Having been a busy couple of years for landlords, our property expert Richard Blanco from the NLA is on hand to help understand what landlords can do to mitigate arising issues. See Richard in person at the NLA & Portico Landlord Seminar on 21st Nov and read a sneak peek into what Richard will be covering in his top 10 challenges facing London landlords below.
1. Your Tax Strategy
Do you have one? We are now in year 2 of the section 24 tax changes which restrict the tax relief on mortgage interest payments even though they are a reasonable cost of running our businesses. Worryingly, only 49% of landlords fully understand the changes according to NLA research. There is a slow trickle of landlords that are changing their structure – around 15% - and nearly 4 in 10 of us say we will buy properties through a limited company structure in future. Think long and hard before re-structuring your business for tax purposes, it can be very expensive and who knows when the tax rules might change in the future?
2. Buy, Sell Or Hold?
NLA research tells us that whilst 15% of landlords plan to buy in the next 12 months, 22 % plan to sell some of their properties. UK Finance reported in July 2018 that buy to let lending was down by 22% and lending to first time buyers was up by nearly 10% over the previous 12 months, showing that government policy to supress landlord borrowing and encourage home ownership is working. Meanwhile house prices are up by 3.2% nationally according to the ONS, but down 0.2% in London. Continuing uncertainty about Brexit, the economy, house prices and indeed government policy alongside hefty stamp duty bills are continuing to put the brakes on the market. I’m nesting up for the Autumn and keeping a watchful eye on things till the Brexit clouds blow over. Where do you stand?
3. Stay On Top Of Regulation
The government has been piling regulation on us over the past 12 months. The key message is that it is really important to stay on top of it and stay compliant. The list is never ending: new HMO definition, fees ban, redress scheme, GDPR, Minimum Energy Efficiency standards, electrical safety checks. If you are struggling, join a landlords association as they will really help keep you up-to-date.
4. Getting A Mortgage
The mortgage landscape has changed significantly since the Prudential Regulation Authority Changes came in last year. Most applications will be subject to a stress test of rent covering 125% of the cost of the mortgage at a hypothetical rate of 5.5%. If you have (or will have) four properties or more you will be classed as a portfolio landlord and a stress test will be applied to your whole portfolio. 60% of landlords report that they are finding it harder to get mortgage finance. There is a growing cohort of specialist lenders like Precise, Axis, Fleet, Vida and Landbay whose technology driven business models can provide more flexibility, but you may pay for it in higher rates and fees. If you haven’t remortgaged recently and you have a low loan to value, consider switching as there are some great rates to be had.
5. Your Article 4 & Licensing Strategy
Do you understand selective, additional, and mandatory HMO licensing? If not, it’s important to really understand how they work as 22 London boroughs now have or are consulting on what is termed discretionary licensing. 9 London boroughs have article 4 directions restricting lets to non related people. www.londonpropertylicensing.co.uk is the best place to go for information.
6. Transformation Of The Letting Agent Sector
The government promised to fully regulate letting agents at the Conservative party conference in October 2017. Already subject to a redress scheme and transparency regulations, they must now have client money protection in place by April 2019, and in future be members of a trade body plus sign up to a legally enforceable code of conduct. All agents will also have to have an approved qualification and lettings fees will be banned, likely in 2019. Letting fees typically make up about 30% of agents’ turnover, so we are likely to see a change in pricing strategies and many commentators believe there will be consolidation in the sector and/or business moving to cheaper online models. I recommend you choose an agent who has always been a member of ARLA, NALS, RICS or UKALA.
7. Disruptive Regulatory Forces
Politicians are considering policy shifts that could be disruptive for the private rented sector. At the Labour Party conference, shadow housing minister John Healey said that a Corbyn government would abolish no fault eviction, introduce compulsory three year tenancies, rent controls and renters unions to strengthen tenants rights. This could increase the number of sales by landlords, reduce the availability of private rented housing and cause house price deflation.
8. Getting Good Yields
Landlords face greater pressure to show good rental yields to obtain a mortgage and recent falls in tenant demand have caused rents in London to soften to -0.2% in the 12 months to August according to the ONS. Although there are signs the market is recovering, getting a good yield is at the forefront of many landlords concerns. Take pride in your property, set high standards and buy in a good location close to amenities so that you attract the best quality tenant. Professional Sharers, Students or multi lets can generate the highest yields, but you need to be prepared for more turnover of tenants and a higher level of management. Working family tenants may produce a lower yield but often stay long term.
Subletting is a particular problem in London, as some tenants find a way to share their costs, or unscrupulous rent to rent operators exploit our assets. Article 4 directions also force us to let to related people, but some tenants may exploit this by moving in additional relatives. Ask applicants who will live in the property before you agree to let to them. Ask them again at the check in meeting and warn them that they must not move anybody else in without your permission. Periodic inspections every 3-6 months are vital to check occupancy and reinforce your policy.
10. Avoid The Void
In the current lettings market, it can take longer to find a new tenant, so make sure you plan for tenant changeovers. Ask tenants to confirm around two months before the end of their contract whether they intend to stay or move so that you can advertise the property well in advance of their departure. If you are using an agent, get keys to them quickly to avoid missing possible viewing, particularly at weekends. Manage the check out process clearly by writing to the exiting tenant with a list of check out issues and discuss possible areas of conflict like cleaning, left over belongings and damage. Line up tradespeople to do any work that is required as soon as they move out. With new applicants be prepared to be flexible on price and furniture as that will be more cost effective than holding out another month for the idealised tenant that might not exist. You can also use Airbnb to short let your property inbetween tenants.
There will inevitably be challenges to the lettings market in coming months but by identifying and understanding your challenges and acting on them sooner rather than later, you can make sure you're top of your game and your properties are safe.
Find out more at the Portico and NLA Landlord Seminar on the 21st Nov here and book your ticket here. Find out more about Portico's Property Management for landlords here and find out more about becoming a member of the NLA here.