Prospects for Property Investors After Bank of England Clampdown on Buy to Lets
Some recent changes are already hitting landlords hard, others will soon. Here we look at the available options in what for many buy to let investors are troubling times.
It’s important to start this blog by letting you know that at the House Crowd, we are apolitical.
We don’t have a preference for any particular political party, we don’t even discuss politics around the water cooler (we won’t tell you what we do discuss, it’s embarrassing out of context).
However, it’s not hard to see that the current government is keen to make life difficult for the humble buy to let landlord.
First there was the Stamp Duty increase, that’s already hitting anyone looking to buy investment properties.
Then there are the changes to mortgage relief, those changes will really hit landlords.
However, it seems bad news really does come in threes as late March brought the news that the Prudential Regulation Authority, an arm of the Bank of England, is planning to put more stringent tests in place for anyone hoping to take out a buy-to let-mortgage.
And be under no doubt that these changes have government’s full backing – they came less than a week after George Osborne said he was considering giving the Bank of England new powers regarding buy to let mortgages.
The government’s and Bank of England’s concern is this – if the housing market becomes saturated with buy to let investors, then any mass withdrawal could lead to a housing crash and the ensuing damage that would bring – both to the wider economy and individuals left with negative equity.
Of course, this assumes that buy to let investors act as one – an assumption which seems to be taken from left field. There is a certain irony that there is concern that buy to let investors could sell up on masse, when previous policies seem to have been designed to make buy to let landlords as jittery as possible.
Buy anyway, ours is not to question the reasons why.
What’s more important is what does all this mean? With interest rates at record lows and set to stay there, how can the smart investor continue to put their money into property – an area which for all the tweaks still has the potential to realise extremely healthy returns.
We believe the changes mean that for most investors looking to go it alone, becoming a buy to let landlord is now out of their reach.
Our founder Fraser puts it like this, saying: “The new restrictions will make it even harder for most people to use traditional methods of property investment as a vehicle to provide for their retirement.”
That’s people looking to go it alone though. There are other options.
The key as always is to invest wisely – and if that sounds a tad glib and extremely obvious, here is what we mean in the current climate with changed parameters.
Safety in numbers
Currently, an investor could buy a property to rent out and base all their figures on the current low interest rates. They would be ill advised to do this, but they could do it.
Assuming they can meet the deposit, the investor could do some calculations and come to the conclusion that as long as interest rates remain low and as long as they have near 100% tenancy they’ll be fine.
The smart investor would take a different view. They would explore what happens if interest rates rise, what happens if the property has periods of being unlet, what happens if a substantial repair is required.
Currently, an investor could make these calculations themselves, and if they were happy with the figures invest. The change is that there is a far greater need to satisfy the lender and lenders are going to make it far harder to get a buy to let mortgage.
And that’s with the changes as planned, there is every indication more changes will come; certainly the government is on the side of making it harder for the individual buy to let investor rather than easier.
For some would-be investors, the changes will stop them making investments they deem perfectly reasonable. For others it might save them from themselves.
Current figures show that 25% of all landlords with a single property are failing to make a profit, if a few more checks stop people making bad investments then for them that is no bad thing. More of a problem is this move to tar all investors with the same brush; it’s like in primary school when the whole class is kept in because one child won’t admit to their misdemeanour.
It is still possible to go it alone, but it will need deep pockets, a lot of patience and form filling and the ability to not only find mortgage deals which they are eligible for, but which offer attractive rates.
For many, crowd funded property investment will be the only option; in all honesty for the past few years it has been the sensible option for most investors.
Even without the financial restrictions, the buy to let sector is now so competitive that finding rental properties requires significant time and effort, then there is the red tape and ongoing admin. Running even a single rental property is fast becoming a full-time job; fine if the returns justify this, less worthwhile for a relatively small return.
As Fraser puts it “By joining forces with like minded people property crowdfunding enables people to invest in property with small amounts of money and without the need for buy to let mortgages or the bank’s approval.”
With crowd funded property investment you are treating it as a passive investment.
There is also no need to study numerous postcodes to find potential properties, and then attempt to get those sought-after properties for a suitable price.
With this model, the investor picks from the investment properties on offer and buys shares in them, with the minimum investment usually just £1,000.
With £20,000 to invest, with this model the investor could get shares in multiple properties, building a portfolio in the process. They would receive a proportionate share of rental yields and also the capital should the property be sold.
With this option, the sourcing of properties is done by experts, people who know where to invest for potential returns and who can spot properties where a bit of TLC can turn them in to a home for potential tenants. The investment is done by the crowd, the two elements are nicely divided rather than all falling on to the sole investor.
With crowd funded property investment the investor can still invest in properties with the potential for healthy returns. The investor can still benefit from capital growth, they can still build a portfolio of properties.
Crowd funded property investment is THE model which can survive the increased government intervention in the sector
There will always be a need for quality rental properties, there will always be the opportunity to make healthy returns by invest wisely; increasingly though going it alone makes little sense.
At the House Crowd we are a crowd funded property investment platform. We believe option two – that option of property as a passive investment – is a choice with advantages for many investors.
Equally, we know there are other options out there and many will feel comfortable going it alone as a buy to let investor.
If you do want any more information on crowdfunded property, please have a look round the site and call us for an informal chat.
And however you choose to invest, we wish you the best of luck.