Buy-to-Let Newcomers Have Never Had It Better

by Mark Alexander

22:38 PM, 15th November 2016
About 2 years ago

Buy-to-Let Newcomers Have Never Had It Better

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Buy-to-Let Newcomers Have Never Had It Better

The cost of long term fixed rates is about half of what they were at the lowest point whilst I built my own property portfolio.

Newcomers to buy-to-let will not be affected by tax changes on mortgage interest relief because they will buy in a Limited company from day one.

Tenant demand has never been higher.

Tenant referencing and rent guarantee insurance has never been better.

Buy-to-Let Newcomers Have Never Had It Better

Newcomers will be clobbered with increased SDLT and that is definitely a drawback. However, compared to two or three decades ago the availability of information is now infinitesimal so that should easily save them more than the 3% additional stamp duty.

Opinion …

Many existing landlords are selling up due to the tax changes affecting them. Newcomers are unlikely to buy as many properties as existing landlords are selling because buy-to-let is no longer as fashionable as it was in the late 90’s to 2009. The net effect will be a reduction in supply of rental property whilst demand continues to increase. The outcome of this is inevitable; rents will rise at a far higher rate than existing landlords will have experienced over the last two decades.  The fact that buy-to-let isn’t as trendy as it was means that Newcomers will not be as likely to buy into investment ghetto’s (off-plan developments) where they are all handed keys and competing to let the same properties to the same tenants at the same time.

The existing landlords who manage to ‘stay in the game’ will also be increasing their rents in line with demand. In part this will be due to necessity to fund their increased tax liabilities or to recoup their costs of incorporation. These rent increases will solidify the rental yields for newcomers.

The new lending rules will ensure that new landlords are not just ‘get rich quick’ wannabes. This can only be good for the industry as a whole. The stronger loan books will attract more institutional investment and the competition for securitisation bonds will intensify. This will drive lending margins down.

Property prices over the next 10 years will be a bit wobbly in comparison to previous decades as supply and demand for properties for sale inflate and deflate like a breathing lung. There will be several factors affecting this including volatility in currency and foreign investment and tenant demand which may rise and fall at times as a result of Brexit and associated immigration policies. Longer term, net immigration and hence increasing demand for UK property is inevitable.

Those landlords who incorporate will have exits routes most of us ‘old-school’ landlords will never have considered. For example, buying and selling shares in established property investment companies  might well appeal to investors of the future as they will avoid SDLT completely on that basis. Furthermore, the rise of Crowdfunding structures may well provide partial exit routes and alternative funding. Peer to peer lending could also become a major factor. The landlords of the future may even get bought out by larger institutional investors. Think back 30 years and that’s exactly what happened to butchers and bakers. Many of the best of them were swallowed up into the supermarket system. Will we see that in the PRS?

The basic fundamentals of buy-to-let have not changed. The value of borrowed money reduces over time in real terms because rents and capital values will rise over the long term, thus magnifying gains because they apply to the entire investment INCLUDING borrowed money.

My concluding thoughts are that constant change is here to stay but the basic fundamentals never change. We cannot go into tomorrow with yesterdays ideas.

What are your thoughts?

The best time



Comments

Jonathan Clarke

6:14 AM, 16th November 2016
About 2 years ago

I am old school. I ask myself sometimes if I had the opportunity of starting again today would I. The answer is invariably yes. Why ? Because in simple terms even if I made only 25% now under the new rules compared to what I have achieved under the old rules I would still be significantly better off than if I didnt take any action. So BTL newcomers yes still have it good. There is tons of free info out there to educate and support. Social media hadn`t been invented when I started. No right move. No property education courses. Nothing. We had it tough! All I had was just an idea in my head planted by my dad

My dad was in banking and I remember him talking to me when I was 17 about compound interest and the effect of inflation. He talked about saving not spending. He talked to me about the value of investing behind the scenes whilst doing the day job. I was always taking out saving plans and the like. He talked about delaying gratification. You don`t really need loads of `things` he said. They are just temporary highs. He was my rich dad poor dad rolled into one. He never spent his money. He just liked the security of it. Other stuff was more important. Property investment provides security. Its far better to be the right side of the double glazing in the winter.

