons for renting vary greatly. Some renters, judging by their salaries, can easily afford to buy, but choose renting to give them more flexibility: some to see if they like the area before committing to buy, others to see if their new job in a new area is actually for them.’
Katie Mack, lettings manager at Regent Estates, adds: ‘We’re seeing an increase in renting across the age ranges. There used to be something of a stigma attached to renting, but people appreciate the degree of freedom, fluidity and choice it gives.’
A report by specialist mortgage lender Paragon Mortgages late last year presented the other side of the coin. The number of private landlords, it said, has grown from tens of thousands 20 years ago to almost 2m now, owning 4.9m properties. The average landlord, according to Paragon, is aged 56yrs.
The growth in the past seven (recessionary) years has been particularly marked. Since 2000, new homes built have passed overwhelmingly into the hands of private landlords. DCLG/IMLA figures show a decline in public housing, an initial rise followed by a slight fall in owner-occupied homes and a vertiginous rise in private rented stock.
‘In and around Berkhamsted, the market has been pretty brisk in the first quarter,’ says Dee Dashwood of Home & Abroad Lettings, ‘and I see that trend continuing. We’ve had a lot of requests for market appraisals on property to let – and a good proportion of them have been houses as opposed to apartments. We took on a 4-5 bedroomed house in Aldbury last month, for example. It’s also apparent that if a property is up to the mark it will let very quickly. If a property does hang around it’s for a reason – usually because the rental is set at the wrong level.’
What goes up
Paragon’s figures indicate that by 2032 owner-occupiers will account for under 50% of all homes in the UK – they are currently about 62%; meanwhile, the private rented sector will rise from 18% to 35.2%. So the demand for rental properties should continue to be strong. But landlords aim to make money from rental income and capital gains. Can the value of property continue to rise?
The policy of the Government seems designed to boost house prices. It increases the flow of funds – help to buy schemes, access to pension pots – but builds many fewer homes than are needed. With limited supply of homes but growing volumes of money chasing them, prices will rise. Buy-to-let landlords (and everyone else hoping to buy a house) should expect to pay artificially inflated prices.
Dee of Home & Abroad says: ‘A house or apartment is like any investment vehicle: it needs to be managed and protected to a very high level. A lot of people come in and ask us about the prospects for buy-to-let. They want a property that will be easy to let. In Berkhamsted that often means 2-bed apartments or the kind of 2-bed cottages at the George St/Ravens Lane end of the town – people are very much attracted to period properties and if they are nicely done they will let very quickly. People are still looking for a home when they are renting – it has to suit their lifestyle and feel to them as though they will be happy living there.’
Katie says: ‘We’ll ask the landlord, are you looking for return on income or capital growth? Historically, capital growth has been most pronounced in Berkhamsted with freehold Victorian cottages, but the returns on investment are therefore lower. Alternatively, if you want to go the leasehold apartment route, with a third-party taking care of the fabric of the building, you might expect a steady income.
Lewis offers this advice to prospective buy-to-let landlords: do your homework; work with a letting agent who can give you a good insight into an area; be realistic about what the property should include, down to kitchen appliances and décor etc, to attract the very best rents. Most properties should go within 14 to 28 days of coming on to the market. ‘Some can even go within hours or a couple of days,’ he says.
Katie of Regent Estates says: ‘For people dipping their toe in the water, I’d suggest: find somewhere within walking distance or a short cycle ride of the station; it’s also advantageous if it isn’t far from the town centre and shops; aim for 2-beds if you can. If the market changes (and it can do, quickly) and you need to match a 1-bed’s offer, you can do, whereas with a 1-bed you’ve nowhere to go; go modern to reduce the possibility of expensive maintenance bills if you can; a rule of thumb – buy the best property you can afford. In Berkhamsted, people will pay for quality.
‘Tenants will flock to properties with those features,’ Katie says.
Dee adds: ‘There are different aspects to the rental market in Berkhamsted. You’ll see plenty of young professional people who work in London, want to be close to the station and want nice accommodation. Demand for 1- and 2-bedroomed apartments is very strong. On the other hand there are young families attracted here perhaps by the schools and the lifestyle, wanting 2-3-bedroomed homes. On the supply side, you’ll find quite a number of properties renting for between £900 and £1,400 a month. But there is not much over the £2,000 mark.’
