Buy-to-let has undergone some major changes in recent years and as a result the profile of a typical landlord has also changed. Emma Cox looks at how things have evolved and what opportunities real estate investors are looking for in 2024
The buy-to-let (BTL) market has changed significantly in recent years, largely due to a number of economic factors that have made BTL investments less favorable for non-professional landlords.
Until recently, a large number of BTL investors were those who had inherited homes, or retained previous properties while moving – known as the ‘accidental’ landlords.
Casual investors also looked favorably on BTL properties as a way to increase their income, especially in retirement. High house price growth, stable financing costs, attractive rental yields and tax reductions made BTL homes a relatively safe option for non-professional landlords.
Challenges for landlords
However, we are now in 2024 and the picture is very different. Gradually we have seen more and more ‘casual’ and casual landlords leave the market, due to the turbulent economic conditions of recent years.
The challenges began in 2020, when landlords could no longer reduce tax bills by recognizing mortgage costs in rental income. Landlords now receive tax relief based on 20% of their mortgage interest payments, causing problems for those who are or have been pushed into a higher or additional tax bracket.
In April this year, capital gains tax deduction was reduced to £3,000, when previously it had been £6,000, and not long before £12,000. As a result, those selling a property are now facing a heavier tax bill, especially those who have owned a property for a longer period of time and have therefore seen higher price growth.
Many landlords will feel the impact of the cost of living crisis, with rising costs and bills compounding the challenges of high interest rates, which will have impacted those who have had to remortgage in the past two years .
Even with higher rents, these factors have meant that returns for landlords have been less prosperous compared to when they first started in the BTL space.
Opportunities for professional landlords
Despite all the challenges, the news may be more positive for professional landlords. While recent times have been less favorable for non-portfolio landlords (those with fewer than four properties), opportunities are opening up for professional landlords (those who work full-time as landlords with more than four properties).
Many will have taken advantage of stagnant house prices over the past year to expand their portfolios, with a large proportion of landlords now turning to higher return options.
As demand for rentals continues to grow and outpace the supply of sufficient inventory, professional landlords have set their plans for property types such as multi-occupancy houses (HMOs).
In both 2022 and 2023, healthcare organizations made up just over a quarter (27%) of all Shawbrook buy-to-let activity. However, as landlords have placed increasing emphasis on diversifying their portfolios, this number has already increased to more than a third (34%) by 2024.
HMO rental yields lend themselves better to mortgage lending in a higher interest rate environment, and the more frequent turnover of tenants allows landlords to continually bring rental prices in line with the market. Some landlords have also managed to convert existing owner-occupied homes into care farms to increase their income streams.
The rise of semi-commercial real estate
Landlords are also increasingly turning their attention to semi-commercial properties. Shawbrook has already seen the number of applications almost double this year compared to 2023.
Retail units with apartments above are proving to be the most popular, accounting for 60% of the applications received by Shawbrook. The added benefit of having both commercial and residential space means landlords can benefit from higher yields with a mix of income streams.
Energy efficiency remains crucial
Although the current overhaul of government Energy Performance Certificate (EPC) regulations has been scrapped, professional landlords have continued to make changes to their properties to improve efficiency; helping their tenants in the current financial climate, but also making their properties the most cost-effective while energy bills remain high.
Limited companies
Higher numbers of BTL purchases are being made via a corporate structure indicates the professionalization of the market, and the increase in investments in the healthcare sector and semi-commercial investments shows that professional landlords have managed to remain agile in the environment of high interest rates, and have grown their businesses despite a challenging real estate landscape.
While there are still obstacles for landlords to overcome this year, the greater professionalization of the BTL market has seen portfolio landlords use it to their advantage to diversify their portfolios, grow their businesses and future-proof their strategies.
Emma Cox is MD Real Estate at Shawbrook