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Antony Antoniou – Luxury Property Expert

Is the Rental Market Still Profitable for Landlords?

Is the Rental Market Still Profitable for Landlords?

In recent years, landlords have faced numerous challenges in the rental market. Lettings legislation has been tightened, taxes on landlords have increased, and now, the cost-of-living crisis and rising mortgage rates are causing some to question the profitability of rental properties. With the Renters (Reform) Bill also making its way through Parliament, uncertainty looms for many landlords.

Deciding whether to continue with rental properties is a personal choice that depends on several factors:

**1. Cash Flow:** Assess whether your property still generates the desired profit on a month-to-month basis.

**2. Financial Objectives:** Determine if you rely on monthly profits as income or if you are more focused on long-term gains from your investments.

**3. Return on Investment:** Consider what you would do and how you would secure a return on investment if you were to sell your properties.

If your intention was to hold the property for the long term, it’s likely that it will continue to deliver good returns over time compared to other types of investments. So, if you are not dependent on a certain level of monthly profit, riding out any short-term reduction in cash flow might be a viable option.

**Rental Income and Capital Appreciation**

As far as rental income is concerned, the figures remain robust. Average rents continue to rise in most areas, with year-on-year increases hitting record levels. For instance, in the 12 months leading up to May, rents increased by 4.7% in England (excluding London), 5% in Wales, 5.4% in Scotland, and 10% in Northern Ireland.

Looking at property prices, even though sellers had to accept offers below the asking price, house prices have experienced significant growth over the past few years. Although prices are predicted to fall by up to 5% by the end of 2023, most landlords should have already seen substantial growth before the pandemic.

While rental income and capital appreciation look promising, landlords are facing increased expenditure due to general inflation, which raises the cost of maintenance and repairs. Additionally, buy-to-let mortgage holders have experienced or may experience higher monthly payments as interest rates rise.

**The Renters (Reform) Bill**

The Renters (Reform) Bill is a topic of concern for landlords. However, most landlords who already maintain their properties professionally and prioritize tenant well-being may not be significantly impacted by the bill. The introduction of fees for signing up to the Ombudsman and the new portal is expected, but the government assures that these will be reasonable.

Some changes, such as the removal of Section 21 evictions, may not have a considerable impact on landlords, as most rarely evict tenants without a valid reason. Strengthened Section 8 grounds will still allow landlords to evict tenants with justifiable cause.

**Making a Decision**

If you’re unsure whether to hold on to your rental property or sell, consider the following steps:

1. **Check Cash Flow:** Analyze ongoing expenditures to ensure your property/portfolio is still profitable.

2. **Know Property Value:** Assess recent capital growth to offset any potential loss in income or monthly profit.

3. **Calculate Break-Even Point:** Estimate mortgage costs at higher interest rates to determine if your profit margin remains acceptable.

4. **Consider Refinancing:** If your property’s value has significantly increased, refinancing at a lower LTV may secure a better interest rate.

5. **Review Investment Objectives:** If your property meets your long-term investment goals, there may be no urgency to sell.

Ultimately, local markets can vary significantly, so consulting local property experts is essential to understand the specific dynamics in your area and make an informed decision about the rental market’s profitability. While challenges persist, many landlords remain optimistic about the future of the rental market and plan to maintain or expand their portfolios.

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