Lewis comments: ‘In Berkhamsted, City professionals rent because many homes are within walking distance of the station, so London is less than 30mins away. Schools in good catchment areas also.’
Landlords can choose from 817 different products in the buy-to-let mortgage field, according to a report produced in February by Mortgages for Business (MfB). David Whittaker, head of MfB, says: ‘For a second consecutive year, the value of the buy-to-let market grew by almost a quarter. We expect further growth in 2015 but at a slower rate.’
Mortgage lenders typically demand a 25% deposit from a buy-to-let borrower – some require 40%. They also want rent to cover 125% of mortgage repayments. Fees can inflate the cost of a mortgage very considerably. Some are charged as a percentage of the loan, but flat-rate fees approaching £2,000 aren’t uncommon. You should, of course, be able to claim fees back against tax.
Yield is expressed as the annual rent as a percentage of the purchase price. So if you’ve paid £200,000 for a property and it generates £12,000 a year in rent, the yield is 6%.
Buy-to-let is subject to income tax on rent and capital gains tax (CGT) on the eventual sale of the property. There is also, of course, stamp duty on the purchase above £125,000. Any stamp duty can be offset against CGT if you sell up.
Among the allowable expenses that reduce income tax liability: arrangement fees setting up the loan; interest on mortgage payments; maintenance bills; insurances, council tax and utility bills if the tenant doesn’t pay them.
CGT kicks in on gains of more than £11,000 – £22,000 for married couples. It is levied at 18% or 28% depending on whether you are a basic rate or higher rate taxpayer. Since it is added to other income, it often pushes people into the higher band.
The rules relating to Private Residence Relief or Lettings Relief are too complicated to cover thoroughly here – consult an expert if you think you might qualify.
You also need to factor in maintenance costs and void periods. The rule of thumb often suggested is that landlords should allow for two fallow months a year.
Katie says: ‘In Berkhamsted landlords can expect void periods of no more than a month a year and probably less – perhaps just a week. There are also routine costs to be taken into account; everything must be kept in working order, and the Gas Safety inspection is an annual requirement.’
Lewis agrees. ‘We don’t get many void periods in this market – no more than a month maximum.’
On wear-and-tear maintenance costs, Dee at Home & Abroad says: ‘The majority of landlords are responsible and realistic. They know it’s up to them to keep their properties in a good state of decorative order and to spend money making sure they remain up to the mark. When a tenancy ends, we share the inspection report with the landlord and discuss what needs to be done.’
Lewis emphasises: ‘Unless you are a very experienced and knowledgeable landlord, then certainly use an agent. Trying the DIY route to save a few pounds can end up costing thousands if you get it wrong. It’s a legal minefield if you don’t know what you are doing. Using an agent will get you advertised in all the right places and websites. You then attract the very best tenants who are fully referenced and credit-checked. An agent will use the correct tenancy agreement, have a detailed inventory made and schedule of condition, collect and pay your rent, conduct regular inspections, perform a proper check out at the end of the tenancy,’ he says.
Dee comments: ‘Fees are charged for a reason. Managing a property can be complicated and time-consuming, especially with a demanding tenant. We have an in-house resource to manage properties. It can become difficult when a landlord knows a tenant – we offer an independent, thorough and professional service.’
Katie amplifies this point: ‘We invite the landlord to detach him or herself emotionally from the tenant; we certainly discourage them from meeting.
‘Our job is to act for one person, the landlord, and to find the right person for the property with the least risk to the landlord.’
Katie concludes: ‘Why appoint an agent? We don’t go on holiday. We’re here at weekends. We’ve had two cases recently where ceilings have fallen in because of problems in the flat above, that we’ve been able to sort out immediately – most landlords wouldn’t have the contacts or the resources to act so quickly.
‘Rents are set by supply and demand and at the moment supply is short,’ says Katie. ‘That may change. It’s a fast-moving market. But in Berkhamsted now there are not many new apartments: there are the retirement complexes, and there are the bigger houses.’
So the prospects for landlords look good in the near future. But it’s worth making one significant proviso: interest rates – and hence credit – surely can’t stay this low forever. Can they?