Buy-to-let returns look set to outstrip cash again
As interest rates rise, many landlords may consider the comparison between the ‘safety’ of keeping cash in the bank versus the ‘risk’ of remaining invested in property. In this article, we examine the latest rental forecasts from ARLA Propertymark, and why 2018 may be another great year for buy-to-let investment.
Rents are likely to increase in 2018
ARLA Propertymark’s December report shows that most letting agents expect rents to rise in 2018. They forecast that a shortage in supply of rental properties will combine with increased demand to push rents higher. In fact, 6 out of 10 agents expect rents to rise, while only 2 out of 10 expect them to reverse.
Other factors will also put upward pressure on rents. Specifically, agents highlight the following as having an inflationary effect on rental prices:
- The ban on letting agents’ fees
- The higher Minimum Energy Efficiency Standards (MEES)
The letting agents’ fees effect
The government has kicked the letting agents’ fees can down the road again, and while it would like the ban to take effect in October this year, now it may not come in until April 2019. However, it’s likely that buy-to-let landlords will begin increasing rents in anticipation of the ban.
Should the ban come into force, then letting agents will pass the fee onto landlords, who will simply pass the charge onto their tenants by way of higher rents. It’s a crackpot piece of legislation that will do little other than to increase rents permanently. The government may be realising the folly of its policy, but it has already set in motion higher rents to compensate.
Supply of BTL properties may fall in April
The increased Minimum Energy Efficiency Standards, which come into force in April, will make some properties illegal to let. It has been estimated that as many as 300,000 properties could be withdrawn from the private rented sector. If this is the case, then more tenants will be chasing fewer properties. This increased imbalance between supply and demand could push rental prices up.
Where properties need to be renovated in some way to bring them into line with MEES, it is likely that the landlord will push the cost onto the tenant by way of rent increases. For tenants, the overall effect should be negligible – lower energy bills should compensate higher rent. The difference, of course, is that energy bills are variable, whereas once the rent goes up, that’s it: the tenant can’t cut down on electricity use to reduce their monthly outgoings.
Longer tenancies could be good news
Longer tenancies of a minimum of 12 months don’t have to be a bad thing. In theory, it should give the landlord extra security of knowing the buy-to-let property is rented, and won’t suffer a costly void period of 12 months. And fewer tenant changeovers mean lower costs of cleaning, repairs, time for viewing, and other admin that comes with tenant changes.
On the other hand, if a tenant wants to leave early, there’s not a lot you can do to stop them. And a 12-month tenancy could make it more difficult to evict a bad tenant.
Therefore, the extended tenancy length is probably better news for tenants than landlords. However, by employing our 12-month tenancy strategies, you should reap the benefits of longer tenancies while protecting against the downsides.
Other positive changes for 2018
Other changes that should be positive for buy-to-let landlords in 2018 include:
- Reforms to universal credit, which should help the cash flow of landlords who let to tenants on this benefit
- Changes to tenant referencing should help find the most reliable tenants
- New tenancy deposit schemes that allow instalment-based deposits, enabling otherwise good tenants who are short of their deposit to be found
So, plenty of buy-to-let landlords to cheer in 2018. Yes, the buy-to-let market has its challenges. It may be that this year’s biggest challenge is financial – higher interest rates and higher inflation must be planned for. But with the right strategies and a good tenant in place, there is no reason why 2018 shouldn’t prove to be yet another good year for the savvy buy-to-let landlord.
Rents are forecast to rise, and so are property values. It’s the kind of passive income and capital growth potential that money sitting in a bank simply can’t match. The key is to ensure your buy-to-let strategies maximise the potential and minimise the risks. Let us help you make sure 2018 is a great year for your buy-to-let property portfolio – contact one of the Ezytrac team today on+44 01522 503 717., and find out why we’re one of the UK’s fastest-growing investment property managers.