The ongoing debate about the private rental sector (PRS) having anywhere near adequate supply to meet demand right now, is likely to continue for some time to come, especially in light of a Budget statement which avoided the topic all together.
There has clearly been a lot of noise around continued landlord involvement in the PRS with the suggestion many ‘amateur landlords’ have been selling up in their droves unable to run profitable properties due to a number of factors including rising interest rates, meeting mortgage affordability criteria, the increased cost of running properties not forgetting the ongoing impact of taxation changes.
Whether that is the truth of the matter remains an ongoing debate. Indeed, it was suggested by the Housing Minister, Rachel Maclean, recently that the ‘narrative’ around landlords selling up in their thousands was ‘wrong’.
However, there can (I think) be no doubting that we have a disconnect between available properties to rent and tenant demand; hence why we’re seeing rents continuing to rise.
Certainly, and this is the case for all landlords, making sure the property is profitable is a necessity, particularly if they are owners of just one or two rentals and they do not have the potential comfort blanket that a larger portfolio might offer them.
All this noise does however seem to point in the direction that activity in buy-to-let is now limited to the professional and portfolio ‘players’ and that the barriers to entry for potential new landlords is so high as to be not worth considering.
Now, of course, there is an element of truth to this. Making a first foray into buy-to-let investment is perhaps as challenging as it has ever been – we are a long way from those pre-Credit Crunch days when landlords needed little capital outlay, when there was no stamp duty extra charge, full interest tax relief was available, etc.
But, that is not to say that we aren’t seeing first-time landlords coming to market. In fact, we have seen something of a growth in this area over the last year or so, with first-time investors understanding the long-term nature of this ‘play’ and still considering the sector perhaps as a means to bolster retirement provision/income in the future.
In that sense, the aims of this ‘new breed’ are not really different to the host of landlords who invested 20 years ago and (may) now be selling up as they move into retirement. Their motives aren’t too much different, although as mentioned, the cost is that much greater to make these first purchases, and it may be harder to make the profits of the past. Harder but not impossible, especially with the tenant demand we have.
Where we do have however is a sharp difference in how first-time landlords are accessing the buy-to-let market and the properties they are eyeing up in order to ensure they are profitable from the start, and they are securing both the yearly rental yield they require but also giving them the best chance to maximise capital growth over the long term.
First-time landlords are now far more likely to be using limited company vehicles from the start of their investment journey, rather than as in the past buying in their individual names.
57% of landlords who plan to buy in 2023 reported they intend to do so in a limited company vehicle, as opposed to 48% on 2020 (BVA-BDRC research, 2022 Q4). Understandably, there is a little bit more work involved in this, and some upfront and ongoing costs that they would not have if they were buying in their own names, but advisers understand there may be tax benefits, plus of course if they have plans to add to portfolios – as many do – then having a limited company set up from the start is a long-term strategy.
As mentioned, it takes a considerable amount of thought and planning to make that first purchase, and those who have the ways and means to invest in the buy-to-let sector understand what is going to be required of the property they buy, plus they understand the costs involved upfront are that much more than they used to be.
As a lender that offers our buy-to-let products to first-time landlords, has a strong reputation in this area, and is able to look at each case individually to make sure it works for all stakeholders, we are optimistic about this part of the market and want to work with advisers who have these clients.
Given the up and down nature of the stock market, and the fact savvy individuals want to diversify when it comes to their investments, we expect a strong buy-to-let sector with a number of new landlords coming in. We are therefore here to help these clients make, what we believe, is likely to be the first of many investments in the PRS.
Grant Hendry is director of sales at Foundation Home Loans
