I wanted to share with you some of the insights that came out of my most recent article submission in the June issue of YPN magazine. I pose the question: Property investment…is it still worth it? In answering this question, we highlight what I call the Danger List, where those investors, which are most vulnerable to the recent policy changes may find themselves. We then present some simple tactics that we could deploy, depending on our situation. Broadly these are to defend, vary or consider alternative strategies instead. Then, in Your Voice, we hear how I have been likened to Alan Partridge by one respondent to our listener survey! Recorded live...not from Norwich...
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
In today’s show, I wanted to share with you some of the insights that came out of my most recent article submission in the June issue of YPN magazine. I pose the question: Property investment…is it still worth it?
In answering this question, I highlight what I call the Danger List, where those investors, which are most vulnerable to the recent changes may find themselves.
I go on to present some simple tactics that we could deploy, depending on our situation. Broadly these are to Defend, Vary or consider Alternative Strategies.
Then, I have a short update on the progress of our listener feedback for you in Your Voice.
OK, let’s go…
Today’s property chatter is based on an adaptation of my June article for Your Property Network (YPN) magazine. So, if you would like to see the full piece, which includes a number of sporting analogies, then you can either grab a copy of YPN magazine, or if you drop me a line I can send you an extract instead.
What exactly is Buy to let (BTL)? Well, BTL is a relatively new investment sector that emerged out of the mid-1990s when ARLA, the Association of Residential Letting Agents, developed a mortgage product in conjunction with a small number of lenders.
The mortgage was specifically aimed at providing more rental housing to meet the growing demand at that time (source: 18 years of buy-to-let, Paragon). Prior to this, most people engaged in the private rental sector (PRS) used to buy property with cash, or alternatively using fairly sizable deposits and commercial loans. It was the environment of the wealthy and / or more commercially savvy landlords.
In 1996, BTL as we now know it was born…let’s remember that was only 20 years ago! According to the Council of Mortgage Lenders (CML), some 1.7 million BTL mortgages were advanced, outstanding mortgage balances now exceed £200 billion (the GDP of Hong Kong) and the PRS has more than doubled in size (source: Wikipedia). Whilst not exactly mainstream, it has certainly become a big investment sector, far more commonplace and the subject of many a pub, coffee shop or dinner party conversation.
The existence of BTL mortgages, allowed people to gain access to the investment property far more easily than they could have done before. At times over this period, the level of deposit required was very low, or even zero, with same-day remortgages exploited by some investors in the last property boom.
In the past 6 years or so, we have seen some radical changes to BTL.
First the Global Financial Crisis and housing crash of 2008/09. Then a progressive stream of policy and legislative changes, accelerating in particular during 2015.
No longer were low deposit loans so readily available to allow easy access to a rental property and for those that could, tighter regulation, control and indeed tax penalties have quickly mounted up. The culmination of these changes came through the emergency summer Budget, quickly followed by the Autumn Statement, both last year and added to in this Spring Budget.
The withdrawal of the fair wear and tear allowance and the change in mortgage interest relief for investors buying with BTL mortgages in their own name.
Then, the Stamp Duty Land Tax (SDLT) premium for second homeowners.
Finally, the penal capital gains tax (CGT) rates for residential property compared to other investment gains.
So, are these change the end of BTL…is it still worth it?
Spoiler alert…it depends!
However, before offering some potential suggestions and alternatives, let’s first of all outline who is potentially vulnerable from these most recent changes in policy. If you can identify with one or more of these scenarios in my ‘Danger List’, then I suggest an urgent review of your plans, if BTL is or was your intended course:
The Danger List
- Investing in BTL in your personal name(s)
- Acquiring property investments using mortgages; particularly with medium to higher loan-to-values (LTV)
- Currently a higher-rate or highest-rate taxpayer
- Would be a higher-rate or highest-taxpayer once your gross rental income from BTL is added to your other taxable income
- Investing in properties with low mortgage interest coverage by rental income and / or low net monthly cashflow
If you identify with one or more of these scenarios, then maybe BTL is being closed off as an avenue for wealth creation in the manner witnessed over the past two decades. In which case, we must find another way. We must adapt and change.
However, to be clear I still believe that BTL can be an effective avenue to pursue as property investors in certain cases.
For example, lower rate tax payers, those seeking to have low levels of debt or those that simply seek one or two properties to hold for long-term capital gain, provided the costs are covered in the meantime, could still find BTL fits their needs. A caveat to this is an ability to cope with the red tape that already exists and is likely to continue coming in.
However, for those that might find themselves ticking off a number of the scenarios in my Danger List, or those that seek greater rewards from property investment, then adaptation in some form will be the key theme over the next few years.
Adaptation can come in various ways of course. Alternatives to the vanilla BTL model through our personal name will include considering defensive approaches, variations to the existing model and some alternative property strategies to BTL.
