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2022 is providing to be a challenging year for many landlords. Tightening regulation (such as removing buy to let mortgage interest tax relief) has already been squeezing profits for some years now. Yet since late 2021, rising UK interest rates from 0.10% to 3%, at the time of writing, has pushed up most variable-rate mortgages and also rates on new fixed-rate deals (including buy to let mortgages). Presently, some landlords now face profits of just £7. In this article, our team at Cedar House offers some options for buy to let landlords about how to protect their property portfolio.
We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Option #1: raise rents
According to the Zoopla UK Rental Market Report 2022, rental price growth has gone up by 12.3% on average this year (£115 a month). For many landlords, they have felt there has been little other choice in the face of rising mortage costs. Yet there is a limit to how far rents can be raised. Many tenants are struggling with the rising cost of living in 2022, with 2.5 million renters already either behind or regularly struggling to pay their rent.
Landlords must also contend with the type of rent they have agreed to with tenants. A periodic tenancy rolls week-by-week (or month-by-month) and the landlord cannot raise the rent more than once per year without tenant agreement. With a fixed-term tenancy, the rent can only be raised at the end of the contract (unless mutual understanding can be reached with the tenant). In any case, landlords must only raise rents at a “fair and realistic” rate – i.e. in line with local averages. Any raise beyond this can be challenged by the tenant.
Option #2: inject capital
If raising rents is not realistic, then landlords might consider injecting capital into their buy to let properties to reduce the size of their mortgages. In turn, this could lower the monthly repayment to lenders and widen the rental yield. This option assumes, of course, that landlords own capital ready to inject into their property portfolio. One study by Hamptons suggests that investors may need as much as £43,000 to keep repayments flat (even when offset by house price growth over the past two years). Of course, this is a very tentative figure and the capital injection may be much higher or lower for a specific landlord depending on the property value, location and other factors.
Option #3: cut costs
For some landlords, various optional monthly costs might be eating into profits. A storage unit, for instance, can easily run over £23.94 per square foot (per month) and a letting agent can also add a hefty expense. Are there creative, sensible ways that costs like these could be reduced – even if this simply involves “shopping around” to find a new supplier or agent? Taking time to carefully choose landlord insurance is also a good idea. Carefully screening tenants – and taking time to nurture good relationships with them – can also help mitigate costs for maintenance and repair later. The latter can be one of the biggest property expenses, so keeping on top of these (through routine inspections) can help prevent minor issues from developing into major ones. Keep detailed inventory reports in case a tenant leaves damage when they vacate the property.
Option #4: diversify to other investments
With landlords’ profits increasingly under pressure, it is understandable that some will want to sell their property portfolios – or, perhaps a portion of it (e.g. to release capital to inject into the ones kept). This is a significant decision and it is worth weighing your options with a financial planner given the stakes involved, to protect your goals and minimise a needless tax liability. There are signs that landlords are increasingly taking this route, with rental homes halving in number since 2019 (from 30 properties available to rent per estate agent branch to 15.6).
Yet with higher mortgage rates spooking more buyers in 2022, downward pressure is acting on UK property prices – with asking prices in November now down by £4,000 in just one month. As such, some landlords thinking of selling may face a difficult decision. Do you try to hold onto a barely-profitable buy to let in the hope that you get a better sale price in the future? Or, do you take a lower sale price now and commit the proceeds to other investments? Unfortunately, it is impossible to predict what will happen in the property market and so investors must act on the best available information (ideally with the help of professional advice) to maintain financial stabiltiy and continue progress towards their goals. At Cedar House, we are a strong position to help as a team of both financial planners and mortgage advisers – helping landlords, especially, to make these decisions with greater confidence.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk