The landscape for investors has been choppy and uncertain for the past 16 months. If you were sat watching stock markets crash, and wondering whether tenants would be able to pay their rents and whatever might become of us in March 2020, you were certainly not alone. Before the fire-hose of governmental aid came to the rescue, it was certainly looking like there might be some very difficult decisions to be made and conversations to be had. The rain was coming down (and the hail, and the asteroids quite frankly) - it was time to see how well you had fixed your roof.
The outcome and effects of the aforementioned fire-hose have been significant. Coming off the back of a very lacklustre market post-referendum for the South of England, and a reasonably flat market nationwide in 2019, we’ve had a boom. I’m sure you haven’t missed it! The inevitable questions then start to arise however - after boom, is a bust guaranteed? How easy is it to cash in? What about the tax implications? What about the never-ending problem in a world with very low interest rates - if I DO sell up, how do I replace that income and that capital growth? All sensible questions which I hope to address here.
The title of the article presumes that we only truly have three options, which is true - stick, twist or fold. Let’s start first of all with reasons to buy.
The case for purchasing rests somewhat on you as an investor being happy with the structure and way(s) in which you will hold property in 2021 and beyond. The conventional wisdom was thrown completely out of the window six years ago, when ‘Gideon’ Osborne released the Kraken known as Section 24. Landlords would now, effectively, if holding properties in their personal names, be subject to a tax that looked more like turnover than profit, if they were using leverage.
I know from experience that many have still not made final decisions on incorporation, versus holding, in their own portfolios. I know none who continue to buy in their own personal names to grow a portfolio; although I do hear of lots of new investors still buying in their personal names. The real problem can be that the proposed solutions can be extremely expensive, and take years and years to pay back that capital investment. There are often ongoing implications also, such as higher accounting costs - the reality that many have faced is that either way, the cost of doing business has gone up. If, at the same time, they have been fortunate enough to be on older tracker-style mortgages, they have also enjoyed some very low mortgage rates - and it is natural to want to sweat these low rates for as long as possible.
The cost of doing business in this sector, of course, HAS gone up for everyone. Research, economics and academic studies suggest that when costs increase, 60-85% of those costs are eventually passed on to tenants. Rents have raced forwards in many areas thanks to the pandemic, but some landlords are still scared to raise rents, don’t like to rock the boat, and are also kind-hearted and don’t want to “squeeze” their tenants. My thoughts are that to be operating a portfolio, you need to be business-like, and thus have little choice other than a fair annual rent review to keep rents somewhere near the market rate. The PRS has over the last two years actually shrunk in size - the supply constraints are no doubt down to section 24, but also landlords organically leaving the market due to retirement, death or other reasons to cash in - NOT being replaced at the same rate by new market entrants.