How to build a 10-year buy-to-let plan

As buy-to-let landlords face increasing pressures, a greater regulatory burden, and more recently a temporary lockdown on the whole property market, many are putting their growth plans on hold or even reducing their portfolios.

However, broader research provides some interesting pointers that the decade ahead will bring plenty of opportunities for landlords old and new – if they are prepared to be flexible and adapt.

Why being a landlord has become more challenging

Landlords often have a hard time winning sympathy – the public perception of them remains that of the ruthless property tycoon rolling in cash, and most homeowners have a ‘bad landlord’ story from their renting days.

But the most recent Private Landlords Survey by the government paints a very different picture, revealing that some 94 per cent of landlords are private individuals, earning an average £15,000 a year from their properties, with only 4 per cent of them using buy-to-let as their main source of income.

Furthermore, nearly 60 per cent are aged 55 or over, and a third are retired. In short, many landlords simply let out properties to enhance their income in later life, rather than hounding after profits.

Margins can be tight, and added layers of regulation can squeeze them harder.

The insurer Simply Business surveyed 800 landlords and found that one in four plans to sell at least one property this year (which in many cases is likely to be their only one).

A third said their rental income had taken a hit in 2019, and a quarter expected this to continue into 2020. Some of the reasons given for the squeeze include the loss of buy-to-let tax relief on mortgage interest repayments, and new rules making it harder to evict problem tenants.

But even though 80 per cent of landlords are not planning to buy additional properties this year, there are opportunities for those willing to take a longer-term view and plan for the coming decade.

Why it pays to think in decades, not years

Property is generally a mid- to long-term investment, and buy-to-let is no exception.

Difficult years and short-term dips can distract you from the bigger picture, such as the overall trend in rising property prices, and the huge shift towards rented accommodation.

In the decade to 2017, the number of people living in rented homes increased a staggering 63 per cent.

Anyone considering entering the buy-to-let market now should therefore consider three key factors:

1. Where is tenant demand strongest right now?
2. Where could property prices rise the most over the coming years?
3. What buy-to-let pitfalls should I watch out for?

Where is tenant demand strongest?

The rental platform Howsy has recently produced a league table of cities and London boroughs to identify the areas where renting is most in demand, relative to the number of rental properties currently found there.

The city that showed greatest demand compared to availability was Newport, where 35 per cent of rental homes were already occupied.

The full top ten list of cities (excluding London) is shown below.

In London, the top spot is shared by the boroughs Bexley, Bromley, Sutton and Lewisham, all with 38 per cent of all online-listed rental property already occupied. The full London league table is shown below:

The areas of the UK least in demand for rental property were Aberdeen and Swansea.

Where could property prices increase the most?

Rental income is only one source of revenue from buy-to-let. The other, longer term return comes from any increase in the value of the property on resale.

Another study, by Post Office Money with the Office of National Statistics (ONS), identifies the regions of the UK where property price growth is likely to be strongest in the coming years.

Nationwide, house price growth has largely stagnated, with a rise of just 0.9 per cent in 2019.

But this average figure masks the upwards trends still prevailing in certain parts of the country. The Midlands, Wales and the North in particular are regions continuing to experience property price growth, with key cities including Cardiff (9 per cent), Sheffield (7 per cent), Nottingham and Birmingham (6 per cent).

A particular stand-out in this list is Nottingham, which also features in Howsy’s top three cities for rental demand. Cardiff’s top position is also a powerful endorsement for the nearby Newport (number 1 in Howsy’s rankings).

Other cities and towns that showed strong indications of future house price growth included Nuneaton, Bedworth, Stockport and Leicester.

Chrysanthy Pispinis, director at Post Office Money, said, ‘Many locations are continuing to see significant house price growth.

These properties are potentially good mid-term investments, particularly as they sit in locations that continue to be affordable, even for first-time buyers, which can be a great indication of future growth hotspots.’

What buy-to-let pitfalls should I prepare for?

One of the biggest hits to higher-earning landlords in recent years has been the loss of buy-to-let tax relief on mortgage interest, but if you are a basic rate taxpayer it won’t affect you.

Other pressures that have emerged recently include:

The loss of Section 21 ‘No fault’ evictions

Section 21 of the Housing Act allowed landlords to end a ‘rolling’ tenancy with two months’ notice, without the need to supply a reason for it.

The government now intends to repeal this (probably towards the end of 2020) so that landlords will now have to provide a reason and convince a judge that it is valid.

Although this development will undoubtedly be welcomed by tenants, it threatens to make landlord’s lives very difficult if they are faced with problem tenants.

Bearing this in mind, any landlord entering into contracts with tenants in the near future should vet them very carefully, to minimise the risk that they will turn out to be problematic.

Fortunately for landlords, the changes proposed would not be retrospective, so they could still end an Assured Shorthold Tenancy (AST) under Section 21 if it existed before the change in legislation.

Private residence relief is disappearing

If a rental property used to be your main home, then pre-April 2020 you can claim up to £40,000 capital gains tax (CGT) relief on any increase in its value.

Post-April 2020 this will no longer be the case, unless you are actually living in the property (as your main residence) at the time of the sale.

More tips for buy-to-let in the 2020s

1. Start small and learn your trade: You might plan to finish the decade as a property magnate, but your first buy-to-let project should play as safe as possible. Buy well within your budget, and initially pitch rents just high enough to cover your costs with a small excess. This leaves you free to make mistakes – which you will – and learn lessons that you can carry over to your next property, where you can start to chase more profits.
2. Make sure you have the correct licences: Not having the correct licence for your rental property can prove very costly, as this landlord discovered. For instance, if you rent to multiple tenants who are not part of the same family, you need an HMO (House in Multiple Occupation) licence. Note too that you need a licence for each property you rent out.
3. Draw up an AST tenancy agreement: Failure to put a strong, legally binding contract in place is asking for trouble – even if you think you know your tenants very well.
4. Build a good relationship with your tenants: A spoonful of sugar early on can make a big difference later. You’ll want to carry out regular inspections, and for this you need your tenants’ permission. So give 48 hours written notice before inspections – and long before this, win their affections and trust with a few small gestures, such as a welcome hamper.
5. Use a deposit protection scheme: Don’t feed the tales of bad landlords who refuse to refund deposits for no reason. Use one of the deposit protection schemes approved by the government so you don’t find yourself accidentally unable to repay a deposit.
6. Have a valid Energy Performance Certificate (EPC): If your property doesn’t have an EPC with a rating of at least an ‘E’, then you could be fined or even banned from managing the property. Make sure your property has this certificate, and give a copy to your tenants.

Find more tips in our Buy to Let Guide. For specific advice on buying to let, talk to a specialist mortgage broker who has experience of rental properties.