Over the last few months, landlords have seen their profits eroded with the Chancellors’ recent tax measures and it is becoming much harder to make money in the buy-to-let market.
While increased financial pressures are driving some investors out of the market, there is still money to be made in the long term if landlords make the right investment decisions.
Peter Armistead, Managing Director of Armistead Property is urging landlords to review their existing portfolio to boost rental income and protect profits, by attracting a different market. Peter comments: “Landlords will often find the best returns in urban areas, with a concentration of students and young professionals.
If landlords can convert a two to three bedroomed property into a three to four bedroomed property, it offers the opportunity to attract students and young professionals who want to house share.
Landlords could also consider changing a house into an HMO, as the yields can be very high. The great advantage of HMOs is that the rent does not need to rise because the profitability of multiple tenants is much higher than comparable, standard buy-to-let property. Usually, landlords rent a property on the basis that one person, or household, is responsible for paying the rent, even though there may be a family of five residing in the property.
For example, a three-bedroomed, single let property may typically achieve a gross rent of £650 per calendar month (pcm) for a family. It is usual that, once converted, the gross rent on the same property will exceed £2,000 pcm as HMO. This represents a significant profit opportunity for landlords who have the required expertise to generate sustainable returns in this increasingly competitive market.
It is also worth landlords considering setting up a Limited Company and using this structure to hold their properties. This will enable them to continue deducting mortgage interest when they are calculating profits. Landlords can also benefit from just 20% corporation tax, instead of income tax of up to 45%.
Landlords need to do a serious portfolio review and work out how the tax changes affect them and what options there are to save, or make more money. For example, remortgaging to get a better deal or renovating some old stock - these costs will be tax deductible. Alternatively, landlords could consider selling some properties or increasing the rent.”