There are plenty of widespread rumours that recent changes to legislation, property tax, and finance have ended the era of buy-to-let property investing.
The uneducated and property sceptics have decided that due to specific changes around the buy-to-let property market and the introduction of more rigorous tax changes and legislation, that investing in real estate is no longer a profitable and worthwhile investment.
However, for the educated and more savvy property investor, the recent changes have created an abundance of opportunities.
Stamp Duty
In April 2016, the government introduced a significant change to stamp duty land tax. All home buyers unless exempt (first-time buyers for example) have to pay stamp duty land tax on any property which exceeds £125,000. Perhaps, the more concerning stamp duty tax change was the introduction of the additional 3% surcharge for any other property purchases.
The introduction of this stamp duty land tax has had an adverse financial impact on anyone wanting to purchase a buy-to-let property investment, because of the additional upfront expenditure that must be accounted for in the investor’s budget.
The additional stamp duty land tax is the primary reason why many people, have come to the mistaken conclusion that the buy-to-let market is dead.
Section 24
In April 2017, the government then announced the implementation of Section 24, legislation that withdraws buy-to-let tax relief by April 2020. The initiative was a proposal from the government to demonstrate support aimed to help more people get on the housing ladder and create a more balanced divide between the social classes.
For many property investors and accidental landlords who have bought buy-to-let property as individuals, Sole traders or Partnership and are higher-rate taxpayers, will face negative financial implications, and as a result, may be forced to sell their property or increase the rents to cover the financial shortfall.
The introduction of Section 24 is, therefore, the second reason why many outsiders have made wild accusations that buy-to-let property is dead.
Not only does increasing rents hurt tenants which opposes the governments objective, but these types of landlords will become motivated sellers, presenting an opportunity for a more sophisticated property investor to benefit. Those property investors who have adopted distinctive thinking and have planned for prevailing property cycles are going to prosper very handsomely, while the masses and sceptics remain fearful of buy-to-let tax changes.
One fundamental point that many people have overlooked is that corporation tax is due to be reduced to 17 per cent, a reduction of 2 per cent from previous years. The decrease in corporation tax encourages professional property investors and portfolio landlords to purchase assets in a limited company while being unaffected by Section 24 changes.
Property Licensing
In October 2018, the government introduced yet another change to buy-to-let legislation. Pre October 2018, in some regions of the UK where there was no Article 4 direction, property investors could own a 20-bedroom HMO (house with multiple occupancies) set over two floors without needing a compulsory license.
However, in October 2018 the new changes initiated by the government meant that more complex buy-to-let legislation enforced all single households with 5 or more unrelated occupants or two separate families sharing facilities and amenities needed to obtain a compulsory license.
Besides, stricter licensing requirements are now forcing landlords to look at energy efficiency and building trade to ensure that buy-to-let houses are brought up to standard.
Mortgage Restrictions
In September 2017, the Prudential Regulation Authority announced that there would be stricter restrictions on buy-to-let mortgage lending. For those lacking clarity, this announcement will have planted doubts of uncertainty in the buy-to-let market; thus, another reason for media allegation around the buy-to-let property market being termed as dead.
However, for the better informed and those prepared to do the necessary due diligence in the current property market will understand it is feasible for first-time buyers to purchase a buy-to-let property investment as their first home, as opposed to a residential mortgage. Particularly for first-time buyers in more expensive areas of the UK, such as the south-east of England, in places such as Oxford and London.
To conclude, despite the challenges that the buy-to-let investor may face there are many solutions to each of them. I believe 2019 and 2020 to be the buying opportunity of the decade for sophisticated property investors that the everyday buy-to-let investor may have overlooked.
Residential mortgages are becoming harder to obtain, and many cannot afford them. As a result, students, working professionals, and young families have to rent which means the demand for rental properties is still higher than the supply.
As existing buy-to-let landlords leave the market due to adverse legislation, such as Section 24, the rental demand against a reduced number of rental properties available will drive the buy-to-let market to an even stronger position.
There remains a shortage of property across the UK according to recent data that suggests we cannot build enough new houses to meet demand. That lack of supply is driving unaffordable house prices, and this is a positive sign that demonstrates rental demand is still robust and an indicator that the buy-to-let market remains a good investment.
For the strategic property investor who adopts an unconventional thinking approach, that understands life is not linear, and seek favourable opportunities amongst economic uncertainty then the buy-to-let market is far from dead.
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