While these are fairly encouraging times for the buy-to-let sector, it does seem that for every positive news story, there is a cautionary tale not too far behind. Admittedly much of this bad publicity has at its source people with a vested interest in the private rented sector not thriving, but amongst the bias there are occasionally warnings that the buy-to-let market would do well to heed and serve to warn against any complacency on behalf of landlords.
Property investors who have been in the game for a while will know the ropes by now, but those who have only started their portfolio since the global financial slump may think that demand has always outstripped supply to this extent and that they are entitled to cut corners. This is emphatically not the case.
I’ll start with the good news as I’m a glass-half-full kind of guy. The Latest Mortgages for Business index has revealed that falling property prices and high tenant demand has pushed up returns in quarter three. Yields on vanilla buy-to-let increased from 6.1% to 6.7% (aided by a 3% property value reduction) while Houses in Multiple Occupation (HMO) experienced a yield boost from 9.2% to 11.1% against the backdrop of the average property value in HMO deals falling by a massive 41% as more investors refinanced on properties worth less than £200,000. Another boon of falling property values for landlords is the subsequent increase in average loan to values, with the typical LTV rising to 68%. Average loan sizes remain pretty flat, but the combined effect of the other factors puts property investors in a pretty healthy position.
On the flip side is a slightly alarming statistic to emerge as the result of a joint project between Shelter and British Gas. At the launch of a huge new census into the standard of private rented living, it was claimed that as many as one in three rental properties are not decent enough to live in and would actually fall shy of what would be deemed fit for purpose under the Government’s Decent Homes Standard for social housing. Reasons for this include dangerous or inefficient old boilers, inadequate insulation, existence of damp or a dilapidated condition.
While many landlords are conscientious and mindful of their responsibilities, it would appear that a minority are capitalising on tenant desperation and not maintaining their properties to a suitable level. Whereas unhappy tenants would vote with their feet when there are plenty of properties to choose from, the current shortage in supply could see individuals forced to stay in unsuitable properties.
I’m aware that I’m most likely preaching to the converted and that the vast majority of property investors operate by the book, but it is always worthwhile reminding landlords of their duty of care and keeping an eye on those who tarnish others by association. The paucity of alternative options for tenants should not be an excuse for landlords to abandon their scruples. A happy tenant is a happy landlord and the sooner any issues are addressed, the more probable it is to that landlords will be spared bigger bills in the future.
With nearly all the properties we take into possession, one of the biggest failings is that the landlord hasn’t carried our basic maintenance, which in turn leads to a spiral of poorer quality tenants (without great references, arrears etc) and can eventually lead to non-payment of the mortgage loan. Nipping these problems in the bud as soon as they arise not only benefits the tenant, but also stands the landlord in better stead.
Bob Young is managing director of CHL Mortgages