2016 generated a lot of miserable headlines for would-be buy to let investors and landlords, with rising taxes and growing rules and regulations increasing costs and reducing profits. However, what most people forgot to mention is that most landlords secured some good returns throughout the year.
According to Rightmove and Nationwide, average property prices rose between 3.5% and 4.5%. So if your property was worth £200,000 at the start of 2016, it should now be worth around £207,000 to £209,000. Assuming you bought the property with a £70,000 cash investment (covering your deposit, cost of purchase, stamp duty, etc., but prior to incurring any sales costs and tax), that’s a 10% uplift in your cash investment over the year
Depending on the location of your property portfolio, that figure could be slightly worse or far better. For example, prices in Hammersmith and Fulham fell by a few percent year on year, but this was after superb increases since 2008/9, while Barking and Dagenham saw prices rise by just over 18%. In Bristol, average prices went up by nearly 14% (source: UK HPI).
From a rental perspective, we tend to see rents fall when stock is higher than demand, stagnate if people’s wages are either static or falling, and rise if wages are increasing above the rate of inflation.
Although wages and rents did stagnate during the credit crunch, over the last few years, wages have tended to increase beyond people’s living costs. So, in areas where demand is higher than supply, this has led to some rent rises for landlords.
According to our own Belvoir Index, which looks at rent rises by region and county in 2016, rental income increased by a minimum of 1% in London and the South East through to approximately 4% in the South, Midlands and Yorkshire.
These rises in prices and rental income should certainly help landlords mitigate some, if not all of the tax hikes that have come in 2016/17 and will start to hit in 2017/18.
What can landlords and investors expect from 2017?
So if 2016 was a ‘good year’ from a capital growth and rental perspective, what is it possible to earn from property in 2017 and is this the year to expand or contract your portfolio?
To begin with, buy to let investors should always aim to invest for the long term – around 15 to 20 years – for two reasons:
The cost to buy and sell property tends to be higher than for other investments The ‘boost’ effect of gearing the investment (via mortgage borrowing) to secure better returns can take some years to come to fruition.
Typically, the longer you invest in property the better returns you can secure. As with all investments, property values and rental income can go up and down – sometimes quite dramatically from one year to the next – so although individual annual performance isn’t the be all and end all, it is helpful to have an idea of what you can expect property to deliver, especially if you have any major decisions to make.
There are three stages of securing returns as a landlord, so here are my thoughts as to how each one is likely to shape up for 2017:
What money can you generate when you buy?
Most investors know you typically make money on a buy to let when you purchase the property. The lower the price you pay, the more likely your investment will survive an inevitable downturn, which may come at the start, middle or end of your investment – or at several stages over 15 to 20 years!
A lower price also means you can generate a better yield and therefore a better return on your investment so that the income you generate through renting is more likely to cover your costs and generate a surplus.
In this respect, 2017 should be a good year for most investors to buy, whether it’s your first property or you’re planning to extend your existing portfolio.
This is mainly due to the London and southern housing markets pretty much running out of steam, following the rapid rise in property prices since the economy recovered from the credit crunch. Now that both demand and prices are starting to slow, there is more chance of picking up a bargain and securing a property at a discount, boosting future returns.
How much net income can you secure through letting?
If you’re planning on putting up rents this year to help compensate for higher taxes and the increased cost of delivering rental properties legally and safely, then it is wise to do so sooner, rather than later.
All analysis to date suggests that rents can rise when wages rise above the cost of living (inflation) and, due to the Brexit vote and the resulting fall in sterling, that’s unlikely to happen this year.
Although this hasn’t stopped the forecasters suggesting that rents will rise, it is prudent to make sure you understand exactly how tax and regulation changes will impact your future profit. Work out how much you would need to increase rents by to maintain your financial position and then carry out some careful local research to see whether those rises are realistic and affordable for tenants.
What could you secure if you decide to sell up?
With property prices likely to stagnate this year and some resulting ‘doom and gloom’ headlines comparing this year to last, it’s likely that 2017 won’t be the best time to sell – unless you have owned a property for a long time and it’s more important for you to get the cash out now, rather than leave it in until a better market appears.
If you do need or want to sell this year, it’s worth considering selling with your tenants in situ or talking to your tenants to see if they would like and can afford the property. Make sure you are realistic about the price you can secure, otherwise it may sit on the market for a while and, without tenants in it, that could end up costing you a great deal in lost rent.
Overall, 2017 is likely to be an ‘okay’ year for existing landlords and those looking to sell up, but a good year for those who are looking to buy at a discount and hold for the future.