How the buy-to-let market is undergoing significant transformations
Buy-to-let has undergone significant transformations in recent years, leading to a fundamental shift in the profile of the typical landlord. The buy-to-let (BTL) market, which was once a refuge for casual investors looking to diversify their income streams or secure their financial futures, has been substantially impacted by several economic factors.
These changes have rendered BTL investments less advantageous for non-professional landlords, ushering in a new era where professionalisation and strategic planning are essential.
Rise and fall of ‘accidental’ landlords
Until recently, many BTL investors were individuals who had inherited homes or retained previous properties upon moving, often referred to as ‘accidental’ landlords. Casual investors also viewed BTL properties favourably as a means to augment their income, particularly in preparation for retirement. High house price growth, stable borrowing costs, attractive rental yields, and tax reliefs made BTL properties a relatively safe option for these non-professional landlords.
Economic shifts impacting the BTL landscape
However, by 2024, the scenario has changed dramatically. An increasing number of ‘accidental’ and casual landlords have exited the market, driven by the turbulent economic conditions of the past few years.
The challenges began in 2020 when landlords could no longer mitigate their tax bills by offsetting mortgage expenses against rental income. Instead, they receive a tax credit of 20% of their mortgage interest payments. This shift has posed problems, particularly for those pushed into higher or additional tax brackets.
Tax changes and their consequences
In April this year, the Capital Gains Tax allowance was reduced to £3,000, down from £6,000, and significantly lower than the £12,000 it was not long ago. Consequently, those selling property now face potentially larger tax bills, especially individuals who have held properties for more extended periods and enjoyed significant price growth.
Additionally, landlords are feeling the impact of the cost-of-living crisis, with rising costs and bills compounding the challenges posed by high interest rates, particularly for those who have had to remortgage in the past two years.
Opportunities amidst challenges
Despite these difficulties, there is more optimistic news for professional landlords. While recent times have been less favourable for non-portfolio landlords (those with fewer than four properties), opportunities have emerged for professional landlords (those working full-time as landlords with more than four properties).
Many professional landlords have taken advantage of stalling house prices over the past year to expand their portfolios, with a significant number now focusing on higher-yield options.
Focus on HMOs and rental yield advantages
As rental demand continues to grow and outpace sufficient stock supply, professional landlords have set their sights on property types such as Houses in Multiple Occupation (HMOs). These properties offer rental yields that are more attractive in a higher interest rate environment, allowing for better mortgage lending conditions. The frequent turnover of tenants in HMOs also enables landlords to adjust rental prices to continuously align with the current market.
Some landlords have converted existing single-let properties into HMOs to increase their income streams significantly. This shift not only maximises rental yields but also provides an opportunity to meet the growing demand for affordable shared housing options.
Diversification into semi-commercial properties
In addition to HMOs, landlords are increasingly paying attention to semi-commercial properties. Retail units with flats above are proving particularly popular due to their dual-income potential. Combining commercial and residential spaces allows landlords to benefit from higher yields through diversified income sources.
This diversification enhances financial stability and provides a buffer against market fluctuations. The ability to draw income from commercial rents and residential tenancies makes these properties a resilient investment choice.
Adapting to energy efficiency requirements
Although the proposed overhaul of the current energy performance certificate (EPC) regulations has been scrapped, professional landlords continue prioritising energy efficiency improvements. These enhancements benefit tenants by helping them manage their living costs during challenging financial times, and they also make properties more cost-effective for landlords as energy bills remain high.
Investing in energy-efficient upgrades reflects a commitment to sustainability and the property’s long-term value. It is a strategic move that aligns with broader environmental goals while providing immediate economic benefits.
Professionalisation of the buy-to-let market
The increasing trend of buy-to-let (BTL) purchases made through company structures indicates a significant shift towards the professionalisation of the market. This approach offers tax advantages and greater operational efficiencies, positioning landlords to navigate the complexities of the property landscape better.
The rise in HMO and semi-commercial investments exemplifies how professional landlords have managed to remain agile. Despite the high interest rate environment and other market challenges, they continue to grow their businesses. This adaptability is crucial for sustaining growth and ensuring business resilience.
Overcoming challenges and future-proofing strategies
Despite the various obstacles landlords face this year, the greater professionalisation of the BTL market is proving advantageous. Portfolio landlords are leveraging these challenges by diversifying their portfolios, implementing strategic growth plans, and future-proofing their investment strategies.
By adopting a proactive and innovative approach, landlords can continue to thrive and expand their businesses. The combination of professional management, diversified investments, and a focus on efficiency positions them for sustained success in the evolving property market.
Are you looking for a buy-to-let mortgage to start or expand your property investment portfolio?
For more detailed insights or to discuss your investment funding requirements, please do not hesitate to contact us. Speak to our team today to discuss your needs, and how you can benefit from the shifting landscapes of the buy-to-let market.
Please note: this is a long term investment which you hope will generate rental income along the way and a profit when you sell the property, but bear in mind that if you need access to some cash, a property can take time to sell or remortgage. If house prices fall, you might not be able to sell for as much as you had hoped. You would have to make up the difference if the property sold for less than you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up. This would eat into, or even wipe out, your income and profit. It is recommended that you also maintain access to emergency funds to cover your mortgage payments during ‘void periods’ that may arise whilst you have no tenant and the property is not let. Please also note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
