When it comes to the topic of investments in the UK, properties are regarded as the Holy Grail. They are regarded as a near guaranteed source of income and there is decent evidence to back this up. House prices have remained strong over the last few years with up to 10% growth noted year-on-year in some parts of the UK. However, with the current Brexit atmosphere now is the time to take a step back and reconsider investing into the UK property market. Here are some reasons why:
Possible Tax Changes
In 2015, Londoners were put through the hoops on the possibility of a mansion tax by Ed Miliband and Labour. The plan didn’t materialise but George Osbourne and the Conservatives introduced the 3% rise in stamp duty for people who already own a property. The stamp duty has been in effect since April 2016.
Annual Tax on Enveloped Dwellings (ATED), a tax mainly payable by companies owning high-value UK residential property, has seen changes in rates and thresholds over time. These changes can significantly impact the tax liability of property-holding companies, potentially affecting their investment strategies.
Furthermore, various tax changes have been implemented affecting landlords, including modifications to mortgage interest relief and wear and tear allowances. These alterations can influence the profitability of buy-to-let investments and affect the decision-making of landlords.
Lastly, inheritance tax (IHT) is relevant when passing on property to heirs. Changes in IHT rules over the years have affected estate planning and the financial implications of inheriting property, thereby influencing real estate transactions.
These tax changes, along with their specific effective dates, have the potential to significantly influence property market dynamics, investor behavior, property prices, and demand for real estate. It’s important for individuals involved in property transactions to stay updated on these changes and seek advice from tax advisors or financial experts to understand the full implications on their investments.
With the current economic and political climate, there is no telling what the next tax policy would be, in the governments bid to cool the housing market. These things need to be kept in mind when considering owning property and becoming a landlord.
Possible Interest Rates Rise
Over the last decade, the UK and other developed economies around the world have maintained negative interest rates. Tracker mortgages will rise as soon as interest rates rise. As a potential landlord, therefore, you have to ascertain how your position can change in the event of an interest rate rise.
The general trend for interest rates on property loans in the UK was characterized by a prolonged period of historically low rates. Following the 2008 financial crisis, the Bank of England implemented substantial interest rate cuts to stimulate economic recovery and support the housing market.
In 2009, the Bank of England reduced the base interest rate to a record low of 0.5%, where it remained for several years. These low interest rates were part of the efforts to encourage borrowing, facilitate mortgage affordability, and boost the property market. For many years, the interest rates on property loans, including mortgages, were exceptionally favorable for borrowers.
Low interest rates during this period led to increased demand for property purchases and mortgage refinancing, promoting a rise in property prices in various parts of the UK. It also encouraged property investors to take advantage of cheaper financing to expand their portfolios.
However, it’s important to note that interest rates can be influenced by economic conditions, inflation rates, and central bank policies. Changes in these factors can lead to adjustments in interest rates, impacting borrowing costs and, consequently, the property market.
Property Management Difficulties
Property management as a landlord in the UK comes with its share of challenges. Staying compliant with evolving legal regulations regarding landlord responsibilities, tenant rights, and property standards is crucial but demanding due to frequent updates. Maintenance and repairs can be time-consuming and financially burdensome. Landlords must ensure the property is safe, habitable, and well-maintained, which can be a significant undertaking.
Collecting rent on time and handling rent arrears is another common challenge. Late or missing rent payments can disrupt cash flow and financial planning. That said, landlords can make use of various systems such as property management software, landlord credit reporting systems, and so on. Addressing these issues and, if necessary, going through eviction procedures can be complex and add to the overall workload.
Finding reliable and suitable tenants can be a hurdle. Thorough tenant screening is necessary to ensure tenants will take good care of the property and meet their financial commitments. Striking the right balance between finding responsible tenants and maintaining high occupancy rates is a constant challenge.
On the positive side, renting to student tenants can be advantageous. Despite stereotypes, many students are responsible tenants, seeking accommodation near their educational institutions. This consistent demand often results in steady occupancy and cash flow. There are also services that can help you find vetted, supported, and great tenants for your properties. Furthermore, renting to students can lead to higher rental yields, especially when multiple students share a property, making it financially attractive for landlords.
You Could Be Better Off Diversifying
In the money market, investors are advised against putting in hundreds of thousands of pounds in one stock. As a landlord, you will be putting in an average of 150,000 into one basket. Even if it all comes together and the current political climate doesn’t lead to a dearth of renters or buyers in future, your mortgage interest payments will eat deep into any incomes generated. How will you cope with years of working hard and hardly breaking even?
Diversifying investments beyond the realm of property in the UK offers a range of benefits. Firstly, it helps in risk mitigation by spreading investments across various asset classes. The property market can be subject to fluctuations influenced by economic conditions, government policies, or local market dynamics. By diversifying into stocks, bonds, commodities, or other investments, an individual can reduce the impact of adverse events affecting any one sector. The goal is to have investments that are not correlated, so if one sector underperforms, gains in others may offset the losses, resulting in a more stable overall portfolio.
Another significant advantage is liquidity and accessibility. Real estate is relatively illiquid compared to certain financial assets. Selling a property can take a considerable amount of time and effort, whereas selling stocks or other securities can be executed quickly on financial markets. This liquidity provides flexibility and allows for easier portfolio adjustments in response to changing market conditions or personal financial needs.
Additionally, diversification opens avenues for income generation and potential yield growth. Property can provide rental income, but other assets like dividend-paying stocks, interest-bearing bonds, or even certain funds offer additional income streams. Different asset classes have unique income potential and growth opportunities, providing a more balanced and potentially rewarding portfolio.
Lastly, diversifying investments can contribute to portfolio growth and capital appreciation. While property can appreciate over time, so can the value of stocks, bonds, and other financial instruments. A well-diversified portfolio ensures that an individual participates in the growth potential of various markets, potentially maximizing overall returns over the long term. The aim is to achieve a healthy mix that aligns with an individual’s risk tolerance, financial goals, and investment horizon.
Selling is Difficult Now
It will take you 2-3 months to sell a house in the UK today. Even when you are deploying known measures for selling quickly, there is a chance that more property owners are looking to sell in your postcode. It often ends in accepting a price lower than the actual value of the property. In contrast, an investor in the money market can sell off their portfolio within any working day, in minutes. There will always be buyers waiting. As a new landlord, can you cope with the prospects of not being able to free up cash when you need it without losing value?