There’s a really clear path emerging that buy-to-let owners are having to navigate in order to protect their investments in the face of market turmoil. Dealing with landlord regulations is key to this. The path goes something like this:
- Mr and Mrs Landlord take a good look at the revenue being generated from their rental properties.
- They can see that surging interest rates are crippling the nett income after mortgage costs. To be fair, as practical folk they always knew that historically low interest rates would not go on forever, but the profits were providing much needed income. But as the cost of living crisis began to bite, it became harder to hang onto those practical thoughts in the face of harsh realities.
- But, they think, by raising the rent they can keep the rent above the mortgage. They never used to push rents up by much at all, as they wanted to be “fair” to their tenants, but this is crisis-time. So, up goes the rent. Phew – they breathe a small sigh of relief (for a moment).
- Until they take a look at the tax-implications of Section 24. This little gem means that landlords can no longer offset the cost of the mortgage against their income: they will be taxed on the gross rents, the total income they earn (with admittedly a small tax credit at the basic rate against mortgage costs allowable as a tax deduction).
- What! So raising the rent has actually just increased the tax bill (potentially also pushing Mr or Mrs Landlord into a higher tax bracket too) even though rocketing interest rates mean profits are falling? And they’re having to pay 80% of every increase in interest instead of being able to offset their financing costs (in the way that any other business can). Wow (they think, politely): Section 24 means a landlord can be paying higher taxes on losses from their portfolio…unbelievable but true.
- Time to look at whether this is a game we want to be in (they decide). In post-tax terms, the properties with, let’s say, 65% loan to value could well have just sunk below the waterline, and Mr & Mrs Landlord are not keeping their heads above the water.
- If not being in the game is the conclusion they draw, they now have to look at how they get their property out of the rental market and sell it, which means (incredibly sadly) evicting their tenants.
And this is where the problems could start…
Interest rates on 5-year fixed rate mortgages are over 6%
I’m writing this while listening to the highly distracting news coming out of my smart speaker. Interest rates on five-year fixed rate mortgages have today risen above 6%. That makes a pretty huge hole in the calculations around buy-to-let returns for anyone coming off their previous sub-2% fixed rate in the near future. There’s hundreds of thousands of such remortgage situations in the next half year, a fair proportion of whom will be landlords. And any with mortgages greater than 60% loan to value will be getting very close to that waterline.
(For more about that whole topic, read this post from earlier in the year).
So more and more landlords are staring down the path above.
Do landlord regulations affect your plans?
So, let’s explore these “problems”: you’ve decided to exit the market, and you need your property back to get it on the market. How do landlord regulations in 2023 affect you?
The short answer is massively. There’s every prospect you won’t easily and speedily get your property back unless landlord compliance has been very carefully handled. Regrettably, my team meet landlords most months for whom the plans to take control of their financial circumstances on the path laid out above have been scuppered. It could be a single missed signature, or a failure to issue one of the documents to tenants at the outset of a tenancy that the law requires (such as Prescribed Information). Maybe a Gas Safety Certificate that was renewed correctly – but then not given to the tenants. Or a host of other potential banana skins. And woe-betide the landlord that failed to register and lodge the deposit (and research shows this still applies to over 5% of all landlords, astonishingly).
Does all your documentation comply with landlord regulations?
These kinds of meetings with worried landlords can often be speedily and efficiently sorted out just by talking to a good agent. Check that a quality local agent will offer a free consultation. Acting on the tips could solve the issues. If there are deeper seated problems that require a dedicated action-plan, a good agent can either quote for remedial work, or sometimes the simpler solution is that the property gets taken under Full Management. This would mean that it could well be best to go back to the beginning, issue everything correctly, sort out the tenancy so that it’s compliant, and get the letting squeaky clean.
For a good place for a landlord to start assessing whether he or she should actually be worrying, here’s a FREE tool that enables a landlord to score themselves on their compliance standards.
A (Free) Rental MOT could be the answer
Simply work through the questions in the Rental MOT smart-form, and get a score for your compliance sent straight on to you. Just working through the MOT may well reveal exactly what could have been overlooked, or which documents are absent. As a result a better-informed landlord would be ready to make their own changes to get compliant.
Or if it’s all a bit too much of a hassle or anything is not clear, then a guided “audit” by one of our team (again free) can be done. The same scoring emerges at the end and a landlord can clarify direct with the Northwood team exactly what needs to be done.
Compliance…oh deep joy
It’s undeniably a bit dull. Like doing the tax return on your investments and gathering together all those forgotten invoices on rainy weekends in January as the deadline looms. But, there’s a massive point to this: unless you are certain that you have been totally compliant with landlord regulations, the whole strategy that the question “is buy to let worth it in 2023” poses could come to a grinding halt. You could be stuck with a property that you know you have to sell, but landlord regulations are stopping you doing so.
Other strategies are available
Of course, selling up does not necessarily mean getting out of buy to let altogether. Many landlords have more than two properties (research shows 57% of investor landlords are in this bracket, so well over two million rental properties). For these landlords it may be that selling one property could release the funds to pay down the mortgage on one or two others, at which point the mortgage stress goes away. The tax issue posed by Section 24 unfortunately doesn’t (until the Government gets a grip on its senses and restores mortgage interest tax relief, as the NRLA are calling for – read about that here). But most investors who want to stay in the rental game because the fundamental goal was always capital growth to fund, say, a bricks-and-mortar pension, would now have the route to do just that.
Property investing is a complex business
Investing in property is a personal passion, and one I’ve pursued for thirty years or more. But I’ve had to adapt my strategies sharply to cope with the changing circumstances (for which read “Government interference”): paying down mortgages, incorporating portfolios, exploring different jurisdictions, availing myself of the best tax advisor skills available. And I know that in order to stay on top of your options, one thing that no landlord should ever cut corners on is compliance with landlord regulations – a good agent is a life-saver in the compliance management game. The risks of screwing up plans, or of coming up against a Court system that can seem slanted against landlords, simply because one was slack on a piece of documentation, are far too great.
In Conclusion – there’s a free check you can do
Don’t take risks – a Rental MOT would show any landlord where there’s a compliance gap, and as it’s a free thing to take advantage of, why not do one. Even if it just confirms all is hunky-dory, find a few minutes to get on top of landlord regulations, so that your options to sell or to stay in lettings are in your hands and yours alone.
As ever, we are here to help – WhatsApp us on07594 476403 to discuss your situation or for an appointment.
Likewise, just click this icon to get the team right on your case.
