Buy to Let Implications for Landlords
publication date: May 29, 2012
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books
Buy to Let Implications for Landlords
Following on from Kate Faulkner's analysis of past rental market returns, Kate explains the implications of buy to let performance for landlords.
Implications for Landlords who invested pre 2005
For landlords who invested prior to 2005, yields and in the main, capital growth returns, will continue to be good. Rents are typically stable or rising in 2012 and in some areas capital growth will continue.
On-going the biggest threat for most pre 2005 investors is what happens to capital growth over the coming years. Property prices are on average, down by 30% in real terms, ie when including the effect of inflation. The effect of inflation on property isn't often considered by landlords, but is critical, especially for those investing for a pension. Since the credit crunch, most landlords will find neither their rents nor property prices will have kept up with annual inflation rates of 4-5%.
For those who invested in properties pre 2005, there will be enough capital growth and good yields to deliver a good return versus other investments as long as they didn't over pay for the properties. For those who invested for yield, good returns are likely to be achieved for 2012.
For those who invested for capital growth, hoping to make money from property prices growing naturally, it is going to be a tough year if your properties are outside of a few good performing areas, such as prime locations within London. For those who invested prior to 2003 or built in capital growth from the day the property was bought, it is unlikely additional capital growth will be being achieved. As a result, landlords will have to consider holding properties for another 10-15 years to see returns which outperform the impact of inflation.
However, the good news for most landlords who invested pre 2005 is that they are likely to have decent equity levels of 25% or more. This means these landlords are much more likely to continue to be able to secure access to good levels of mortgage finance both now and into the future.
So from Kate's perspective "For those who invested prior to 2005, capital growth is likely to be slow to materialise, but good equity levels and stable to rising rents should mean decent yields are delivered and landlords can access good finance." Kate warns though "The picture for those who invested post 2005 though isn't necessarily as rosy".
Landlords who invested post 2005
Securing good returns since 2005 will have been a lot tougher for landlords. Those who invested for capital growth will have had a rough ride unless they built in capital growth by getting a deal ‘below market value'. For those that invested for yield, returns will be improving, but property values may well have dropped by up to 30% in real terms.
Rental performance too may not be as good as ‘average' figures from rental indices are suggesting. In some areas across the UK, rents still haven't recovered to the 2008 highs, which means when you take inflation into account, real rental returns could have actually fallen for many post 2005 landlords.
Probably the biggest issue for buy to let landlords with properties held since 2005 is equity levels. For those who bought with a 25% deposit back in 2005, it's likely that your properties will now be worth a lot less and for some, equity levels may well be in the danger zone of less than 10%. The major headache this will cause landlords is trying to remortgage on decent rates. There are unlikely to be many lenders willing to support buy to let properties with less than 25% equity levels on each individual property, although there are some which will take a look at the average equity across the portfolio. Some landlords may need to accept though they may be forced to sell some properties within the portfolio.
From Kate's perspective, essential advice for landlords who have invested since 2005, "It is essential to have a full financial review of your overall finances and check via the likes of Property Check what lenders are likely to value your properties at prior to re-mortgaging." According to Kate, "Getting through these tough times is all about financial planning and working out strategies to survive a downturn." From Kate's perspective, many landlords are sticking their head in the sand, hoping values will miraculously grow prior to re-mortgaging, but Kate's view is, "This is unlikely to happen for some years to come and as interest rates start to rise, many landlords are going to be hit with massive falls in income and little equity in their properties to attract refinancing."
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