Buying investment property in 2017/18: What size of property?

Should you buy a larger number of smaller (cheaper) properties rather than fewer larger (more expensive) properties? Tenancy reform is also discussed as is the banks attitude to lending. Will the changes encourage more responsible landlords and more responsible lending?

Full text transcript below:-

David Court: One of the interesting things that’s coming from all of our discussions is that change happens, and change is certainly happening at a hugely impressive rate. I’d like to try to summarise what the situation is. Bank changes, if I put you on the spot and say if there’s one, two, three changes you see happening, which ones would you choose?

Murdo McHardy: I think the biggest change we’ve seen is the lending market has changed in 2017, and will change more towards the end of the year, some of the biggest changes we’ve seen for years. The two key ones that people need to be aware of really are how affordability is assessed for buy to let mortgages, and the fact that probably in most cases bigger deposits are gonna be needed. That’s the first one. Second one is that coming October this year, anyone who owns and grows a portfolio and has four or more properties will be treated as a portfolio landlord, and that takes them into a different dimension from a lending point of view with the amount of information that they’re going to need to provide, the records they need to keep, etc. So, they’re the biggest two changes that we’ve seen and they’re the biggest changes we’ve seen for a number of years.

David Court: David?

David Miller: There’s been a couple of significant changes as far as tax is concerned. Undoubtedly the change in the way Tax relief is granted on mortgage interest is massive, and it’ll have a very large effect for particular landlords, higher rate landlords who are particularly highly geared. The other change I’m seeing is the increase in tax to buy a property, what we used all used to call Stamp Duty, now Land and Building Transaction Tax, and the new additional dwelling supplement, and in my opinion I think we’ll see a trend towards people buying smaller properties rather than larger ones to rent out because the cost to buy is quite significant.

David Court: Rob?

Rob Trotter: Well, certainly in 15 years I’ve never experience quite such a period of change, but the number one item on the agenda for us tenancy reform. I could talk at length, and I have done, on tenancy reform, but I think people need to understand there is a new lease coming into place, it is very different. They need to understand the implications, they need to understand how it impacts them, and they need to make sure that they’re prepared for it. It need not be bad news, it need not be too daunting, and I think there’s certainly a high degree of optimism but that is, I would say, the number one change is a new lease coming into play, which will effect the whole of Scotland. Every landlord in Scotland from the beginning of next year onwards.

David Court: How would you want to see that managed and controlled in the future?

Murdo McHardy: Well, you’re right, change is inevitable. Interestingly, out of all the changes we’ve talked about coming up in the market, and that we’ve seen already, when we did a survey recently it clearly showed that these changes haven’t put people off investing in the property market. So, people are aware of them, they acknowledge them, and you’re right, they just need to manage them. From a lending point of view, I think the key thing would be to understand the changes and to make sure you’ve got your finances in place before you go and see Rob about “Which property should I buy? Or what’s the best area?” Make sure you put your finances in place, and you know how much you can borrow based on different scenarios.

David Court: Rob are you seeing anyone being discouraged by-?

Rob Trotter: No, definitely not. People fear change, it’s inevitable, but I think if we look at the reason why these changes are coming into place, the reason that the whole of the rental industry, the private rental sector, in Scotland is being reformed and regulated is because there is a widespread recognition that more and more of the population, and fundamentally the younger population, are going to become an increasingly reliant on private rental accommodation. That, in an unregulated market, is dangerous. So, regulating that market is in direct recognition of the growing reliance on that. And changes in tax implications? It’s clear that there is revenue to be generated by HMRC because of property prices increasing, rents are going up, increasing demand from investors to invest in property, and increasing demand from tenants. So, if we look at the drive behind the change, it is for positive reasons that property investment is here to stay, and the rental market is only going to get stronger and stronger. I would try to view it in a much more positive and optimistic way than just being a fear of change.
But, understanding what that change is, understanding how it impacts you, and making sure that you’ve got an agent who’s looking after your properties that also understands that is key, and it’s crucial.

David Court: David?

David Miller: I think the changes, which we’re all faced with will be positive from the point of view it will encourage more responsible lending and more responsible landlords. As Murdo said before, larger deposits will be required for many people in new cases. People will need to think critically about the type of property they buy, the size of property, the amount of the cost to manage the entry cost in terms of what you pay for, for what used to be called Stamp Duty, so that’s a big issue. For landlords who are already in the market, who are very highly geared, they might need to change. To some extent, some might end up having to sell some properties to drive down their borrowing. People will just need to be aware of the tax situation, look very carefully at their own position, and different people will have different scenarios. Speak to your advisor and take appropriate advice.