The Accidental Landlord

A large proportion of landlords find themselves in the position of being an ‘Accidental Landlord’.

Some start out this way, and find that they have an excellent investment property which proves to be a good asset, and perhaps even use it as a springboard to start their portfolio, for others this property could be a minor nuisance or a full-scale nightmare. Sometimes the figures just don’t stack up, and the property you have is not a good investment.

If we went back to the pre 2008 market, most properties worked as a Buy to Let (BTL) investment. That is simply not the case anymore. In 2017 the Bank of England instructed lenders to tighten the lending rules on BTL mortgages, and as a result many owners now find themselves in a position of being unable to move their mortgage to a more competitive product, and the repayment costs have increased, eating away at their profits.

The BTL market is still strong, but not in all areas of the country, and certainly not for all types of properties. The criteria when evaluating an investment property is very different today compared to before the property crash. Some areas of the country have recovered and are thriving, some have not and the outlook remains bleak.

The last couple of years have seen a raft of legislation that is aimed at professionalising the sector, and it can certainly feel like it is aimed at the small-scale landlord or investor. The wear and tear allowance on furnished properties has gone, and of most importance tax relief on interest payments has been replaced with a 20% tax credit, the full impact of this will be felt when you submit your tax return for year 2020/21. For anyone that has bought or been gifted their property recently will also be aware of the 3% Stamp Duty surcharge, and many won’t be aware of the Capital Gains tax they will pay when they sell their property.

Aside from tax, we now have Right to Rent checks, EPC regulations, selective licensing areas across the country where you need a Landlord Licence before renting, along with HMO regulations which change from area to area. Proposed changes to Section 21 mean you may need to go through the Courts (Section 8) to remove a tenant who no longer pays their rent. Even GDPR regulations apply to landlords. For a lot of people, the “juice in no longer worth the squeeze” when it comes to being a landlord.

People can become accidental landlords for many reasons. Properties can be left by loved ones, you may need to rent out your family home when you move locations due to work, can’t sell due to negative equity, or you watched too many episodes of Homes Under The Hammer and found yourself at an Auction House one day. A contact recently came to me with a plan. They had been left a 2-bed bungalow which was worth around ￡300,000. They intended to spend ￡25k of their savings on modernising the home, which would increase the value of the property to ￡350k, and then rent it out to supplement their income.

The anticipated rental income in the area was ￡800. However. Some properties just don’t work. They just dont add up. If the client were to re-finance onto a standard BTL mortgage with a Loan to Value of 75% (in this case ￡262,500 mortgage on a ￡350,000 property), the rental cover that lenders required was ￡1,503 per month ([￡265,000 x 0.055%] x 1.25)/12 that’s a big difference from ￡800, and simply means you cannot borrow that amount of money on that property.

The reality is that you can only borrow ￡139,600 on this property using a BTL product. The new mortgage regulations are actually a really good barometer of whether a property works as an investment. With a rental income of ￡800, you should be looking at a property that has a maximum value of ￡186k. Using a mortgage, the client could cashflow ￡393 per month, but by leaving over ￡200k equity in the property. The return on investment was 2.35%. That’s a poor investment, some properties just don’t work.

The property wasn’t for them. They had no passion for bricks and mortar, no desire to be a landlord, but simply didn’t know what else to do with the property, and thought that is was the best route to take. This is a real-world example of how we have helped someone NOT buy property, and NOT become an accidental landlord. Perhaps he’s the lucky one who has never had a tenant in arrears, the calls at midnight to say the heating doesn’t work and hasn't found himself elbow deep in the toilet fixing a blockage.