Private landlord or landlord in the business of buy to let, amateur or professional, gentleman or player ‘ the first problem for them all is one of definition. The landlord with a single property, even two, is often called an amateur or a novice ‘ but if that property has been successfully rented for a number of years, who is to call the owner a novice or amateur?
A common definition of a professional is that of a landlord with a sizeable portfolio. But does that apply to someone caught up in the excitement of an initial success in buy to let who then quickly builds a small portfolio? This is not a professional, not yet anyway.
With talk of a flood of new investors in the property market there are worries that not everyone understands what they are getting into.
In the buy-to-let market, there is room for both the amateur as well as the full-time professional. Indeed, there is a need for all types of buy-to-let landlords to serve the rental market in locations and different ways. There may be areas with a need for a few ‘amateur’ landlords providing a small amount of extra housing needed for the local rental market. Or there may be an obvious need for conversions, or even regeneration in an area slipping into decline. Then there are areas in desperate need of private investors, most probably ‘professional’ landlords to shake up the whole local housing scene.
Despite the ill-informed comment about buy to let over the summer, the fact remains that the market has a long way to go. It is often forgotten that the rental market is fluid, fast-moving and difficult to track location by location, and there is often confusion between the buy-to-let market and the private rental sector as a whole.
The buy-to-let section of the rental market tends to be the most successful end of the market as investors and their agents go for better quality property, usually furnished and decorated to meet local market demands. If there is a struggle, it is often just with a neighbouring landlord who has failed to keep up with changing times.
However, most forecasters agree the rental market is destined to grow, driven by tenant demand. It is expected that within 10 years the private rental sector will have grown by 40%, which will mean it accounts for around 15% of all housing. As this happens it is likely a good number of those landlords currently operating in the market will have become professional landlords and grown with the market.
The Financial Adviser Confidence Tracking (FACT) Index, conducted by Paragon Mortgages among its customer base of landlords, occurs every quarter. The most recent survey found that, across the spectrum of amateurs and professionals, maturity stands out as a common factor. More than two-thirds are aged between 36 and 55 and more than two-thirds have more than two or three years’ experience as landlords. More than half of the so-called amateur landlords have four or five years’ experience as landlords to stand them in good stead.
This overview of maturity and experience may not be fully consistent with the market as a whole, but the survey results show that whatever label is put on buy-to-let landlords, amateur or professional, they are successful. And all lenders who are experienced in buy-to-let lending echo that view. This must be due, in part, to the advice they received from mortgage brokers when they were planning their portfolio.
The Index revealed more than half of all amateur landlords only hold one rented property while more than seven out of 10 professional landlords hold between three and 10 properties in their residential portfolios.
What about the day job?
But although these portfolio landlords are clearly professional in going about their buy-to-let business, it does not follow that they are professional in the classic ‘ but narrow ‘ definition of the word. They have not necessarily given up their day job to concentrate on being a landlord, although many do so once their portfolios reach a certain size or value. Even then, everyone has their own price and benchmark for these values and sizes. As a result, it is difficult to give statistical reasons why landlords may switch from amateur to professional. The vital factor that they should all have in common is they recognise being in buy to let means they are in business ‘ whether they have a day job or not. A key job of the mortgage intermediary is to offer advice and help the client to take out the right product to suit their property investment needs.
Even so, landlords ‘ professional or amateur ‘ tend to make up their own minds. However, even after a summer of press discontent with buy to let, landlords expect to increase their portfolios and claim that their property investment decisions are now based on the likely rental return, rather than capital appreciation.
In other words, amateur or professional landlords recognise the two sides of the buy-to-let equation ‘ capital appreciation and rental returns. They also recognise the two are contra-cyclical. Should house price inflation fall away, rental demand will increase. This is typical of the rental market and has been since long before the concept of buy to let got under way.
These two factors working contra-cyclically make up one of the prime motivations for entering the residential investment market. The recognition of this helps to underline the fact that buy to let is an investment for the medium to long term, so as to take advantage of the two cycles.
However, understanding these elements of buy to let should follow from a proper understanding of the starting point. Before discussing the detail of the loan, the broker should verify a client’s buy-to-let proposition has been arrived at in the safest possible way.
When dealing with a novice or amateur landlord, brokers should start by ensuring they discuss the local market conditions with a professional letting agent ‘ preferably a member of the Association of Residential Letting Agents.
Has the selection of property been made with an understanding of local market demands ‘ flat or house, number of bedrooms, outside space, parking and commuter routes? Has the elementary calculation been made to ensure the probable mortgage costs will be covered by rents that exceed them by between 130% and 150%?
To be of service to such a client, a broker should know if the answers to these questions have been arrived at with some care and with the help of professional advice.
Even when dealing with a landlord who is experienced in property investment there is no harm in reiterating the pitfalls of void periods, running costs and expenses and that there are obligations to tenants.
One and the same
Lenders in the buy-to-let market treat professional and amateur landlords in much the same way when it comes to the products on offer.
The range of buy-to-let mortgages is as varied and as sophisticated as those available in the commodity mortgage market. Where the major sea change has occurred is in the relationship between lenders and the professional landlords.
Specialist lenders actively encourage a personal relationship with borrowers, aiming ‘ without interfering in the intermediary’s client relationship ‘ to replace the high street bank as the listening lenders of first resort for property-related business.
This enables the lender, intermediary and borrower to work together to build property portfolios in the most cost-effective and business-efficient ways. Although this has the effect of providing risk management for both lender and borrower, its primary purpose is to establish the working relationship needed to grow a business.
One of the attractions to the buy-to-let property investor is that it is an investment that allows for personal control. It is not subject to the whims of fund managers, the vagaries of the stock market, or the success or failure of individual financial corporations.
The downside of this is that the investor takes total responsibility for the investment. Whether using professional managing agents or running properties personally, the investor must recognise where the buck stops. It stops with them. There can be no question, therefore, of buy-to-let investing falling under consumer targeted regulation because it simply does not fit.
Buy to let should remain for the investor, amateur or professional, to control and to profit from by being in the business of providing a service to the tenant, their customer. All in all, a proper form of free enterprise.
John Heron is manag- ing director of Paragon Mortgages
On average professional landlords tend to have between seven and 10 properties.
Those interested in property investment need to understand that capital appreciation and rental returns are contra-cyclical.
Lenders are taking professional property investors more seriously and are investing in closer working relationships that do not exclude the intermediary.