This month, Toby talks about the practice of offering over asking rent, and looks at some recently introduced landlord legislation.
It’s been a tough week to keep up with exactly what’s happening to Section 21. Although this video was recorded shortly before the PMQs during which the Prime Minister appeared to confirm that Section 21 would be abolished, it’s pretty much hit the nail on the head (if I do say so myself!).
It’s been a tough week to keep up with exactly what’s happening to Section 21. Although this video was recorded shortly before the PMQs during which the Prime Minister appeared to confirm that Section 21 would be abolished, it’s pretty much hit the nail on the head (if I do say so myself!).
The start of October has brought no fewer than three changes to regulations affecting landlords. Here’s Toby with everything you need to know.
With more than 170 different pieces of tenancy legislation to keep on top of (and more on the way!) how are landlords meant to keep up to date? The seminar will help Bath landlords to stay compliant with ever-changing regulations, and provide support to make the most of their property investments.
So join us at The Francis Hotel, Queen Square on Wednesday 19th October from 18:00.
Full details and tickets can be obtained from here: https://www.eventbrite.co.uk/e/bath-landlord-seminar-taxation-mortgages-legislation-tickets-403368906257
The cost-of-living predicament is threatening the budgets of many Bath households.
Inflation is running at 7.8%, yet the best savings rates in the market are only 2.75% (because of low Bank of England interest rates). This means that the value of people’s savings is falling fast.
To add insult to injury, the possibility of a recession on the horizon could add another nail in the coffin of people’s wealth and savings.
Looking back at the last recession (ignoring the 2020 Covid recession), the Stock Market (FTSE index) dropped 40.1% during the Credit Crunch (2008/9) — scarcely a soothing thought if you worry about a recession looming in the next couple of years.
A recession can have a catastrophic impact on household budgets, as a weaker economy characteristically means that salaries drop, and people get made redundant.
Bath rentals aren’t perfect, yet in many ways, they go a long way to help – let me tell you why.
1. One of the most significant benefits of investing in residential property is to hedge against inflation. An ‘inflation hedge’ is an investment that defends against the decreased purchasing power of your money that results from the loss of its worth/value due to inflation.
The last time the UK suffered high and persistent inflation was the 1970s.
In 1973, the average British house was worth £9,942. In 1980, that same house was worth £23,287. If the same £9,942 had been invested instead in the stock market in 1973, it would have been worth £19,384 in 1980.
So how did that compare to inflation?
Neither property nor the stock market beat inflation in those seven years (as the goods and services of that £9,942 in 1973 had risen to £25,897 by 1980).
But investing in the stock market between 1973 and 1980, that stock market investor would have lost 25.2% of their investment in ‘real terms’, compared with only 10.1% for property investors.
However, there was the bonus of seven years’ worth of rent!
To give you some idea of what that would be worth in today’s figures (even if the rent didn’t go up during that time frame) …
2. Rental properties have repetitive, regular monthly income, whilst dividends from the stock market are dependent on there being profits which, in a recession, can be hit and miss.
3. Existing Bath landlords know that the rents their rental properties achieve don’t historically decline during recessions in the medium term.
And even if average rents do go down, every rent is fixed at the start of the tenancy. Also, it is infrequent for a tenant to negotiate a reduction in rent mid-tenancy even if average rents did drop.
4. Property prices sometimes fall during recessions.
Dropping from £253,777 at the peak in September 2007 to £204,700 in May 2009 (before they started to rise again).
Yet as I stated above, the Stock Market dropped 40.1% with the Credit Crunch. Also previously, the Stock Market dropped 36% on Black Monday before the early 1990’s recession and 55.3% in 1974.
Which sort of drop would you prefer?
5. (Almost) guaranteed rental payments. Insurance can be taken out for rental payments (you can’t get that on stocks and shares). Also, the government will cover most (or all) of the rent when someone is made redundant and needs to apply for social security.
6. For those Bath landlords who take a mortgage, inflation can be a benefit. The first is the effect of inflation on mortgage debt. As Bath house prices rise over time, it reduces the loan to value percentage of your mortgage debt and increases your equity. You will receive a lower interest rate when you re-mortgage in the future because of the lower loan to value percentage.
Also, as the equity in your Bath rental property increases, assuming you fix your mortgage, your payments stay the same.
Finally, inflation also helps Bath buy-to-let landlords because rents tend to increase with inflation. So as rents go up, your fixed-rate buy-to-let mortgage payments stay the same, creating the prospect of more significant profit from your buy-to-let investment.
