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It was already a difficult time for many people economically in the fallout of a pandemic, global conflicts and the ensuing energy price rises before the UK government panicked the market with its frequent changing of the premiership. Many people are feeling the pinch, no matter their income level, and landlords are not immune to the wider economic problems the country faces.
With interest rates higher than they have been for some time, mortgages are more expensive, lending confidence is lower and the rental market is facing increased pressure as fewer people can afford their own homes. But with so much uncertainty in the air, how can landlords protect their buy-to-let investments in the face of such difficult times?
Is Selling Up a Safe Bet for Landlords?
It’s a difficult market and there is certainly nothing to gain from running yourself into debt if you can no longer afford to continue with the mortgage on a buy-to-let property. The rent may no longer cover these expenses and you are hesitant to raise the rental price. You may also not be able to raise the rent charge if you have already done so once this year due to protective tenant agreements.
Rather than waiting it out and potentially ending up in a worse position, one option is to sell up and keep hold of the equity while you wait for the market to recover. Of course, it’s not something to take lightly and there will be lots to consider, but sometimes the best way to protect your financial investment is to take the money back and distribute it elsewhere.
Raising the Rental Price to Cover Mortgage Payments
Once you’ve invested in a property, you may be forced to increase your rental price to cover mortgage payments as interest rates climb, particularly if your fixed term is coming to an end.
If you have no choice but to do this, the rental price may become higher than the average for the area and make your property undesirable to current and prospective tenants. The rental market is competitive with so few people able to jump onto the property ladder and pricing yourself out of potential tenants’ price range could see your property lie vacant, unable to make you money and shrinking in value. With this in mind, it’s important to ensure that any changes in rent prices are still affordable for tenants.
Making Use of Tax Breaks to Improve Profitability
If the previous measures won’t work for you, there are other ways to protect your investment. For example, when assets are transferred between spouses, Capital Gains Tax is not commonly paid.
Simon Odam, Director at Wellden Turnbull, further explains, “you may well be able to reduce your tax liability by moving some of your assets into the name of your spouse – this could allow you to make use of a lower tax band.” In other words, if your spouse’s tax bracket is lower than yours then your rental income will be taxed less, helping to improve your returns and tackle any cash flow problems you may be facing.
Become a Limited Company to Lower Tax Burden
Landlords who haven’t incorporated themselves are at the mercy of unpredictable tax changes, from restrictions to increases in contributions. But, becoming an incorporated company offers taxation benefits. For instance, corporation tax is currently frozen at 19% until at least April 2023, which is lower than VAT.
Even with the rise that may come, corporation tax is significantly lower than the income tax an individual landlord would otherwise have to pay. Furthermore, the sale of a property held by a company follows the rate of corporation tax versus higher rates that individual landlords must pay.
Invest in Recession-Proof Homes
While there is nothing that is truly protected against the markets, there are certain areas which prove time and time again that recessions impact them less. And with the UK falling into a recession for the first time since 2008, those with the means should consider investing in a property that will retain its value.
For example, London’s affluent areas like Fitzrovia, and busy parts like Kingston upon Thames, due to their green areas and good schools, are insulated from market trends. Naturally, they may involve a greater investment but in a property market that may shrink in the coming months, buying a protected property is a smart step.
Know Your Area Before Investing in a Property
One of the best ways to ensure you aren’t buying a dud when investing in a buy-to-let property is to stick to what you know. There might be a great deal at the other end of the country but unless you are familiar with the area, or know someone you trust who is, then it represents a risk.
Knowing the characteristics of the neighbourhood is important as you can understand what tenants you will attract and how you can cater to their needs. But it’s also invaluable to understand the value of homes in an area over time, how much they have increased, and whether it’s an up-and-coming area or if the value remains low.
You will also know what the major plans are for the future and how this can influence the value of your investment. For instance, those who invested in properties along the Elizabeth Line Crossrail enjoyed a price boost of up to 215% since plans were first introduced. In the property market, predictability and knowledge are important weapons to ensure you don’t make an investment blunder.
Waiting the Situation Out
Perhaps one of the best strategies for investments during a difficult financial market is to wait things out. It’s not exciting and takes some courage but when the market settles is the best time to invest, as the outlook becomes more positive.
Opportunities for finding great value buy-to-let properties will begin to present themselves, with properties available at greater discounts and long-term growth potential. For landlords, it’s a case of seeing through the next 12-24 months and setting yourself up for a fruitful future beyond that.
Ensure Proper Maintenance of Investment Properties
While there are tax breaks and measures you can follow to protect your investment, there is no harm in making sure your property is well looked after to help retain its value. Of course, landlords are duty-bound to provide some property maintenance for their tenants
“With inflation currently at a forty-year high, the cost of maintaining a rental property has climbed by quite some margin,” says Ettan Bazil, CEO and Founder of video maintenance service, Help me Fix. He adds, “while maintenance costs are now swallowing a considerable chunk of a rental property’s earning potential, it’s a necessity that simply can’t be ignored.”
Neglecting maintenance due to rising costs can impact what your property is worth in the long run. Thankfully, scheduling maintenance is easier than ever with our time-saving property management software, helping to manage maintenance tasks and worksheets to assign jobs to tradespeople.
