With returns on our savings sitting at an all time low anyone with funds to invest will be looking for alternative ways to gain a respectable income from their hard earned cash.
We ask here whether becoming a private landlord is a viable solution.
As a nation we have long been obsessed with home ownership, particularly since the Thatcher years and the right to buy policies that encouraged Britons to buy their council houses. Home ownership soared through the eighties and nineties, and it has only been in the last decade that the trend has reversed.
The recent financial crisis has brought about a combination of effects that have favoured the rental market.
Restrictions on easy borrowing of money for house purchase were one of the first reactions of a banking industry under fire for creating the mayhem. Deposits were demanded of a market that had become used to being able to borrow above the cost of their home. At the same time lower, or no, wage increases have made those higher deposits even harder to save for.
Market watchers such as Countrywide and Nationwide are both reporting that prospective tenant numbers are outstripping supply, which under normal market forces will always lead to a rise in price.
There are around 8.5 million rental properties in the UK. For some people that may be a lifestyle choice giving the tenants the freedom to move as and when they please, but for the vast majority it’s a step in the journey to home ownership.
Average rents across the country are £750 a month, but as with any average that masks a huge range from Mid Wales, or Burnley in the post industrial north where a lower priced two bedroom rental property might cost you less than £400 a month, to London where the average is £2315 a month – in fact in London rents are usually quoted as weekly amounts, how telling is that?
Rents are rising below the rate of inflation at the moment as an average, but the South West is seeing the biggest increases at 3.9% while unusually London is at the lower end of rises with just 1% increase between May 2013 and May 2014.
Could you be a landlord?
We can see that there is a definite market for more landlords, and the majority own just one or two properties – that could be you. But what might you earn? And what are the pitfalls?
An investor will often consider a 5% yield to be the minimum worth considering, and much of the country is delivering against that at the moment. Last year saw higher rent rises and yields were averaging 5.4%. This year average yield has dropped to 5.1% but that’s not necessarily something to worry about.
The other figure to consider when you’re thinking about owning more properties is your potential capital gain – the rise in value of your property. Now of course you can only realise this value when you sell the property, and you’ll need to seek advice to avoid being hit for capital gains tax at 40%, but it could outstrip any rental income in the long run. The Bank of England is already worried at the pace of house price rises, and reports this week showed the average London house price increasing at 18% while the Waltham Forrest area recorded a crazy 26%. If you owned there at the moment you’d be lucky if you could earn as much as your house does!
Across the country average incomes from a property were around £20k, made up of £8k in rent and £12k in value increase. Suddenly your cash ISA paying out 1.5% or thereabouts is looking particularly weak, even when you take costs and income tax into consideration.
Other factors favouring property ownership as an investment include payment history – bad debt is falling, and with it one of the biggest worries of the prospective landlord.
Let’s not get carried away though. Taking on rental properties is not for everyone, and certainly not for anyone who is likely to become emotionally involved with the property. Very few tenants will be as careful with the property as you would, and things will go wrong, probably when you’re on holiday, or already worrying about something else! Your deposit offers some protection, although it’s not as straightforward taking the cost of damage from a deposit as you might expect. You can offset much of the worry by employing a managing agent, and if your life is busy already then it could well be worth the extra cost.
Getting a good return on your money from renting is certainly possible, but do take professional advice, and talk to friends and neighbours who might have experience. You could go for the best of all worlds and buy your rental property in an area where you’d like to live, then spend the time when you’re looking for new tenants living there yourself. Many retired couples who moved out of town long ago are enjoying the inner city renaissance of cities like York, Manchester and Bristol in this way right now.
Nothing is guaranteed, and you can be sure that the Bank of England will be more vigilant in the years to come than it was in the noughties, but if those potential dual returns in capital growth and rental income are exciting then there could be a whole new investment experience waiting for you.