Avoiding the get rich quick ‘buy to let’ trap

One of the fastest growing entrepreneurial ventures in the UK is the buy-to-let landlord scheme.  A paltry fifty-thousand pounds can start a young person on their way to building a fortune in property wealth.   In fact, most of the new landlords are now between 25 – 35.

The banks recently relaxed their lending criteria for buy-to-let mortgages. Many High Street banks are stepping on the band wagon and offering these high risk mortgages. Why not? The housing market is hot.  Even if a landlord with a 10 million dollar portfolio declares bankruptcy, the bank should be able to sell the properties at a tidy profit. 

With this in mind, banks are letting many new landlords accumulate millions of dollars in mortgages. 

It sounds like an easy way to make money. But, there is a catch.  A moderate twenty thousand pounds can help you secure the first home.  Another ten thousand will bring it up to code.  Do not worry about the mortgage payments, the rent will take care of that.

The hidden costs can add up.  Letting agents will take 10 – 15% off the top of the rents. Tenants can refuse to pay rents pay them late, and regularly damaged properties.  The government is always adding a few hidden fees and taxes.

The capital gains tax is overlooked until it is too late.  Homeowners do not pay tax on a home that you live in, but you do pay it on a buy-to let, not to mention the looming emission efficiency regulations many municipalities are instigating.  And, there is tax due on the rents collected.

Last summer saw landlords hit with stiff regulations on home improvements for buy-to-let properties. The average property required £10 000 worth of improvements. 

All of these expenses take a sizable chunk out of the rental income – before the mortgages are paid. 

The Landlord Association has stepped in and called for government action for a landlord protection scheme in which professional tenants are required to join a register in order to protect landlords.

The majority of UK landlords have endured bad tenants who refuse to pay months of rent – laughing as they quote government programs that protect them - and then disappear leaving the landlord with hundreds or even thousands of pounds in unpaid debt.

At the moment, there is relatively little that the landlord can do.

In fact, the number of buy-to-let repossessions are commonly caused by tenants not paying rent and leaving the landlord with an unrecoverable deficit.

Tenants have protection from the Tenancy Deposit Scheme. Something that infuriates most landlords.  The relatively small problems was caused by a minority of rogue landlords brought major government action and overshadowed the far bigger problem of a large number of bad tenants.

At the moment, a tenant can move from landlord to landlord, possibly for years, and never pay more than a couple months rent a year. There is no way to stop them.

The Landlord Association would like to see the government create a register for tenants or a tenant accreditation scheme managed with a national command at local level would be an ideal solution.

The crunch comes when banks start lending anyone money to become landlords.  Like the retired man who recently received a 40 year mortgage to get his first rental property. The man will be 112 when the mortgage is paid, and hopes that the rental income will not only pay his bills, but repay the mortgage.

The industry doesn’t need this type of landlord. They have no long term interest in establishing a good reputation, or improving the lot of landlords across the UK.

The potential of the buy-to-let market depends on who you ask.

November to February saw a 10.7% increase in the value of ARLA ( Association of Residential Letting Agents) members property. A clever trick – as the average property value increase for the entire nation was 10% over the last year.

ARLA claim that tenant demand is exceeding supply – a quick look in any newspaper challenges that claim. They alsoclaim that their members are financing 70% of their purchases. This is only true if you do not include the secured loans borrowed on their existing portfolios to use as down payments on future purchases.

And landlords favor older homes, or indeed the past three, amongst their members. It is hard to believe that a fast acting landlord wants to waste money renovating and older home when a new one is ready for occupancy.  There is also the increased fear of being stuck with properties that are difficult to resell if the market swings to a ‘buyer’s market.

Another startling fact is the number of landlords who have substantial amounts borrowed on interest only mortgages.  “In for the long term” means something totally different in the buy-to-let market. It means that the landlord is willing to gamble 25 years of their life against the hope that their homes will increase in value (even when they are 25 years older) and that they will be able to sell them, repay their mortgages, and then bank the profit.

What will really happen is a stamped out of the market caused by novice landlords the first time they experience a dip in the cost of houses. Unfortunately, these landlords will learn a little too late that they bought their homes at artificially inflated prices, and the resell values will leave them petitioning for insolvency and mercy from the courts.