Yet, there are downsides to renting.
Rent arrears can be a worry. However, during 2021, landlords who used a letting agent were, according to an investigation from Denton House Research, 272.5% less likely to be in arrears of two months or more.
One of the biggest reasons is the more stringent tenant referencing that letting agents tend to do compared to landlords who do it themselves. At our agency, we like to reference tenants carefully for job security, stability, and any history of non-payment on rents, always liaising with previous landlords/agents to see they were a good tenant.
That is why many tenants with a poor tenancy record are attracted to properties that are not through agents, as they know most (not all) DIY landlords don’t reference their tenants as thoroughly as letting agents do. Solid referencing is not a 100% guarantee you won’t get rent arrears or have your rental property trashed, yet it will go a long way to mitigate it.
One of the things about investing in Bath rental properties is that buy-to-let investors have more control over their returns than stock market investors do. Buy-to-let provides long-term stability and constant income to counterweight the massive swings seen in the FTSE stock market.
You must make your own decision when investing in the private rental market in Bath. If you’d like to chat over the phone for five or ten minutes to discuss where I would be investing in the Bath property market, don’t hesitate to send me a message or pick up the phone.
How are you planning for the spectre of a potential recession?
There has been a rise in demand for rental properties and an 8.9% fall in the number of private rented properties in Bath, which has caused Bath rents to rise by 8.8% in the last year – a new all-time high.
The National Residential Landlords Association asked the respected economics think tank, Capital Economics, to carry out research on the UK rental market. It found that demand for homes in the private rented sector needs to increase by 227,000 homes per year if the current trends in the property market continue (growth of the population, Brits living longer, the lack of new homes building and the reduction in social housing).
So, based on those numbers, Bath needs to have an additional 369 private rented properties per year.
The problem is the number of private rented properties in Bath has reduced from 11,553 in 2017 to 10,936 in 2021, a net loss of 617.
Section 24 was introduced in 2017 to level the playing field on the taxation of property between homeowners and landlords. Section 24 stops landlords from offsetting their buy-to-let mortgage costs against the profits from their rental property. Interestingly, no other kind of UK business is affected by the Section 24 taxation. In other words, whatever other form of business you might be in, be it butcher, baker or candlestick maker, every other business can offset their finance costs against their profits, except buy-to-let.
The issue caused by Section 24 Tax is that some landlords ended up paying more income tax than they really made in profit after paying their buy-to-let mortgages. Meaning on the back of rising house prices in the last five years, some Bath landlords have sold their buy-to-let investments.
When someone buys a property, they normally must pay a tax to the Government for the privilege. This tax is called Stamp Duty. Yet landlords must pay an additional 3% stamp duty supplement on top of that when they purchase a buy-to-let property. Evidence suggests some Bath landlords have decided to hold off or scale back buying additional buy-to-let properties for their portfolio because of the thousands of extra pounds that landlords have to pay to buy the rental property.
Some Bath landlords are converting their long-term rental properties into short-term furnished holiday and AirBnB properties. Whilst the hassle, stress and service levels are much higher, these types of properties do tend to make more money and aren’t as heavily taxed as normal lets. When properties convert to short-term lets, it removes another property out of the general supply chain of long-term rental properties.
With more than 170 pieces of legalisation, and new laws being added each year, the burden on landlords is huge. On the horizon is the Renters Reform Bill which will remove no fault evictions. Also, all rental properties with an Energy Performance Certificate (EPC) rating of below a ‘C’ will have to be improved (i.e. money spent on them) by the landlord. Hence why some landlords have been selling their rental properties with low EPC ratings in the last 18 months.
There are some Bath landlords who are classed as ‘Accidental Landlords’. In 2008/9, with a slowing property market and house price values dropping in the order of 16% to 19% (depending on the type of property), some Bath homeowners decided to let their home out as opposed to selling it at a loss. But with the price booms of the last 18 months, many decided to cash in on the higher property prices and sell – again taking another private rental property out of the system.
Even with better provision of affordable social housing and higher rates of owner occupation in Bath (rising from 56.22% of homes in Bath being owner occupied in 2017 to 58.28% in 2021), demand for private rental property continues to outstrip supply.
There are many reasons behind this including …
Quite simply – Bath rents have rocketed. They are 8.8% higher today than the spring of 2020 … and that’s on the back of rents being 9.7% higher in spring 2020, compared to spring 2019.
