Buy-to-let remains challenging for landlords. Government interventions and the wider housing slowdown have resulted in declining activity in the market.
According to a report by Shawbrook Bank and the Centre for Economics and Business Research, the buy-to-let market is unlikely to stabilise until 2021. The report suggests recent changes to legislation, including tax changes, will cause landlords problems in terms of generating an income and realising a profit. When you look at mortgage figures, which highlight the decline in the number of buy-to-let mortgages being applied for and taken out, you can appreciate the stark warning.
While some landlords are choosing to reduce the size of their portfolio or even sell off all of their properties, there are still plenty of ways to protect and grow your buy-to-let income in 2019 if you want to remain invested in property.
Investing in the Right Property
The most important thing any buy-to-let landlord can do in terms of maximising their income potential is to pick the right properties, as highlighted by The Buy to Let Index Quarterly. While rental yields on average are below historic levels, certain areas are actually performing rather well. Rental yields in certain areas of the country are still averaging 3%, with capital gains reaching around 10%.
For would-be landlords and those looking to expand their portfolio, spending enough time to scout the property market and finding the best locations is important. You don’t want to purchase a property just because it’s cheap, for example, which is one area where new landlords will often trip up.
You have to ensure the market is right for finding tenants that can afford the right rent.
Targeting the Right Tenants
If you already manage a buy-to-let property or portfolio, it pays to make sure you are targeting the right tenant. Different locations might attract a different type of tenant, and different properties might suit different people. Understanding your ideal tenant is important in terms of being able to advertise effectively, as well as being able to ask for the right rental price.
Knowing how you can target the right tenant is also a great way avoid void periods as much as possible. Void periods are often landlords’ biggest challenge in terms of maintaining rental income, particularly if they’re reliant on rent to pay most of the buy-to-let mortgage.
In 2019, consider what you can do to attract more long-term tenants. If your portfolio means your target tenant is professionals who tend to only stay for six months and move on, make sure you use resources that make finding the tenant and signing contracts easy, as well as keeping your costs low.
Expanding your Property Portfolio
House prices have dipped almost everywhere in the country, which could present opportunities to expand your property portfolio and improve your income stream.
Expanding your portfolio can both protect your rental income and grow it further. There are numerous ways of doing it. Outside of seeking properties and doing your research via traditional means, seeking out repossessed and abandoned properties could both offer opportunities for growing your portfolio without a huge initial investment.
Properties that need improvement are not always a bad idea. You can, generally speaking, save a lot in initial costs since these properties tend to be cheaper to buy. Of course, you have to be smart and consider the cost of refurbishment upfront. You don’t want to buy cheap but end up spending more to renovate the property than you would have spent simply buying a property that is “tenant ready” in the first place.
Another option might be to buy from other landlords in your local area. If you know of landlords that are looking to exit the market and may be looking to sell property quickly, is that an opportunity for you? If one of these landlords has sitting tenants you may be able to acquire a new property for your portfolio with tenants already in place!
Checking Your Buy-to-Let Mortgage
If growing your portfolio isn’t on your agenda, there are still plenty of things you can do to grow and protect your buy-to-let income in 2019.
Check your buy-to-let mortgage to ensure you’re getting the best deal possible. This is something landlords should do regularly. Changing your mortgage to a better one, subject to your terms and conditions, is usually not that difficult and it could yield big savings in the long-term.
Renegotiating and changing your mortgage will be especially important in 2019 now that mortgage tax relief is removed. However, this tax relief is going to be phased out and next year, landlords will be able to claim 25% on mortgage tax relief. This will be replaced fully in the 2020-21 tax year, from which point on, landlords will get a 20% tax credit on mortgage interest paid.
The best deals depend a lot on your situation. In general, two-year fixed mortgages tend to offer the best rates. In the long-term, five-year fixed mortgages might be better since it’s hard to know how rates may develop within a two-year period.
Without this tax relief, you should also look to reduce your mortgage as much as possible. Paying off your existing mortgage can be one of the most effective ways to boost your rental income.
In any case, comparing mortgages is the key. You should consider using an independent broker if you’re not that accustomed to the nitty-gritty of mortgage rates and deals, and this is another area where less experienced landlords can find themselves spending more than they should be. It’s always good to conduct your own research, too. The more knowledge you have, the better your deal will be.
Creating a Limited Company
Another possible strategy to explore is to consider creating a limited company to manage your buy-to-let property portfolio. Due to recent tax changes, running a limited company could be a better option for private landlords. When you have a limited company, you will be able to take advantage of capital gains tax strategies. If you’re a higher rate taxpayer, you could end up paying 40% of your profit in income tax, while as a limited company you only have to pay the corporation tax rate of 19%.
You also have more options in terms of how you distribute your rental profit. Your limited company can pay you a dividend, or you can grow your profit to use later for another investment property.
Controlling Your Expenses
Finally, it’s important to look to control your expenses and find ways to control costs whenever you can. Ditching costly letting agents that manage your property and moving to a DIY landlord model is a good option. DIY landlords have more control – you don’t have to pay costly management fees and you are more in control over your spending. With Upad’s tools and guidance, going solo is not difficult or daunting. You will get to decide just how you run your business, keeping more of the money you get from your properties.
While buy-to-let landlords face a challenging landscape, it is by no means a hopeless situation for landlords who wish to maintain their property investments.
We hope this guide has shown you there are still many strategies you can use to protect and grow your rental income in 2019. With thorough planning and clever use of the tools available, vigilant and diligent landlords can enjoy a prosperous 2019 and beyond.
Upad's Landlord Club gives you access to exclusive guides and helplines that will make you a better landlord and maximise your opportunities to grow your buy-to-let income. Click the link below to find out more and join the Upad Landlord Club.