The first step is to look at our current situation and try to protect or defend it.
Aim to keep mortgage lending down by reducing the LTV at the outset or by overpayments. Look at switching to longer-term or low-rate fixed deals. Increase rent levels more steadily over the next few years than perhaps we might have done otherwise.
Consider placing new BTLs into company ownership. Noting that this may not be suitable for everyone and so professional advice is recommended.
The hardest hit segment of BTL will be those that cannot service their mortgages and tax bills through cashflow following the changes. This is will be where low yields and rental coverage of mortgage repayments leave a small margin of pre-tax profit today.
Instead, seek higher yielding single lets, such as in in the outer regions of the UK. Alternatively, multi-lets or houses of multiple occupation (HMO) in any area with the right mix of rental demand and supply permissions.
- Alternative Strategies
Alternatives that we could consider include short-term lets, such as holiday rentals and serviced accommodation for example. Equally, moving away from pure rental strategies could bear fruit, such as property trading, conversions and development projects. Many of these strategies currently have more favourable tax treatment than BTL.
More creative strategies can come into play, such as lease options and rent to rent. However, more creative can also mean more complex, more risk, more work and more sharks at times too!
So, is property investing worth it still? The answer: no, yes…or maybe!
No - perhaps BTL for a significant number may well have become far less attractive, or even unsustainable for some that identified with my earlier danger list. Some BTL investors have or will exit the market.
Yes – for a few that are left largely unaffected by the recent changes, perhaps it’s ‘keep calm and carry on’. Things can change over time so, best to stay on top of what’s coming up though.
Maybe – for those that BTL no longer serves, the key as to be to adapt. Defend, vary or consider alternative strategies as I mentioned earlier. There is more to property investing than just BTL after all. For those that plan ahead, can make course corrections and change their approach and direction, a rich reward still awaits those that implement a flexible, professional and more diverse approach to property investment than pure BTL. You never know, you may be able to pick up a bargain from those that are exiting the market as well…
So, which of these camp are you in right now: defend, vary or alternative strategies? Do you identify with my Danger List? Drop me a line email@example.com to share your thoughts…I would love to hear from you.
As for me personally, I have an existing portfolio, some of which is in my personal name, along with further plans for growth. I have a mixture or different tactics that I am deploying. I am using some of the approaches mentioned under the defending, varying and alternatives strategy ideas raised.
I have some investments through a company, have identified some properties to switch to an alternative model or to review the rent. I am involved in trading and conversion projects and higher yielding income strategies as well. Whilst I am looking at the UK, I am also investing in some overseas markets that I know, as a potential hedge against further potential changes in the UK.
I am equally affected by the recent policy changes myself. However, as a professional property investor, I know that I need to keep my eye on changes ahead and adapt to these changes both predicted and actual.
How about you…how are you affected…and more importantly what are your plans?
Next up though, we will talk about how you can help me to shape the podcast going forward…
Over the past few weeks, I have been seeking feedback on the podcast and already I have had some very useful and insightful responses. I would like to gather as much feedback as I possibly can from listeners both old and new, so please would you consider taking a few minutes to complete our listener survey.
You can find a link to the survey in the show notes and if you drop me a line firstname.lastname@example.org I can ping you the link straight back as well.
So far, it seems clear that you like the pure property content of property chatter along with my own insights and experience and the subject matter expert contributions have been well received. Casa gets a big thumbs down and a one or two of you think my wider philosophical insights and at times meandering style is not your personal cup of tea. I have been likened to Alan Partridge at times for laughing at my own jokes! But it’s OK…when you put yourself out there a little bit, you know that you won’t please all of the people all of the time, although I think it is important to let your personality and values shine through as transparently as possible. One thing is for sure, I am passionate about sharing my knowledge and as long as you find this useful or interesting, I will happily continue to do so J
I would rather have a larger representative sample before drawing any final conclusions, so please make your voice heard and complete the survey. It is anonymous if you would like it to be. However, please also remember that if you make an observation or comment and keep your response anonymous, I may not fully understand the full meaning without the benefit of being able to check it with you. I won’t bite don’t worry…but equally, I and other listeners may not 100% agree with you, either…
I would also be happy to tackle your questions and more in the months ahead in the YPN column, so drop me a line email@example.com with your questions with the subject line YPN won’t you? In fact, I have started to post reader questions and my replies onto the blog now too. So, make sure you head over to www.thepropertyvoice.net to see what Kate & Brian had to say in response to my YPN columns so far won’t you. By the way…Brian is not his real name…I wanted to protect his identity unless I am given permission to use a real name; I won’t unduly expose someone’s personal situation either in case you are concerned about that.
Right now though, all that remains for this week is to say, thank you very much for joining me on the show today and until next time on The Property Voice Podcast…it’s ciao ciao!