The severe shortage of housing in the private rented sector is pushing up rents in Bath as demand continues to grow. Many Bath people are finding it hard work to find appropriate accommodation at a reasonable rent, and with mounting numbers of tenants predicted to continue, this situation will only get worse unless more houses are built.
My heart goes out to those Bath tenants struggling with the cost-of-living crisis only to then be hit by higher rents.
Yet, these higher rents are now enticing new landlords back into the Bath buy-to-let market because of the higher returns.
With higher inflation, property investment has often been seen as a safe harbour to invest one’s money in. With the bonus of rising yields (because of the increase in rents) together with the nervousness of the Bank of England to increase interest rates too much because of the issues in Eastern Europe, this could be the start of a second renaissance in the Bath buy-to-let market.
If you have concerns about the issues in legislation and taxation, then the advantage of employing a qualified letting agent, with the choice of property, what you pay for it and how it’s managed, will go a long way to mitigate them.
If you would like to discuss any aspect of this article, you’re very welcome to drop me a message or call me.
Reside General Manager Toby Martin summarises rental activity over the last month, with the latest facts and figures from the local market.
Nationally, the average length of time it takes from agreeing the sale of a property to the keys being handed over is 111 days (down from 117 days last year). In Bath, we are just above the national average at 112 days.
So why does it take 16 weeks, when all that is required is for lawyers to look at some paperwork and get a mortgage? Also, what can Bath homebuyers and sellers do to speed this up?
The legal process to buy and sell a UK property is called conveyancing. The conveyancing system itself hasn’t really changed in hundreds of years. After the housing market was reopened after the first lockdown in the spring of 2020, the property market returned with a bang, helped on by the stamp duty holiday.
In 2021, the number of properties selling in Bath skyrocketed, e.g. by 96% in June 2021 and by 65% in March 2021. Many conveyancers and solicitors had to sort the legal paperwork out for upwards of 120 to 150 properties each at any one time.
For years, conveyancers have complained of overwork and underpay. Conveyancing is seen as the Cinderella of the legal profession. This workload was the straw that broke the camel’s back, making many conveyancers leave the profession and go into better paid legal work, like corporate law.
Also, the legal process of conveyancing has built-in inefficiencies, and the conveyancing profession has been relatively slow to innovate. However, there are some excellent tech solutions that are being slowly rolled out across the industry to make the process more efficient and effective.
If you are buying or selling your Bath property as we speak, you won’t be able to wait for the conveyancing profession to be revamped, yet you can be as pre-emptive as possible to get your Bath house sale through earlier.
In a nutshell, make sure you have all the paperwork sorted on your home before you put it on the market. Next, get the ball rolling on your mortgage. If you receive some paperwork, read it, check it, sign it and send it back in a day; do not leave it a week. Finally, always communicate frequently with your estate agent and conveyancer.
When you instruct a solicitor, most will request money to start the ball rolling for searches and disbursements. They won’t lift a finger until that is paid.
You will have to prove who you are in the conveyancing process, so your conveyancer will ask you to show them proof of ID and address. If you are buying, they will need to prove you have the funds/deposit to buy the home (and if your deposit is coming from family/friends, then they are required to write a letter to that effect).
A couple of years ago, the Government set up the Home Buying and Selling Group to find the answer to this problem. Chaired by the well-known property guru Kate Faulkner, it is looking at an amalgamated Seller’s Information Pack (SIPs) and an IT-based single platform to share and communicate that SIP between buyers, sellers, their conveyancers, the estate agent, mortgage providers and brokers and finally surveyors.
The advantage of the SIP is that it can be created before the buyer has been found, meaning property buyers would be more knowledgeable when making an offer. Also, once the sale has been agreed upon, the SIP could be sent straightaway electronically to the buyer’s legal team (from the seller’s legal team) to start the procedure of asking for searches and raising inquiries.
So, before the SIP becomes mandatory, there are things everyone can do to ensure they secure the home of their dreams quicker.
I recommend that the seller, the agent and the conveyancer start to liaise with each other to get the key information on the property being sold as quickly as possible. Then once a buyer is found, I believe it is vital that the agent regularly communicates with all the stakeholders in the chain to ensure everyone is playing their part to expedite the sale.
In the future, utilising technology and every agent/conveyancer preparing information upfront with the SIP will drastically reduce the time it takes between agreeing a sale and the keys/monies handed over.
The conveyancing process will have to change to meet the needs of the 21st Century, but how long that will take is the big question.
Reside General Manager Toby Martin summarises rental activity over the last month, with the latest facts and figures from the local market.
