Is now a good time to invest in property?
Cheryl Mills, owner of Yendor Homes, thinks so, and here's why.
Investors love property. This has always been the case because of the tangible nature of bricks and mortar, seen as superior to buying volatile shares, a pension, or even cash savings which currently give next to no return. But is now the right time?
Many of us have an understanding of property when we own our home, and unlike a typical pension where we wait a lifetime to see any return, an instant and increasing cash-flow in the form of monthly rental payments appears very attractive.
Additionally, a sensibly researched and acquired buy-to-let offers the possibility of making significant long-term “pension style” capital gains. House prices have increased on average by a third over the last decade, roughly doubled over the last 20 years, and rents have seen a steady increase over this period too, as more and more people find themselves needing to rent.
At present, the coronavirus pandemic is having a negative impact on the Scottish economy and there continues to be a dramatic rise in unemployment. Many landlords are finding it difficult as inevitably some tenants are struggling to pay their rent, but even so, these are still a minority.
We are likely to be facing the worst recession for a generation and consequently this will have repercussions on the security of rent returns as well as house prices.
Investing successfully is a matter of finding a balance between fear and greed. To paraphrase Warren Buffet, one of the world’s most successful investors: you should buy when others are fearful and sell when they are being greedy.
Situations like this subsequently create great buying opportunities. For those with a reasonable appetite to risk and are prepared to take a calculated risk, based on sufficient research and due diligence, the risk is acceptable. The reward can be substantial. Timing and patience are crucial but waiting for the right time to buy usually pays off.
There are currently some really good buy-to-let mortgage deals available, fixed at low interest rates as banks are keen to lend to the right investors. By using gearing (borrowed money), investors can buy far more for their money without exposing themselves to increased risk.
With interest rates at record lows and feasibly not able to go much lower, with a fixed rate mortgage based on a bank rate currently at just 0.1%, any rise in inflation can only be helpful long-term. Whilst borrowing does increase risk if prices go down, it also magnifies gains when they go up. Over the long-term property prices have never done anything other than rise.
An interest only buy-to-let mortgage of £150,000 can be serviced for around £175 per month keeping the landlord’s costs low, while an average rent recouped in the central belt is £654pcm. It has been estimated that around 50% of people under 40 will be renting by 2025 and average net yields for a buy-to-lets are currently around 5.9% or even higher in some regions.
With rates as low as these and potential returns high, many landlords are taking the opportunity to re-mortgage their properties, releasing extra capital to make further investment as good opportunities present themselves. The stamp duty holiday until Spring 2021 is another incentive to buy now.
Without a doubt its become much harder to manage rental properties and make a good profit, with increasing legislation and regulation creating more work for landlords. Additionally, the changes to taxation rules have cut profit margins, causing some landlords to decide to sell-up. Most landlords however are adapting to the changes by buying through a limited company and managing the financials more efficiently.
Hence, with the boom in the demand for rental accommodation continuing, given that economic uncertainty means people will likely postpone taking on home ownership, a shortage of rental property is keeping tenant demand high and rents tracking upwards.
Running rental property is not all plain sailing by any stretch of the imagination; there is work to do, there is tax to pay, repairs to be performed; there are tenant problems and void periods. But you don’t make high returns on your money without some effort.
Despite all this, being a landlord can be very rewarding, you are providing a community service and providing you stick to the rules and provide good quality accommodation, your efforts will be appreciated by your tenants and by the authorities.
In a recent conversation with Dennis McNair of Abacus Mortgage Services, Dennis commented that:
“Looking a gift horse in the mouth has never been a particular trait of private sector landlords over the last few years, likely because those gifts have become few and far between. The opportunity to save LBTT on purchases until the end of March 2021 has been seized upon as a potential catalyst for a rise in investment purchases over the next four months or so”
“We live in uncertain times and it seems important to me that the government does not overlook the fact that landlords are also challenged by this situation…”
“…When homeowner repossessions increase, and they will, if greater certainty can be delivered, coupled along with the stamp duty saving, I have no doubt landlords will be motivated even further to add to portfolios, and advisers will no doubt benefit from what is an increasingly competitive mortgage market and a greater need for advice.”
I'd love to hear your comments and views. Feel free to contact me with your opinion.