Landlords must make improvements to their properties’ energy efficiency to avoid one in ten buy-to-let houses being unlettable in five years’ time.
New legislation will make it a crime to rent out properties with the two lowest energy efficiency ratings, F and G, from April 2018. Homes with these ratings are most common in the private rental sector.
Tenants will hold the power in demanding developments to insulation from 2016, with landlords unable to refuse reasonable appeals for better energy efficiency.
The English Housing Survey revealed that 11.4% of houses in the private rented sector had the F or G rating in 2011. In a dramatic contrast, just 2% of local authority properties, and 1.6% of housing association homes had these ratings. The number of owner-occupied houses was higher, at 8.2%.
These ratings expose a lack of basic insulation. Over half (57%) of owner-occupied properties have cavity wall insulation where a cavity existed, with 38% of privately rented houses having the insulation. Within social housing, the number is 63%.
Over 12% of house in the private rental sector do not have double-glazing, whereas 5.3% owner-occupied homes do not.
The Government is yet to decide whether the prohibition of letting out badly insulated properties will come into force on a set date, or whether they can be rented until the end of an existing tenancy agreement.
The National Landlords Association (NLA) has introduced a scheme to aid landlords in making the energy efficient changes to their rental properties. It reflects the Government’s Green Deal, in which energy efficiency improvements are paid for by a loan that is then repaid through an electricity bill add-on. The impression is given that a reduction in energy bills will cancel out the loan.
The NLA says: “The Government has made it clear that there will be consequences for those who do not voluntarily improve the energy efficiency of their properties by a specific time, so there is no excuse not to comply with the cost-neutral scheme.”1
Buy-to-let investors, however, could be caught by surprise by the laws. A growing number in the market borrowed a total of £16.4bn last year, a 19% rise on the previous year, and the highest level in four years.
Investors find buy-to-let appealing for the good rental incomes that surpass the poor returns from cash deposits. Rental yields average 6%, say Savills estate agent.
If this is an industry you’re looking into, there are certain things to reflect on. By considering all of your investments, you must ensure you have enough money to avoid borrowing excessive amounts, or place too much into property assets.
Stephen Rees, Head of Real Estate Advisory at Coutts, a private bank, says: “I wouldn’t advise putting more than 10%-15% of your assets in an investment property. It is an illiquid and specialist market. So if you have only £100,000 to invest, I would think very hard about it. If, on the other hand, you have £1m in assets, buy-to-let is worthy of serious consideration for a part of that money.
“Equally, be sure that you don’t over-borrow. If you put up 20% of the purchase price and borrow the rest, events beyond your control could get you into trouble. Instead, we would recommend at least 50% equity, and even then you should have a plan for cutting the debt if your lender gets cold feet.”
Rees also says that those with less to invest could have 30%-40% of their gross incomes consumed by costs. He says: “You are completely exposed to one tenant, so if he leaves, refuses to pay, or vandalises your property, your income disappears. You also have no economies of scale when it comes to maintenance and little bargaining power with tradesmen and estate agents. Successful investors have usually built up a portfolio of a few properties over time.”1
When choosing the perfect property, the area and home needs to appeal to tenants. Researching the market is vital in determining what they’re looking for.
Jeremy Leaf, a north London estate agent and spokesman for the Royal Institution of Chartered Surveyors (RICS) advises: “Imagine that you are moving to Tokyo or Adelaide and looking for a place to rent. What would you look for? That’s what tenants here will want too.
“Do a huge amount of research, make a nuisance of yourself. Call up estate agents posing as both buyer and tenant to get a feel for levels of supply and demand. Walk the streets at different times of the day to get to know an area. Find out about flood risks and crime levels, and if any new facilities are planned.”1
New build houses can provide low maintenance costs, and potentially guarantee rental income. However, they will also face competition from other investors for tenants, which could force rents down in the future.
A Director at Anderson Harris, mortgage brokers, Adrian Anderson, says: “Commuter towns to London are always good.”1
Another broker, of SPF Private Clients, Mark Harris comments: “The outlook for buy-to-let is bright. As first time buyers struggle to get on the housing ladder, rental demand continues to climb. Yields are improving while the rates on buy-to-let mortgages are looking increasingly attractive.”1
Borrowers are also advised to consider private banks, by Rob Currie, of Nedbank Private Wealth, who could offer better interest rates, equal to those on ordinary residential mortgages.