Witnessing unprecedented growth since the mid-1990s, buy-to-let has become widely viewed as an excellent way to build personal wealth. Over the years, despite a series of ups and downs, many landlords across the UK have reaped notable benefits from both capital gains and rental yields.
Yet, although many observers still believe that it’s a simple case of acquiring a property, moving tenants in and then watching the cash roll in, a closer look at the average landlord’s day-to-day shows a different reality... A reality that looks set to become even more challenging in the near future.
A New Buy-to-Let Market Paradigm
The series of top-down measures in recent years has reflected a government eager to reform the industry and perhaps curtail some of its underlying profit-making objectives.
On the one hand, with the demand for rental accommodation showing no signs of abating, checks and balances that seek to create a safer environment for tenants should be welcomed. Most practiced landlords are unlikely to oppose to regulations such as compulsory smoke alarms, stricter HMO licencing rules and the possibility of wider electrical safety requirements.
As intended, the Prudential Regulation Authority (PRA) stricter stress-testing criteria is also tempering the speculative nature of buy-to-let as an asset class. It’s hard to dispute that creating a more sustainable borrowing environment will serve the sector well in time.
Yet there are two pieces of legislation introduced in recent years that are less forgivable…
In April 2016, the Stamp Duty surcharge effectively doubled standard rates for second property owners. In higher value areas like London and the South East, this means that landlords are paying out tens of thousands as entry costs.
This followed former Chancellor George Osborne’s implementation of Section 24 of the Finance (No. 2) Act 2015 – arguably the biggest shock the sector has ever witnessed. Phased in since the 2016/17 tax year, the legislation significantly restricts the amount of mortgage interest costs that can be offset against gross rental receipts.
What has rattled landlords the most is that, unlike any other business, tax is being levied on revenue and not profits. Despite a mortgage cost credit of 20%, the risks for individual property owners can be significant – particularly for those that are in the higher or additional tax brackets. Some are finding themselves inadvertently classed as higher tax payers even though they’re not earning extra income!
Should You Sell a Tenanted Property?
With data from the Ministry of Housing revealing that some 4,000 landlords are selling up every month, you may be considering whether it’s worth joining them.
Whilst some believe that the current chancellor may, at some stage, reduce Stamp Duty surcharge to stimulate the sector, the chances of any kind of Section 24 reversal look slim at the time of writing. To date, campaigns such as ‘Axe the Tenant Tax’ alongside other lobbying efforts have been largely ineffectual. The so-called ‘plight’ of landlords, it would seem, isn’t high up on the Treasury’s list of concerns for the foreseeable future.
However, it’s worth noting that Section 24 may only affect about a third of landlords. Those that can remain under in the lower tax band, even after the legislation is fully phased in (2020/21), will not have to worry too much about. Similarly, landlords with low loan to values ratios who haven’t excessively refinanced over the years are also unlikely to be impacted as much.
Indeed, with reports suggesting that some 1,400 buy-to-let properties are being purchased every month, a new breed of well-prepared landlords are seeing the changing tide as an opportunity rather than a threat. Here, the current focus is more on buying in Limited company (Special Purpose Vehicle) structures, exempt from the effects of Section 24, in solidly yielding locations – often in the Midlands and the North.
This professional approach comes in line with the growing institutional build to rent sector, where an unprecedented number purpose-built and professionally managed units are cropping up in larger cities – pushing out the smaller-scaled landlords to a certain degree.
Ultimately, every landlord’s situation is different and whether you sell will ultimately come down to your own financial circumstances, your level of gearing and a range of other factors. Before making any hasty decisions, speak to a suitably qualified accountant / tax advisor who can look at your annual cashflow statements and examine where your real liabilities are. You may want to check out The Property Investor’s Blog post which interviewed over 23 tax professionals on the back of phase 2 of Section 24.
Perhaps you can consider some relatively simple restructuring, sell over-leveraged assets to reduce your exposure or explore other strategies to boost your cash flow. If you’re one of the many ‘accidental’ landlords that has simply bought an extra property to supplement your income, alongside the wider risks, these changes might trigger you to dispose of your property. You can then benefit from the equity accumulated over the years.
How to Sell a Tenanted Property
The most obvious option would be through an online or offline estate agent. However, much will depend on the condition of the property and whether you wish to market it with tenants ‘in situ’.
It’s fair to say that tenants by and large do not generally treat properties like their own, so you should ensure that you have the reserved funds to make it presentable to the open market. Remember that existing tenants have the legal right to exclusive occupation and full enjoyment until the end of the tenancy agreement. You would often have to wait some months until you can access the property, then further time to refurbish and prepare it for sale. On the plus side, however, aiming for an owner-occupier as the end buyer usually means a better price.
Alternatively, you may wish to sell with the tenants continuing to live in the property. This may be the easiest step to take, especially if they don’t want to leave. The benefits here are that you will receive rent right up to the point of sale and typically will not have to incur as many refurbishment costs. But, at the same time, you’ll be narrowing down the pool of potential buyers to investors and traders mainly. They will invariably look at the property with short and long-term earning in mind – focusing on the specifics of the transaction (ROI, gross/net yield and other financial metrics). In short, you’re likely to get offered a lower price.
The estate agent may want to try and organise open days or block viewings – but generally marketing process with properties with sitting tenants is difficult. This situation is worsened should you have a disobliging occupant who will only move out on the back of expensive eviction procedures.
Many landlords therefore see the benefits of selling through an auction or private acquisition company. Again, you’re more likely to be dealing with professional buyers who will look at the financials in more detail than most. But they would be less concerned about the condition of the property, problem tenants and other issues. The process is also much more efficient relative to most open market sales (particularly with established fast house sale companies).This post summarises our extensive guide on selling a tenanted property. As a company, Property Solvers help all kinds of homeowners with their selling issues and runs an express estate agency.