The last two years have been particularly difficult for professional landlords in the buy-to-let property market. Will the start of a new decade bring a positive outlook or will rental property remain an uncertain investment?
Many of those who invested in property during the boom years, following the mantra that bricks and mortar are the safest bet, have watched the value of their assets plummet. Many have been unable to continue making their mortgage payments, and still others have found it impossible to sell housing stock even at a significantly deflated price.
This period has also seen the rise of the ‘accidental landlord’. This group of homeowners have been forced into the buy-to-let industry as a result of not being able to afford mortgage payments and an inability to sell their properties. The phenomenon of the accidental landlord has had a significant effect on the nature of the buy-to-let market as a whole. It has contributed directly to the saturation of the rental market and this has, in turn, resulted in depressed rental prices.
Furthermore, it is a sad truth that many accidental landlords simply lack the expertise to properly manage a property – entirely understandably, bearing in mind that they have been forced into this position. This has meant an increase in complaints from tenants, which has been damaging to the landlord profession as a whole.
Given the difficulties faced by so many landlords and buy-to-let investors over the past two years, many presume that things can only get better. But there is a broad range of opinion regarding the shape of the rental market in 2010. Many analysts are worried about the possibility of a ‘double-dip’ recession, in which the economy undergoes a second massive crash. Others, though, are confident that the worst is behind us, and that the housing market will continue to recover.
As a professional landlord, it is vital that you are prepared for all possible outcomes. Here are some of the main factors that might affect you during the coming year.
Sales volume increase
It seems likely that sales volumes of property will increase during the course of 2010. While this will be seen as good news for the economy as a whole, it will have mixed effects for professional landlords.
As the market begins to ease, and mortgages become more readily available, accidental landlords will be more able to sell their properties – meaning that the number of rental properties will be reduced.
Simultaneously, many of those individuals who were forced into renting will begin to find it easier to buy a property. This could see a significant reduction in rental demand, and therefore a reduction in average rental prices.
However, there is concern that the availability of mortgages will increase at a rate that outstrips the number of new properties coming onto the market. This could result in sales prices being pushed up again, and many more individuals being forced back into renting. This would be good news for professional landlords, who would see inflated rents.
The Financial Services Authority recently announced that buy-to-let mortgages would be subject to much more regulation. In the past these mortgages have been treated as business loans, and have therefore been less stringently regulated that residential mortgages.
Additionally, self-certification mortgages have been outlawed. These mortgages were aimed at self-employed individuals and others without easily mandated proof of income. The fact that these loans are no longer available is likely to cause significant problems for self-employed landlords wishing to expand their portfolios.
If you have previously relied on self-certification mortgages and now wish to purchase more buy-to-let properties, you may wish to consider setting up a limited company. You could then become an employee of your own company, pay yourself a salary, and therefore provide proof of income to lenders.
What about negative equity?
There has been a lot of coverage in recent months of the ‘menace’ of negative equity. Negative equity, whereby the value of your property is less than the outstanding loan secured against it, has certainly caused problems for homeowners wishing to move.
But it is worth remembering that this phenomenon has no practical implications unless you are trying to sell. If you do not need to sell your property, negative equity is nothing to worry about. For landlords in particular, negative equity is not typically an issue as buy-to-let properties tend to be long term investments.
But if you were planning to sell, it may be wise to think again. If property prices were to tumble further (as some forecasters suggest may happen), you may well be better off holding onto your existing portfolio – especially if you can find tenants. Property prices will inevitably rise again, so do not panic and sell your portfolio simply because its value has fallen.
The coming 12 months will pose their own set of unique problems for landlords and it is impossible to forecast with total accuracy what the state of the rental market will be over that period. As a result, it is important that you ensure you have taken every possible precaution to safeguard your income and your assets for the year ahead.