Just wondering if landlords are able to do anything to mitigate this - other than raise rents - for Mortgage Solutions
9 responses from the Newspage community
My advice? Take steps to make your property green. Come 2025 your properties already have to have an EPC rating of C or better and this date is coming round fast. It has to be dealt with sooner rather than later so if you can do it now, thus reducing your tenants utility bills, you can perfectly justifiably increase your rents accordingly and not even hit tenants in the pocket. Plus you're avoiding the looming crisis being walked in to that is 75% of rental properties are not currently at standard. You do not want to be one of the landlords trying to deal with that at the last minute.
The only option for BTL landlords seeking to maintain rental yields is to either increase rent or reduce costs, although they may find it difficult as rents are currently rising at breakneck speeds to their highest level on record. Other than that, we're expecting more and more landlords to move their properties into a limited company structure to reap the benefits this allows. Both the residential and BTL markets are going through a recalibration due to rate changes with more on the cards. With the global economy suffering from inflation and possible recessions, another base rate rise in August by the Bank of England is nigh on certain; my prediction is it'll be a jump of 0.5%
My advice review your portfolio to ensure is the yield still there and ensure you have the best possible mortgage deals in place by speaking to a broker as just today spoke to a new client who has been stuck on a variable rate for the past 12 months, and also ensure you are on track to ensure your properties are on track to meet the EPC rating of C if possible by 2025 as this will likely impact what you are able to do in the future.
For many landlords, the default will be to increase rents to offset rates rising. However, landlords should also consider the other costs they typically face such as their letting agent fees. It may be worth sense checking to see if current agents are adding value for money or if there are cheaper alternatives that still provide the service needed. With many agents struggling for stock on the sales front there may be deals to be had on the letting side with agents keen to obtain new business.
Sole trader landlords could consider setting up a Special Purpose Vehicle (SPV) limited company for their BTL properties. Your mortgage interest payments can be claimed as a business expense, and offset against profits, which is particularly beneficial for higher rate taxpayers.
Rising buy to let rates are a much bigger problem for investors in London and the southern counties, as yields are much lower. Some London post code areas have yields as low as 2-3%. Whereas popular northern towns and cities like Manchester, Bradford, Leeds, Newcastle (and my lovely home town Bolton) still offer yields of 8-10%. So if investors are worried about rising rates, then they need to make sure the properties they invest in have a strong yield and sufficient profit margin between rent and interest payments.
The cost of living crisis, inflation, and BoE rate hikes are not isolated issues for residential homeowners alone. BTL landlords will also be affected, and those unprepared could be in for a tough time. Let's not forget about the recent Government legislative changes which has resulted in heightened energy efficiency standards for BTL properties (which for many older properties it's very difficult to achieve), the introduction of a rental ombudsman service foe tenants, and the removal of Section 21 of the Housing Act to provide, “security for tenants in the private rented sector and empowering them to challenge poor practice and unfair rent increases without fear of retaliatory eviction”. This deadly combination will undoubtedly separate the wheat from the chaff in the BTL sector. Landlords need to get their house in order now. Those that are highly leveraged with 'cheap' mortgage debt, low yields and poor company structures will feel the pain first.
The last thing renters need right now is a jump in their rent, seemingly squeezed from all directions landlords should think carefully before passing on the full cost of rising rates to their tenants. To mitigate potential rent rises landlords should consider ways in which they can help themselves and their tenants reduce costs. That could be in the shape of tax efficiencies from setting up a limited company, reduced energy costs by planning for the 2025 EPC regulations or simply reviewing rents across the portfolio rather than applying rises directly to individual properties.
Running a BTL portfolio is a business, and to turn a profit, you must be aware of your income and expenses. Check your assets to identify which ones aren't working. Ask yourself soul searching questions: Can you convert to a multi let which is a HMO (House of Multiple Occupancy), as this may cover your costs faster and create a bigger return? If an existing HMO is not working will it be better as a single let but take care you don't lose the planning status if you are in an Article 4 area. Is there a possibility to increase the floor space to make more money by adding an extension or reconfigure the property to find an extra bedroom? Is it suitable for a more profitable short-term rental in the right area? Will changing the tenant type to a lengthier contract minimises voids and improve profits? Do you need that fancy accountancy software when a spreadsheet may just be as good? Are all these regular costs needed? That direct debit to a landlord’s association is a must for advice but is that monthly subscription to a networking meeting you never go to necessary ? Have you claimed all your expenses to reduce your taxable profit? If married are you linking the rental income to your respective tax codes. If your accountant is not adding value to your business change to one that will. Is the EPC (Energy Performance Certificate) accurate because if you are remortgaging getting a C or better may improve the interest rate offered. Look at the renewal dates of your mortgages and start seven months before their end to see what options you have. The proposed changes where you will need a minimum of C to let out a property from 2025 may impact on your thought process. Don’t put off regular maintenance as that will put future tenants off increasing your rental voids. Consider selling if nothing can be done because losses or breakeven will only get worse. As a business owner be as lean as possible with your expenditure and consider future interest rate rises. If it still works fine, if it doesn’t review your options.