It is clear that the war on buy-to-let landlords since 2016 has escalated heavily, and now, as we reach a new decade, the impact of new stringent regulations and punishing tax schemes has led to large numbers of investment landlords leaving the sector.
Momentum, which has been stifled, can be blamed on stricter affordability checks, a stamp duty charge of three per cent for buy-to-let properties and second homes, rent checks for buy-to-let landlords with at least four properties, as well as the reversal of tax relief for higher rates on mortgage interest.
As more unfavourable regulation will be implemented until 2021, buy-to-let landlords will likely experience a reduction in their yields and a squeeze on profits. If this regulatory environment continues, then the rental sector will continue to slow down.
However, despite the challenging environment, statistics from 2019 have shown that one third of landlords still own at least two homes, which signals that investor landlords are still continuing to add to their housing stock. Landlords who have remained buoyant are likely those with bigger portfolios of property, which is proof of how the rental market continues operating increasingly like a business.
Buy-to-let landlords are acutely aware of the requirements to implement measures to protect tenants and meet regulations within the rental sector. However, little has been implemented to reassure the valid concerns of landlords in return. In turn, this has meant fewer rental homes are on offer, which has inadvertently caused an increase in rental prices.
In order to ensure that the private rented sector remains afloat and reduce the exodus, there are a number of potential solutions. For example, HMOs (Houses in Multiple Occupation) are quickly becoming a common investment for buy-to-let landlords. They can give them access to attractive yields alongside less risk. For example, if the home is rented to a number of long-, medium- and short-term tenants and a renter cancels their rental agreement at the last minute, the landlord will not lose much rental income due to the other tenants still living at the property.
With HMOs viewed as a revenue cost with the structural and refurbishment work they require to meet general requirements and regulation, the income from the property is tax deductible. However, this is only applicable according to the Machinery & Plant Capital Allowances, which affirms whether communal areas in the property qualify for the tax relief on income. The capital and purchase improvement costs for communal areas will be treated as a cost from the landlord’s letting business.
Landlords will stand to receive high returns, and by launching a limited business for their property portfolio, landlords can enjoy tax relief which was previously available on buy-to-let mortgages. Although letting HMO properties is an attractive option, it is crucial that landlords conduct due diligence on the requirements of HMOs from the local authority, which will vary for each borough. In order to ensure that landlords meet legal requirements, inventory and reporting software, such as that available with an inventory base login, can create reports to a professional standard. This includes risk assessments, building inspections and check-out and check-in reports.
Some landlords may rule out investing in HMOs due to the potential hassle, but there are solutions for ensuring that your investment is effectively managed and well selected.
The focus of any buy-to-let property portfolio is on good rental yields and healthy rental demand, so landlords could also expand their current property portfolio by searching beyond London. With house prices across the UK stabilising and showing great promise, opportunities to boost your property portfolio are widely available from cities such as Liverpool and Manchester.
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