buy-to-let mortgage

Making the most of a buy-to-let portfolio in the current economic climate

Paresh Raja, CEO at Market Financial Solutions, explores how buy-to-let landlords can manage their property portfolios and maintain profits. 

It’s no secret that the ongoing economic climate has had a pronounced impact on the property investment landscape in the last 19 months: interest rates have risen at an unprecedented pace, inflation has diminished buying power and house prices have experienced some declines.

Due to the elevated cost of borrowing, many buy-to-let investors and landlords will have seen their mortgage repayments skyrocket, potentially harming the profitability – and perhaps even viability – of their property investments.

As a result, a cursory glance at the headlines about the state of play in today’s private rental sector (PRS) leaves one with the impression that we are witnessing the ‘death of buy-to-let’ investments and that landlords are exiting the market en masse.

That said, recent research found that the majority of buy-to-let landlords (64%) are not planning to sell any of their properties in the next year, while data from Benham and Reeves showed that rental portfolio income has increased by 8.7%.

Combine these facts with a Hamptons forecast that suggests that rental prices are going to grow by 25% in the next four years, and the buy-to-let sector continues to look like one that’s worthy of investment – particularly as the wider economic landscape begins to recover.

Indeed, with inflation falling again last month and the Bank of England applying the brakes to its rate hiking cycle, there appears to be light at the end of the tunnel. Consequently, we should see the mortgage market stabilise further, and rates should continue to fall.

However, although the macroeconomic trends that have harmed the viability of owning a buy-to-let property are receding, it is vital that landlords continue to manage their portfolios as effectively as possible in order to maintain their profits in the months and years ahead.

Striking a balance

Firstly though, it’s important to recognise that while the cost of landlords’ financial obligations have risen significantly in the last year, so too have the costs faced by their tenants.

As such, those landlords who are considering raising rents need to strike a careful and fair balance between their elevated mortgage repayments and the potential financial limitations of their tenants.

There are a couple of ways that this could be done. For instance, by offering flexible rental payment options such as monthly, bi-monthly, or quarterly payments, landlords can allow their tenants to better align their rent with their income or cash flow.

Furthermore, opting for gradual rent increases that align with local market rates and inflation, instead of sudden and substantial hikes, allows tenants to plan their finances more effectively. This approach fosters a more stable and cooperative relationship with the tenant and will help to ensure that rent is paid in full and on time.

Ultimately this will protect a property’s rental income and potential for profit, which landlords should look to maximise during the current economic climate.

Maximising potential

Indeed, while prices are softening and the rental market is experiencing high levels of demand, landlords should be looking to maximise the earning potential of their rental properties in the months to come.

Improving the cost efficiency of their buy-to-let portfolio would be a good place to start; by reducing their outgoings each month, landlords will be less reliant on rent hikes in order to turn a profit.

For instance, upgrading essential features of the house – such as plumbing, lighting and heating – can prevent potentially larger outgoing costs further down the line should they need maintenance. Similarly, opting for low-maintenance materials for flooring, countertops or fixtures would help to cut down on the frequency and cost of upkeep.

In turn, this will also improve the desirability of one’s property, paving the way for a fair rent price increase when it’s time for a tenancy renewal or when the property goes back on the market. Indeed, the higher the quality of any improvements that are made to the functionality or aesthetics of a property, the more willing tenants will be to pay higher rent.

On a similar note, although the government recently chose to postpone the impending Energy Performance Certificate (EPC) regulations, properties with sustainable features are still highly valuable to renters and buyers alike – largely, this is because they reduce their energy bills.

Therefore, by investing in things like LED bulbs or upgrading windows to double or triple glazing, existing tenants may be willing to pay more in rent to facilitate these improvements, while they will further improve the appeal of their properties to prospective tenants on the market.

Elsewhere, looking to expand the square footage of a property can enhance its appeal to renters, but it can also elevate the value of the property should the landlord choose to sell further down the line. Expanding living spaces, investing in extensions or extra bathrooms, or converting unused areas like loft space into rooms can all improve a property’s rental and sale value.

Finally, as prices soften, some landlords may decide to capitalise on any relative bargains that the market is producing in order to boost their portfolios. That being said, it’s important that landlords have flexible financial options in place if they choose to renovate or expand their buy-to-let properties in the current climate.

Reconsidering finance for a buy-to-let portfolio

With mortgage rates continuing to place pressure on investors’ purse strings, many landlords may not have the capital needed to boost the desirability and earning potential of their portfolio. Therefore, they could consider reaching out to a broker to help them secure a loan that is tailored to their needs.

For example, bridging loans are often used to finance renovations or extensions in the buy-to-let sector. They can also be used to purchase a property and then secure a longer-term financial option. Typically these short-term loans can be approved and delivered quickly, making them a practical choice for landlords who need to move at pace in the current market.

Moreover, refinancing existing mortgages or exploring buy-to-let mortgage options can also help landlords access capital for property enhancements without incurring substantial upfront costs.

Indeed, some landlords may be on mortgage products that are now unaffordable due to the changing base rate. As such, by taking out a refinancing loan, landlords can access products with potentially favourable rates that better match their needs and financial situations.

It’s important, however, to pick a lender that is able to provide flexibility around loan terms, as well as certainty about how their products might be impacted by the wider economic climate. Therefore, those lenders who can provide deferred or rolled-up interest payment options are likely to be of the most value to landlords in the coming months.

Similarly, lenders who offer top slicing options – where landlords use their personal income to supplement rental income when assessing affordability for a mortgage – are better placed to help those landlords whose financial situations have changed drastically in the last year or so.

To briefly conclude, with the rental market experiencing high levels of demand, now is as good a time as any for landlords to think about maximising the earning potential of their buy-to-let investment properties. However, while the economic climate remains uncertain, they must ensure that they can access financial products that provide a high level of flexibility and certainty.

Paresh Raja is the founder and CEO of Market Financial Solutions (MFS), a London-based specialist lender that provides bridging loans and buy-to-let mortgages. Prior to establishing MFS in 2006, Paresh worked as a senior professional consultant in one of the top five management consultancy firms, and also set up an independent investment group.

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