The word 'let' means 'easy' in Danish but anyone who has dabbled in the private property rental market will testify that it can be anything but that. And now, the ability to tell social housing tenants from those who fund their rents entirely by themselves has become impossible.
In addition to founding a social housing Real Estate Investment Trust, I have maintained a substantial buy to let portfolio for almost 20 years. Recently, I read with trepidation national media coverage which boasted confident predictions regarding the rates of return from buy to let investments -authoritatively waxing lyrically about 6% returns. In my experience, that figure is wholly unrealistic and scarce attention has been given to the risks and realities of being a private buy to let landlord.
While it is without doubt true that the headline return rates outperform even the best savings accounts, investment and maintenance costs easily erode those returns. These include management fees (between 7.5% and 11% plus VAT), insurance, repairs, and boiler maintenance plus council tax liabilities during periods of vacancy.
All of these costs come to about 19% of the rent income, excluding the contingent council tax liability, which almost instantly reduces the trumpeted 6% return to just a little over 5%.
I recently acquired a buy to let property in Lancashire for £62,250. A very nice little 2-bed council house that is in need of a bit of a hug before it is ready to let. With a new kitchen, bathroom and a full central heating installation plus contingent electrical and plumbing works and council tax bill for the 6-week renovation, my total investment is £72,075.
Realistically, this property will fetch £395 per calendar month: a return of 6.5%, as predicted. However, take into account the full cost of the associated overheads I'm now looking at 5.2% without even having touched on the potential risks.
For general let properties, many landlords take the risk that the house will remain in occupation. While this risk can be mitigated by being a good landlord, providing good, well-maintained housing within a rent envelop that is affordable and that encourages tenants to stay, vacancies do arise and tenant turnaround takes time.
10 years ago, when I wrote the Rent Assurance policy, I had actuaries calculate the rent loss arising from vacancies and the magic figure is 7% - a calculation that still stands today. Add to this a more recent innovation from local authorities to remove the council tax exemption for empty homes during the turnaround period. To use my Lancashire property as an example again: each week of vacancy costs £91 in lost rent and £25 in council tax. This reduces the yield on my investment by 0.12% for every week where there is no tenant. The average ROI figure has now fallen to 4.84%.
And of course there is the issue of arrears as falling wages and inflation begins to eat into people's ability to pay even the most essential bills.
Working families, that were dependent of housing benefit, and who topped this up from their own resources because they were in under-occupied accommodation are increasingly unable to do so. Some landlords try to exclude benefit claimants from their stock and openly advertise this policy. I don't altogether see how this is either legal or has any practical value since any tenants' circumstances can change mid-tenancy.
With more than 500,000 people supported by food banks there is an increasing risk to rental income as families face the choice of food or rent.
Mechanisms to protect landlords such as deposits and bonds do of course exist, as does the option of resorting to the courts to secure possession of the premises. But these situations seldom end well and the property, if secured through the courts, can be in such poor condition that the losses from arrears, damage to the property and legal costs to secure possession seriously exceed the deposit and bond arrangements.
In my experience and that of many other smaller landlords, the better way is to take a longer term view and work with tenants. In the short term, this approach might reduce your investment return but overall, you will see an improved ROI.
Housing remains my preferred investment choice. Get it right and it provides a stable return that keeps pace with inflation. But the revenue return rates are not as high as some would have you believe. They are however sensible, sustainable and therefore attractive as an investment.
One final but important point: There is a very direct link between the investor and the tenant of the house. It is regulated by the tenancy agreement. For the investor it protects the investment and for the tenant it establishes their home. I can think of no other investment where there is such an obvious link.
This point, for me, emphasizes the most important principle of the buy to let market. We are landlords; we occupy the privileged position of providing people with houses in which they can make a home. It can be financially rewarding but with that financial reward comes great responsibility.