Buy To Let: Is it still worth it?Friday, October 13, 2023
Is BTL still worth it?
Demand 10, supply 1
In September 2023, Zoopla released their Rental Market Reportdemonstrating the state of the rental market in terms of supply versus demand. Their research shows that while demand for rental homes has cooled slightly in the past year, it is still 51% above the five-year average. Rightmove research released on the 5th of October showed that a typical rental property is receiving 25 enquiries – more than triple the amount of enquiries properties were getting for the same period in 2019, before COVID.
The increased cost of borrowing will likely be a primary concern for new landlords thinking about entering the property market. However, with the correct guidance from brokers, accountants, and property tax advisors, entering the market could still be a long-term profitable opportunity, especially with the decreasing house prices seen in the UK across all UK regions for the first time since 2009.
Start-up costs pay dividends in the long run
The initial start-up costs might be off-putting for potential landlords thinking about entering the market. Some of the main costs include:
- Stamp Duty: This type of property tax is payable when you buy a property in England or Northern Ireland. For BTL properties, the standard rates begin at 0% for properties valued at £40k or less. This increases to 3% on any property valued over £40k up to £250k.
- The Cost of Obtaining Advice: Would-be BTL landlords may also have to consider the cost of getting the correct professional advice, whether it’s across property tax advice or specific broker advice.
- Valuation: The cost of getting a BTL property valued can be expensive when factored into the other associated costs of getting ready to let.
- Property Survey: BTL surveys are a new type of survey designed to give investors a clear understanding of the property they intend to buy. However, they are not an allowable expense from a tax perspective and can be costly.
- Legal Costs: As with any property purchase, legal counsel is required to enable a transaction to complete. These costs will be incurred by any new BTL landlords entering the market.
- Interest Rates: The headlines have been full of the challenges that interest rates have presented in the mortgage market, and those looking to secure a residential BTL mortgage are subject to higher costs than a few years ago.
While there are initial costs to consider, like the above, some indicators within the industry suggest that becoming a landlord now could have long-term opportunities. The Financial Reporter reached out to Peter Williams, CEO at Propp, to talk about the long-term opportunity in the landlord market:
"In terms of an exodus, less experienced landlords may choose to sell as their margins are squeezed, but experienced landlords are playing a long game and know the value in capital appreciation."
Jumping through hoops -
negotiating the proposed new rules and regs
There are planned changes in rules and regulations across the BTL industry which may prompt questions over entering the market as a landlord. These will be considered by any clients searching for a residential BTL mortgage.
- Planned changes to eviction laws: No-fault evictions could be abolished, but landlords may benefit from strengthening property recovery should a landlord need to evict a tenant within certain circumstances.
- Decent Homes Standard: This legislation is currently on track to be applied to private landlord residences. It concerns the reasonable upkeep of housing and was once applied purely to social housing but will soon affect private landlords.
Why it pays to be Limited….
For those who are still thinking of entering the market, there are potential tax savings that may be made by landlords, by registering as a limited company, as opposed to acquiring the property in personal names only. For starters, there are two levels of corporation tax, 19% for companies with a profit under £50k, and 25% for those above £50k, the former is likely to include the majority of landlords This may provide substantial tax-saving opportunities in the long term. Your clients might want to discuss the following if they choose to take this route:
- Picking a company name – Choosing a company name can be the first step for many prospective landlords, and deciding the correct company address and SIC code will make it easier to set up a registration with Companies House.
- Appointing a director – This can be the primary person who acts as the landlord on any properties across a portfolio. It can also be helpful to appoint a company clerk at this time.
- Paperwork – Creating a memorandum and articles of association and ensuring your clients know what company and accounting records must be kept.
It can involve a lot of work up front, but there are financial benefits to registering as a company when becoming a professional landlord.
Real-life lending criteria
If you have clients searching for a BTL mortgage, remember that we have flexible lending criteria which can suit a variety of landlords. We're here to support clients with unusual circumstances. Here are just some examples of what makes us different:
- MINIMUM INCOME – There is no minimum income requirement for BTL (except for ex-pat BTL applications). To apply, one or more BTL applicants must be employed/self-employed or receiving a pension.
- LIMITED COMPANIES/LLP – Limited company applications can have up to 4 directors or shareholders that cover at least 75% of the shareholding.
- PORTFOLIO LENDING – For four or more BTL mortgaged homes in a single portfolio
Find out more on our BTL criteria page here.
The big picture and the road ahead
Whilst there are some justified concerns about entering the BTL market, it's clear that there is still an ongoing nationwide demand for rental properties. Those willing to make the initial investment to buy a rental property and take some of the steps outlined above, have an opportunity to see a good return on their long-term investment.
As a broker, your clients will seek expertise from you, as well as accountants, property tax advisors, and lenders like us. And we are here to help with all manner of mortgage circumstances thanks to our flexible criteria. Contact your local BDM to discuss your next case.