The vast majority of rental property owners (the term ‘landlords’ is understandably disliked by many in the sector, and seen as outdated) – 82% according to the English Landlord Survey – are non-professional, owning fewer than 5 rental properties.
Since 1997, when buy to let mortgages became widely available, rental property owners have had a great deal. Rental income and capital growth that in most locations outpaced stock market returns.
This rosy period is over now. Seeing rental demand growing, unmatched by supply of quality rental homes, the government began to put in place policies with the goal of creating a more professional Private Rental Sector. Examples of policies include:
- Section 24, which restricts income tax relief on property finance costs,
- The Renters (Reform) Bill which will remove Section 21 (no fault) evictions, and
- Minimum Energy Efficiency Standards which mean your property must have an EPC of E or above to be rented out (unless exempt), though legislation is proposed to increase this to EPC C, potentially costing owners up to £10,000 per property, across an estimated ⅔ of private rental homes.
The combination of regulatory pressures and higher interest rates are triggering a ‘landlord exodus’.
Rental property owners have a number of options, including:
- Sell now and reinvest elsewhere
- Redevelop
- Keep for later but stop renting it out eg use as second home
Let’s look at each.
‘Sell now’ is actually several options:.
- Sell tenanted to an investor – the best approach here may be to sell via an investment agent or, if you are looking for a quick and certain exit, an auction house, since the majority of buyers through traditional estate agents are homeowners
- Rent to own – offering renters the opportunity to buy the property over time can be a socially beneficial way to sell
- Sell vacant – whilst this gives potential buyers optionality, the disruption caused to the people who live in your property and pay rent should not be ignored, especially if they have been there for a long time. You must also consider the costs of holding a vacant property until it sells, which, except for auction sales, are generally dragging out at the moment
Once you have sold, there are plenty of options. You can select your own investments or work with a wealth advisor. It’s likely that you can achieve returns at least as good through indirect investments after the costs of complying with current and planned regulations, with less hassle, if you are not currently a professional investor.
Redevelop
- Property development is attractive to many people, and glamorised through TV shows like Homes Under the Hammer. A word of caution: with labour shortages and labour and material price rises, this may be more costly and challenging than anticipated. For this reason, to any landlord wanting to leave the rental market because it is too much hassle, development is probably not the answer.
Hold for another use
- Having a second home or holiday let is an attractive idea to many. Consider all of the costs, before making this decision – including any mortgages, maintenance (in the long run this typically averages 8-12% of market rent each year) and potential empty homes council tax premium of up to 200% on council tax.
The investors we are working with who are considering selling find it useful to detach from the emotional pull and focus on what they are likely to make in the future, rather than what they might have made had they sold at the price peak of 2022. The truth is, the costs of sideline property investment have increased. By contrast, many REITs (companies which own property and can be traded on the stock exchange) are trading below Net Asset Value (NAV).
Read the article in The Telegraph, here
