There was a time not so long ago, when most landlords in the private rented sector entered the market “accidentally”, or reluctantly. Accidental landlords rent out their property because they may have inherited it or they previously lived in it but moved away or moved in with a partner. While property prices are rising and mortgage rates are low, it was an easy choice to rent out the property earning additional income in the short-term and building a nest-egg for the long-term. This familiar scenario is responsible for a significant proportion of properties in the private rented sector, but things are changing.
The landlord environment is becoming tougher and it’s not as easy as it once was to run a buy-to-let property as a good investment. Legal requirements relating to property safety are becoming stricter and more expensive. Taxes are being increased relating to relief of mortgage interest and wear and tear allowances. Transaction taxes when purchasing a buy to let are higher than they have ever been. Indications are that interest rates will soon rise which will affect the mortgage market. Buy-to-let will still be an extremely attractive investment choice but landlords will have to make smarter choices.
Landlords looking to get into the market should consider the following:
This is how much mortgage lending there is on a property, sometimes referred to as loan-to-value or LTV. A low LTV, or no mortgage, can be appealing as it maximises the amount of cash profit generated by the rental income. The downside is that it ties up more capital in one property and therefore minimises the benefit from increases in property prices compared to using mortgage lending to buy more than one property.
- Rental Yields
This is the amount of rental income the property generates compared to the price of the property. A good yield in Edinburgh is around 6% and landlords should make sure they invest in the right areas and optimise their spend accordingly to result in a good yield.
- Capital Growth
Identifying an area where property prices are likely to grow faster than average can help maximise the long-term return for landlords. Things to look for are wider investment in local areas such as tram routes and commercial developments.
Existing landlords who are considering their properties should look at the first two points above, specifically; would their investment perform better if they increased their amount of mortgage borrowing and increased their number of properties? How long have their current tenants been living in the property and is their rent level keeping up with their local market? Would their properties benefit from upgrading or improvements like an HMO license? There are many things landlords can do to make sure they are getting the most out of their buy-to-let portfolios.
The days of “accidental” landlords are coming to an end. Some will decide to sell up and exit the market but for many others this is the time to review their portfolios and make improvements that will have them performing better than ever before.