Changing priorities for landlords demands fresh approach from lenders

Anyone active in the buy-to-let market cannot have failed to notice the significant change in today's landlords.

It’s no secret that the swathe of tax and regulatory changes introduced by government over the past few years have meant that some part-time landlords have opted to cash in their chips, replaced by professional landlords who have spotted the opportunity to increase the size of their portfolios.

However, it’s worth noting that the shifting sands of the buy-to-let market have also meant that landlords looking to add to their portfolios are increasingly less likely to look at properties that are ‘ready to go’.

He’s a bit of a fixer upper

In my opinion, the market is now such that it’s far harder for a landlord to pick up a property at below market value in the way that they once could. 

As a result, landlords who are keen to buy — and there remains plenty of them — are now looking at those fixer uppers (the properties that need a little work done to them), whether that’s a new kitchen, a new bathroom or simply a redesign.

Landlords are looking to properties where they can swiftly add some value, rather than those which are ready to be listed on day one.

Moving into — and out of — HMOs

Another area where landlords are adopting a slightly different approach is HMOs. The introduction of HMO licensing last year is undoubtedly a good thing, as it will improve standards across the board in terms of the quality of the properties on offer.

We don’t want a housing market where tenants are renting tiny, barely habitable rooms.

But these regulations have presented a challenge to investors. Some properties no longer fit as a HMO, so landlords need to revamp the structure of the property so that they can continue letting it. 

At the other end of the scale, there are some existing HMO properties which need particular improvements in order to meet the HMO requirements.

Essentially, I believe there is a lot of movement with properties either moving into or out of HMO status.

You’ve got to know when to hold ‘em

The property investors who like to flip properties are employing an amended strategy as well. When house price growth was in a healthier state, they may have been able to pick up a property at an auction, spend £10,000 on renovations, and then sell it for a £40,000 profit.

But house price increases are far more pedestrian at the moment — data from the Office for National Statistics shows that annual price growth has slumped to 0.9% in the year to June 2019.

As a result, developers who in the past may have bought a property, renovated it and then sold it are now more likely to hold it for a period. For some properties it may be that they need to pick up rental income for a year or two in order to enjoy that same £40,000 profit level. Adding enough value to a property to make a quick flip worthwhile is far more difficult today.

Delivering the flexibility investors need

Our desire to find a product that meets the needs of these varying types of borrower has led to the development of our bridge-to-let product, which we launched last month. 

It’s a way to offer investors short-term finance to cover those lighter refurbishment works — whether that’s as a way to add value or to move into, or out of, HMO status — before they exit onto a buy-to-let deal. Crucially, it also provides them with some flexibility over when and where that exit takes place.

The market can be unpredictable, and the necessary refurb works can take longer than expected. As a result, we didn’t want to pin landlords in with a product that can only make sense if they then transition onto a buy-to-let product within a couple of months — there can be a longer transition period if needed.

Similarly, we didn’t want to lock borrowers into having to move onto one of our buy-to-let deals as they exit the bridge-to-let. 

Obviously, we’d love them to, but equally we realise that a broker’s job is to use their expertise to identify the very best product for their client, and there may be times when a different lender is more appropriate. 

The market for property investors has changed, and that means lenders need to take a fresh approach to product design. Bridge-to-let is just the latest example of how we are listening to brokers and their clients and will continue to do so.

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