40 years later I kinda get what he said and quietly almost automatically have seemingly followed his mantra. Borrowing money to invest is good if you build a solid foundation and pay attention to the fundamentals. Time is very kind to the property investor. Leverage allows growth. If you get one successful property investment working for you then if you have 20 you will be 20 times richer.

If one believes that simple calculation is true then buy 1 investment property and see how you get along. Wait a year as i did and then decide do you feel comfortable with it. I did so i moved out of my comfort zone went and bought some more. That then became my comfort zone. Repeat that exercise until you have enough to fund the lifestyle you choose.

I started running like Forrest Gump and just kept buying properties along the way. Then 4 years ago or so I decided to stop. I had enough. I stopped running. The hard work had been done.

Now Inflation, compound interest, capital growth. rent rises do all the work for me . They are my friend. I can take a rest. But almost magically and silently I see that the real term gap between borrowed money and capital values still gets bigger and bigger without me having to pay it much attention. Its a form of perpetual motion. In another 20 years that will provide even more of a comfort blanket for me and subsequently my children.

My Dad was right. I`m glad I listened to him
.

Mick Roberts

7:19 AM, 16th November 2016
About 2 years ago

I was earlier than u then Jonathon, I was learning about compund interest at the age of 7 at the corner shop by my Mum telling me to save my last Rolo. And my mates couldn't understand why I was saving it for later-True.

And I was the only one with the bank account on holiday in Skegness at the age of 11, when others had ran out of money & I had to withdraw out bank to borrow them.

I decided to stop buying in 2004, as I knew inside things were getting high, & then I bought 13 in 2008 as the Estate Agents were chucking 'em at me, begging me to have 'em for peanuts.

Yes Mark, a lot of what you say could become the norm, one risky thing for the newbies though, is if rates rise, as they have to buy high to buy at all, yes low interest rate, but on a high loan.

I'm still gonna' do the Tax form Mark, going to need some time.

Claudio Valentini

14:40 PM, 16th November 2016
About 2 years ago

I got into the business back in 2009 with a plan to buy one property a year until I got up to 10 properties then take stock. Back then I asked my accountant if I should proceed thorough a Limited Company. Their advice was to do this as a sole trader. In fairness, that was the thinking at the time and the availability of BTL finance was more readily available and cheaper then than it would have been on a commercial basis.
All was going well and I was on target and growing the portfolio nicely up until 2015 and S24. At that point I stopped to take stock of the changing landscape. I was reluctant to move too quickly as I wanted to see what Osborne did next. I was pretty suspicious of his motives and I figured he was cynically waiting for landlords to quickly move and adopt a new business model so not only would the Treasury skin Landlords if they stayed in but once they attempted to adopt a new business model they would skin you again on the way out.
Then there was Brexit and Osborne got the bullet…
I’ve decided to wait until the autumn statement and see if Hammond is more amenable toward the PRS than Osborne was. It’s put my growth plans back by about 18 months but it’s allowed me to take stock. Assuming no change to the status quo, after the autumn statement I’ll sell off one or two of the worst performing properties once they become vacant then set up a Limited company and loan the company the capital gains and carry on growing the business through that structure for the foreseeable.
My opinion: Everything I’ve ever read from any successful PRS landlord is that this business is all about the long term. In that case an 18 month delay is a blink of an eye. The fundamentals of this business are essentially sound. By and large and region specific, bricks and mortar are an appreciating asset and there is a supply and demand imbalance which will take some years to correct. Yes, for those that choose to stay in the business there will be increases in SDLT to accommodate and a more stringent lending criteria than we may have been used to. These factors will just serve to just discourage the more ‘cottage industry’ minded landlord as I feel most people tend to give incremental upfront costs more weight than the potential of future gains — in short they’re loss averse (I think that’s ‘Prospect Theory’ in practice).This is good. Less competition and a more professional body of PRS landlords left in residence, pardon the pun.
I still think there’s another 10 years or so before the large scale corporate institutional investors move in and start to fully dominate the space, meanwhile there’s a solid ‘people business’ out there looking for entrepreneurs to service it…


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