Residential property has long been the investment of choice for many Britons, but with many landlords who developed their portfolios in the early days of the buy-to-let market nearly 30 years ago now in retirement or nearing retirement age, a new breed of landlord will be required to step up and provide the rental homes of the future.
Paragon Bank surveyed 500 landlords with between one and three properties who have expressed a desire to grow their portfolios to understand what this future cohort looks like and what is driving their property ambitions.
+ The average age of aspirational portfolio landlords is 37.8. The highest proportion of landlords were aged between 25 and 34 (35%), followed by 35 to 44 (31%)
+ Three quarters were already higher-rate taxpayers and 77% are in full-time employment
+ Over four in 10 live in London or the South East, with 12% located in the North West
+ 51% are already involved in a property-related sector or role
The report found that family and friends with an existing property business was a key driver for 43% of next-generation portfolio landlords to initially become a landlord, followed by a desire to develop long-term rental income.
+ 67% chose property over other assets because it’s a tangible asset
+ 60% are investing in property because of the long-term demand for rental homes
+ 53% view it as a long-term investment to supplement their pension
+ 38% financed their first rental property via a buy-to-let mortgage, but 36% purchased outright
The research also highlighted how there is a greater desire to invest in more complex propositions. Today, only 8% of these landlords invest in houses in multiple occupation but that rises to 17% when thinking about the future. Similarly, 14% of landlords invest in multi-unit blocks currently and, in future, that is expected to grow to 26%.
Elsewhere, we see a large jump in the proportion who are targeting terraced housing, the staple of the rental market, rising from 26% currently to 37% in future.
Richard Rowntree, Paragon Bank managing director of Mortgages, said: “The PRS needs a consistent flow of new landlords coming into the sector, those with aspirations to develop the portfolios of the future. Our analysis of industry data shows that over the past 10 years, the average age of landlords purchasing a buy-to-let property with a mortgage has fallen.
“It is clear there is a committed group of younger landlords who stand ready to take the mantle and provide the rental homes of the future. What they require is a regulatory and fiscal environment that encourages them to do so.”
Click here to download the report.
New data suggests rental prices and affordability are ‘softening’
Tighter regulation and higher taxation will rid the rental market of rogue landlords and other bad actors and only the major players that have survived past property crises will survive.
The market will be cornered by professional landlords, hedge funds and private equity whom will own the likes of Connells, Foxtons and Rightmove in the not too distant future.
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Rogue landlords work under the radar and no legislation will touch them. They mainly rent to illegals and as we know there is no shortage of them. Is good landlords and deserving tenants who will suffer.
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Landlords entering the PRS have no experience of the downsides. That was me 25 years ago. Like many, I was an accidental landlord, and then invested to supplement my pension. Then… tenants and government became involved!
Yes, the country [and lenders] does need a steady influx of new landlords, but the profile of the PRS will be different, with different investment options. I just don’t see traditional BTL as one of them for younger new entrants.
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I agree! Landlords now see no profit from rent but now with the increase in CGT there will be little profit in selling. The winner today is Gov. with all of the extra tax they are receiving but, sadly it is the tenant who suffers.
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New laws in tenants favour, EPC change and capital gains tax will make it a poor choice for many prospective landlords. I plan to sell a couple before the EPC changes come into force, 1 a year to minimise CGT. How this helps tenants is beyond me.
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The report confirms that the younger landlords are wealthy and in the south. It doesn’t confirm they were made aware of the forthcoming changes in legislation likely to have an adverse impact, particularly if the trend is towards terraced houses which are typically old and cheap to buy, particularly out of the London belt which will cost a unrecoverable fortune to maintain with an EPC C band.
There will always be wealthy people with spare cash to buy and rent properties. The big question is simple …. how many of them are there today. So many come into the market as DIY landlords who inherit a property and see the chance of some extra cash from rent and capital value long term. That has and continues to be raped by government and local authorities for a long time now and no end in site.
I predict the housing market will continue to shrink, available only to the wealthy landlord, as many will not be able to afford the risks and importantly want to, which is why its been shrinking over the last few years with no end in site.
