Landlord Exodus – The Next Step

Are You Facing the Landlord Exodus? Here’s Your Next Move

Once hailed as a lucrative venture, being a landlord has lost its luster in recent years due to a barrage of regulatory changes. Telegraph Money recently shed light on the predicament of squeezed buy-to-let owners, and we’re here to guide you through your next steps.

Historically, purchasing property for rental income was considered a stable way to grow your wealth. From 1997, the availability of buy-to-let mortgages facilitated an era of high rental income and capital growth, sometimes even outperforming stock market returns.

But the landscape has shifted. Buy-to-let mortgage rates have spiked, triggering a potential remortgage crisis. Simultaneously, elevated taxes and new regulations have compounded the challenges faced by landlords.

Anna Clare Harper, an expert at sustainable investment advisory GreenResi, commented, “The rosy period is over. As rental demand grows and outpaces the supply of quality rental homes, the Government is implementing policies to enhance the professionalism of the private rental sector.”

These policies encompass reductions in tax relief for mortgage interest payments, the Renters’ Reform Bill, the abolition of Section 21 no-fault evictions, and stricter energy efficiency standards. Properties must now possess an Energy Performance Certificate (EPC) of “E” or higher to be rented, with plans to raise this requirement to an EPC of “C”.

Harper emphasized, “This might cost property owners around £10,000 per property, affecting roughly two-thirds of private rental homes. The combined weight of regulatory pressures and rising interest rates is driving a ‘landlord exodus’.”

This predicament hits “accidental” landlords particularly hard – those who aren’t full-time property investors. According to the English Landlord Survey, over 80% of landlords own fewer than five rental properties and operate non-professionally.

Shahram Shaida of Allbricks, a platform for home buying and property investment, noted, “Government regulations are exacerbating the situation, especially for non-professional landlords. These factors might drive more landlords to sell.”

In line with this trend, the latest data on capital gains tax reveals that a substantial number of taxpayers – 139,000 – reported 151,000 disposals of residential property during the 2022-23 tax year, resulting in a combined liability of £1.8 billion. This figure significantly surpasses the previous year’s numbers.

Rachael Griffin, an expert in tax and financial planning at Quilter, explained, “This substantial increase indicates a significant exodus of landlords from the property market, as stricter laws make buy-to-lets a less attractive investment.”

So, what options do landlords have if they’re contemplating an exit strategy?

1. Evolve Your Property to Maximize Income

Some landlords might want to retain ownership but seek avenues to boost revenue. Consider exploring the realm of holiday lets. James Forrester, MD of Stripe Property Group, suggested, “Platforms like Airbnb have made holiday lets an attractive option for pivoting landlords.”

However, there are regulations to navigate. Properties must be fully furnished and available for rent at least 210 days per year to qualify as holiday lets. Regional restrictions also apply, like the 90-day limit on renting in London without planning permission.

While holiday lets can generate substantial income in high-demand areas, the costs – including mortgages, maintenance, and potential “empty homes council tax” – must be weighed carefully.

2. Embark on Property Redevelopment

Property development presents another path to explore. While renovating could lead to higher rental income, it entails substantial initial expenses and a potentially lengthy process, further complicated by labor shortages.

Harper cautioned, “Rising labor and material costs could make this more challenging and costly than anticipated. For landlords looking to exit due to the burdens of the rental market, development might not be the solution.”

3. Sell Your Property

For a clean break, selling the property might be the most appealing option. Multiple approaches can be taken, such as selling to another investor with tenants in place, partnering with an investment agent, or opting for an auction.

Alternatively, the “rent-to-own” concept gives tenants the chance to buy the property over time. This socially beneficial approach aligns well with those seeking an ethical exit strategy.

Selling a vacant property should not neglect tenants. Disrupting their living situation and rent payments demands consideration. Also, factor in the costs of holding a vacant property until it sells, including the lost rental income.

After a successful sale, deciding what to do with the generated lump sum is crucial. Non-professional investors might achieve comparable returns with fewer hassles through indirect investments after accounting for the costs of adhering to regulations.

However, selling at a time of declining house prices could result in missed capital gains. According to estate agent Hamptons, buy-to-let sales in 2023 have yielded gains 10% lower than those in the previous year. Any capital gains would be subject to capital gains tax.

4. Invest Sans Ownership

In today’s digitally driven world, property investment options abound. Innovative Finance ISAs (IFISAs) offer a way to invest in property development without owning property. These ISAs enable tax-free investing in peer-to-peer lending and crowdfunding, with property development being a popular sector.

Jason Ferrando from EasyMoney explained, “Investors can use their tax-free ISA allowance to invest in property development projects. IFISAs may yield higher interest rates than traditional ISAs, making them attractive in a rising interest rate environment. However, as with any investment, there is a level of risk.”

The Changing Landscape of Landlording

The landscape for landlords has shifted dramatically, and it’s essential to understand your options when facing a landlord exodus. Deciding whether to evolve your property usage, redevelop, sell, or explore new investment avenues can be a complex decision. Each path comes with its own set of considerations, risks, and potential rewards.

As the market continues to evolve, keeping an eye on the dynamic trends and seeking professional advice can help you make informed choices about your property investment journey. Remember that regulations, market conditions, and financial considerations will shape the most appropriate path for your unique circumstances.