... and the 5 reasons why you most definitely shouldn't!
It looks like the buy-to-let market is about to enter a challenging period. But when we look back at the last recession and what is happening now, there are vital lessons all landlords can learn to protect themselves. In fact, there are opportunities for landlords both in the short term and the longer term. Let’s look at the challenges and opportunities ahead…
The Immediate Challenges
There are three main challenges ahead for landlords. The major concern is the impending rise in unemployment and how that will affect tenants’ ability to pay their rent, the rents being achieved and the possible Capital Gains Tax (CGT) changes might mean an increase in tax paid by landlords when they come to sell their buy-to-let properties.
Firstly, let’s look at your tenant’s ability to the rent; the Furlough Scheme did help soften the blow, helping out 240,200 people in July which represents 36% of the NI workforce. However, it cannot be denied the economic fallout from Coronavirus has already placed some tenants under financial stain. As the Furlough Scheme finishes at the end of October, the newly announced Job Support Scheme will be coming into play on the 1st November, but with employers expected to pay 55% of an employee’s wage the IFS think tank director Paul Johnson warned it was a “very big change from furlough” and “less generous”, adding: “A lot on furlough now likely to lose their job.”
When a tenant fails to pay the rent, the next step is to instigate legal proceedings, although guidance from the NI Executive has recommended that landlords and tenants should work together and exhaust all possible options before starting eviction proceedings. Yet more and more landlords are feeling the pressure as many mortgage payment holidays will be coming to an end shortly.
If a tenant finds themselves being made unemployed in the months to come the best action to take is to apply for Universal Credit as soon as possible, which should help with their rental payments. With regards to the evictions process, the Executive have changed the rules a number of times in the last few months, so if you want an update, don’t hesitate to contact us, whether you are a client or not – we are just happy to help.
Secondly, the rental market has remained strong in the second half of this year as demand levels have accelerated due to economic uncertainty. Rents are increasing against a backdrop of falling incomes which is creating affordability pressures for many households. The labour market profile suggests the pending economic damage is likely to have a greater impact on private renters than homeowners and this may lead to falling rents over the coming 6 months throughout Northern Ireland. This may affect the larger council areas such as Belfast, Lisburn and Derry City, but I don’t think this is so much of an issue in this area as rents in Craigavon, Lurgan and Portadown are around 3% higher year on year.
Thirdly, there is talk that the Chancellor is looking at many different ways to pay back the Coronavirus bill, and one area he is exploring is changing the Capital Gains Taxation rules. As property is the biggest asses that most people own, this also a reason for concern for buy-to-let landlords. Currently, CGT on sales of buy-to-let property is levied at 18% for basic income tax rate payers and 28% for higher rate income tax payers. There is talk the capital gains made on the landlord selling their buy-to-let property could be taxed at the landlord’s income tax rate. But I have to stress that this is just ‘talk’ at the moment!
The Opportunities Ahead
Northern Ireland has officially entered its first recession since 2009, which will naturally make investors think about ‘offloading’ their portfolios. Nevertheless, there are numerous indicators to show that now is the time to either become a buy-to-let landlord or to expand your property empire and buy more property… let me explain.
Firstly, if you have money tied up in stocks and shares, many FTSE companies will not be paying dividends for a while, and the best savings accounts are only achieving 101% with a 120-day notice period, so where are you going to invest your hard-earned money?
The average buy-to-let property in the Craigavon and Portadown area, for example, will earn a monthly return of 6.48%
Of course, deciding on the right property is crucial to get a good rental income and return on investment. I have so many first-time landlords buy with their heart and not their head. Buying a property that you are going to live in is more heart than head but buying for investment purposes is a completely different kettle of fish.
Secondly, the local property market is certainly very busy at the moment, yet even the most optimistic agents say it cannot last. Whether the market goes pop or has a slow and steady puncture, the market will cool in 2021. The recession will mean some people are less able to afford a mortgage. This means that if property values do ease off in 2021, you may be able to get a great buy-to-let deal if you are planning on becoming a landlord or expand your property empire as an existing landlord.
Third, if people aren’t buying, they still need a roof over their head and the council aren’t building any council houses, meaning the private sector will need to take up the slack.
Property pal also reported that almost 1 in 5 people who planned to buy a house before COVID-19 no longer plan on buying later this year, resulting in tenant demand remaining at the same levels.
Therefore, if you are still unsure about becoming a landlord or adding to your portfolio, the risk of a fall in tenant demand is minimal. But please don’t go buying any old property, as it’s fundamental that you make a good investment from the start in order to see a good return on your investment.
Plus, if property values do fall in 2021 (as in 2009), tenant demand for rental property will only go up.
Fourth, reports that the mortgage lenders are starting to impose stricter conditions are true, yet during Covid, many lenders are seeing buy-to-let landlords as a safer option to lend their money to. In June alone, the number of buy-to-let mortgage products rose by nearly 20% to just over 1,700 meaning if you have a decent deposit of 30% upwards, you are likely to find something that fits your needs.
Finally, buy-to-let investment has to be seen as a long-term investment yet, for many, that is a source of financial security. Of course, property values may dip a bit next year… but then again, they might not! Whereas there may be intervals where it’s more difficult to sell because property values will be too low, as is normally the situation throughout a recession, there will also be times where landlords will make a nice profit when selling their property investments. Like all things in life – it’s all about the timing.
Of course, buy-to-let does come with some risks and challenges, but it’s all about mitigating those risks. Also, there is no denying that buy-to-let also comes with a lot of opportunities as well.
If you’re thinking about starting out in property investing or even a landlord with an existing portfolio feel free to drop me a message, email or pick up the phone and we can have a quick chat about your personal goals when it comes to buy-to-let.