The current landscape for property investors has become increasingly challenging. With the combination of higher interest rates, a hostile regulatory environment, recent political instability, and an energy crisis affecting all sectors of society, it’s no wonder that some landlords are considering exiting the market. However, amidst the storm, there are strategies that can help landlords not only stay afloat but also thrive in these difficult times.
Maximising Your Yield
To counteract the squeeze on margins caused by higher rates, it is crucial to pivot to areas where properties generate a higher yield. Currently, the Northeast and Scotland hold the top 10 spots for rental yield, while the Southeast and London struggle to keep up. Stress testing has been a major challenge for landlords seeking refinancing, and the primary way to combat this is by aiming for a greater yield. There are a few approaches to increasing yield: purchasing cheaper properties or raising rents.
Fortunately, the lending market has adapted quickly to the new normal and is finding creative ways to mitigate affordability issues through top-slicing and other means.
The Power of Auctions
With the market predicted to turn in 2023, according to Savills’ projections of an average 10% drop, cheaper properties become more attractive despite the need for renovation. Purchasing properties at auctions presents an excellent opportunity to acquire investment properties below market value. What was once solely reserved for cash-buyers is now accessible to a broader range of investors using bridging finance, a versatile tool suited to converting auction properties.
Rebalancing and Re-leveraging
Consider evaluating the leverage within your portfolio. If you have one property with high gearing and another with low gearing, you can rebalance your portfolio to achieve a lower loan-to-value (LTV) ratio, resulting in a lower interest rate. It is crucial to work with a trusted broker who can help you navigate these complexities and adjust your strategy accordingly. Market conditions are changing rapidly, so having a broker who is well-informed is essential. You can also gain expert advice by using a financial comparison site such as Propp.
Exploring New Strategies
While sticking to what you know may seem comfortable, it’s worth considering a change of strategy. Recent changes to permitted development rights have made it more convenient to buy and convert commercial properties into residential units. Commercial properties are typically valued lower than residential ones, offering a value uplift potential for investors. Converting upper floors of commercial properties into multiple flats allows you to manage cash flow effectively and rapidly grow your portfolio. By selling one flat to release equity for your next project while retaining others for rent, you can achieve sustainable growth.
Implications for the Rental Market
The rise in buy-to-let mortgage rates may increase costs for landlords, but it also presents opportunities in the rental market. In the short term, the supply and demand imbalance is likely to become more acute, particularly if landlords exit the market. This scenario would drive rents higher, benefiting landlords who remain. Furthermore, the higher rate environment makes it more difficult for first-time buyers to enter the property market, leading to increased rental demand.
For landlords in a strong cash position, this presents an opportunity to fill the supply vacuum, acquire more properties, and secure tenancies while yields are high. The buyer’s market created by these circumstances provides an ideal time to grow a portfolio.
In conclusion, while the challenges faced by landlords in a higher rate environment and during a recession are undeniable, there are strategies that can be employed to navigate these difficult times successfully. By focusing on maximizing yield, exploring alternative avenues like auctions and commercial property conversions, and capitalizing on the implications for the rental market, landlords can weather the storm and come out stronger on the other side. With careful planning and the right expertise, it’s possible to thrive even in challenging times.