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Spot on!
I will never invest another penny in BTL, but I do see a future for investing in BTR for those who still believe in the future of the PRS, just not BTL.
A few months ago I took a little punt on PRSR. It was trading at near 30% discount to NAV, with a strong record of completions and rental to the ‘family’ market mainly in the South. It’s just paid a 4% dividend and I’m up 17% on my investment. I appreciate they need to be able to borrow to build more, and should be in a position to do so as their discount reduces. If they don’t, I’ll simply sell up in 5 minutes and for the price of a large G+T, take my profit, and look elsewhere. I wish my remaining BTL was as profitable and easy to dispose of!
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Spot on! Buy to let was born when millions of us lost 75% of our pensions when Labour changed the investment rules. They are now going after pensions today but buy to let is no longer the investment it was.
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Perhaps one way to look at this issue is to consider the amount of starting wealth and your investment strategy…
Typically, BTL landlords look to achieve a minimum ROI of 5% per annum on the current value of the property. This hopefully covers the cost of the 75% LTV mortgage, expenses and fees, leaving a small profit overall annually which usually gets eaten into by voids and damages. However, at the end of the mortgage, the property will be worth four/ five times the initial purchase price and the mortgage payments fall away – PURE PROFIT thereafter. It might take 20-25 years, but it happens eventually. BUT, I’ve known BTL landlords that have had to subsidise the mortgage payment for one reason or another. I can’t imagine having to choose between paying my own mortgage or the one on the BTL property because of a void or because the interest rates have just skyrocketed.
Short-term landlords will never truly win. The bank does very nicely thank you, but the short-term landlord gest a lot of headache for a fairly minor gain.
Conversely, if you have enough cash money in the bank to buy a freehold property outright and then refurbish it to the standard required by legislation and tenants then you are on to a winner right from the outset. You have no mortgage to pay and get a monthly profit from day 1. This could be considered a salary if you like and the property still increases in value over the 25 year period.
However, there are some very interesting little accounting tricks that allow a normal individual to open a company and loan that company a significant amount of money at commercial interest rates. The loan payments from the company to the individual are all but tax free, except for a little on the interest rate charged. If the amounts are set just so, then the rent paid to the company by the tenants is just enough after fees, deductions and depreciation, etcetera to cover said loan repayment. The company then pays little or no tax. On a loan of £250,000 over a 25 year period at a fixed interest rate of (say) 8% you will pay back the initial loan plus roughly £328,860 in interest. Depending on your personal circumstances, the £1,096 per month you receive could be entirely tax free… Plus you are getting your initial investment money back at a rate of £833 per month giving you a potentially tax free income of £1,929 per month. The value of the property stell ends up at perhaps five times the original purchase price. Obviously, there are hoops to jump through to keep the tax man happy…
The end result? From an initial outlay of £250,000 you have an annual income of £23,000 (great at the beginning, not so much by the end), your initial investment money back (unless you reinvested it of course), and all the while and not paid very much tax. In the meantime your company has gone from zero assets to outright ownership of a property worth five times the original loan, the loan has been paid off and the balance sheet is clean. If you’re clever with the way the ownership is arranged, this could then be included within your pension or as a holding company partially owned by junior family members.
All you need is to be rich in the first place!
The alternative to this would be a BIG organisation that gets preferential borrowing rates. It constantly grows its portfolio by using the unmortgaged value of the portfolio to leverage further lending. This is definitely a Ponzi scheme, but everything works fine until the market does what it will inevitably always do. The company in question would need to be very light on its borrowing at this stage to survive. If well managed, this would appear to be not top difficult to achieve within the usual boom and bust cycle within the UK.
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Yes, it’s all about having the cash in the first place.
My partner is currently in the process of transferring her unencumbered rental property to her son, who will continue to operate it as a rental. I wonder if he would be better off buying the property from her via a Ltd company, with a loan from Mum? After all, she will be paying CGT in any case. His company would then repay the loan to her at 8%, and she could gift him said repayment.
Thoughts?
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