E49: Can you still make money as a Buy-to-Let landlord? With Anna Pearce and Michael Annis

The following is a transcript of our monthly podcast, The Pension Confident Podcast. Listen to episode 49 or scroll on to read the conversation.

‍Takeaways from this episode

• The narrative of North vs. South valuations is changing - property valuations in the North East is set to outpace growth in London and the South East over the next five years.
• The Renters’ Rights Act ends no-fault evictions from 1 May - the Renters' Rights Act abolishes no-fault ‘Section 21’ evictions, replacing them with a fault-based ‘Section 8’ system.
• Buy-to-Let mortgages work differently from residential ones - Buy-to-Let mortgages typically require at least a 20% or 25% deposit.
• Around one-in-three landlords are planning to exit the market - a combination of the Renters’ Rights Act, the loss of mortgage interest tax relief, extra Stamp Duty, EPC upgrade requirements and Making Tax Digital has created a regulatory snowball for Buy-to-Let landlords.

PHILIPPA: Welcome back. Now, becoming a landlord with Buy-to-Let properties, well, that’s long been seen as a way to build long-term wealth. But with brand new rules, higher taxes, and more paperwork, it’s becoming harder to turn a profit. Did you know that since 2022, the rental sector is the only area of the housing market to have lost value? So are Buy-to-Lets still a good bet? And where does this leave existing landlords trying to make sense of a changing market. Today we’re breaking down the story behind Buy-to-Lets and what you need to know before you think about jumping in.

I’m Philippa Lamb. If you’re new to the podcast, hit that subscribe button and you’ll catch every episode as soon as it airs.

Now with me today to talk about Buy-to-Lets, I have Anna Pearce. She’s a Buy-to-Let Landlord, she’s a Content Creator. You might know her as “Property Empress” on [social media] and she has a lot of experience guiding aspiring Buy-to-Let landlords through this shifting investment landscape. Michael Annis, he’s a Mortgage Broker with more than 10 years’ experience. He’s been helping people achieve their home ownership dreams for over a decade, including [for] more than a few new and old Buy-to-Let landlords.

Hi both.

ALL: Hello.

ANNA: Hi Philippa.

PHILIPPA: Thanks for coming in.

MICHAEL: You’re welcome.

PHILIPPA: Here’s the usual disclaimer before we start. Please remember [anything] discussed on the podcast shouldn’t be regarded as financial advice or as legal advice, and when investing, your capital is at risk.

What’s happening to the property market?

PHILIPPA: So Anna, you’re a really experienced landlord, landlady?

ANNA: Oh crikey, I don’t mind, to be honest. Landlord, landlady.

PHILIPPA: How many properties do you have?

ANNA: Well, at the moment we have around 10 properties, but we’ve scaled back because we’re actually reinvesting in the North [of England]. So my original portfolio was in the Midlands and actually now we’re investing in the North for a very good reason, which I’m sure we’ll come on to today.

PHILIPPA: Interesting. Yeah, we’re going to talk about location. Obviously we’re going to talk about location. That’s interesting. What got you into doing it in the first place?

ANNA: Oh well, so 15 years ago I was working in pensions. Funny enough, I was a Pension Actuary.

PHILIPPA: OK.

ANNA: And I knew that my job was at risk and my now husband was out of work and we kind of stumbled across some property training. And I said to my husband, “Wow, this sounds great for you”. And then we did some training and I just - it just opened my eyes and I just thought, “Wow, this looks fantastic”. I got three offers accepted in my first three months and then I was made redundant. I kind of went from there.

PHILIPPA: That was bold. I mean, most people would’ve been looking for another job and you’re starting in a whole new industry.

ANNA: I thought, why not? What a great opportunity to throw myself into it.

PHILIPPA: Yeah, I guess you kind of edged into it and it’s gone well.

ANNA: Yes. Yeah. Thank goodness!

PHILIPPA: So Michael, I mean, obviously you advise people doing this, but have you ever dabbled yourself?

MICHAEL: Might dabble soon. I sort of know what I’d dabble in, if I find the right place.

PHILIPPA: So Anna, I was thinking we might start with a bit of an overview about what’s been happening in this market over the last, I don’t know, say five years? 

ANNA: Well, that’s a really interesting timescale because property has always been relatively predictable. And then when we went into lockdown in 2020, it just threw everything in the air. A lot of people started leaving London because obviously everyone was working from home. What we found was that the government threw a lot of incentives at the property market because they were worried that prices were going to crash when we went into the first three months of lockdown.

And what we actually saw was that the market boomed, particularly outside of London. And what we found was actually London didn’t do very well in terms of house prices. And what we started seeing was in the North, prices started skyrocketing. So there has been a really interesting journey over the last kind of five, six years where historically, if you’re investing in property, you invest in the South. Because prices go up really well, particularly [in] London. There’s a ripple effect. So it starts in London, it ripples out. And then you’d invest in the North because [of] its cheap property prices. You could buy £50,000 houses [and] get really strong rental yields.

PHILIPPA: Yeah.

ANNA: So you’d invest in the North for [a] nice monthly income. You’d invest in [the] South because prices go up in value. And what we’ve had since lockdown is actually the North now has the cheapest prices, the strongest income and rental yields, but also they’re going up in value significantly. So actually, there’s, in my opinion, besides convenience, there’s no reason to invest in anywhere but the North.

PHILIPPA: Interesting. OK, and I’m going to have to ask you, I mean, do you agree, Michael?

MICHAEL: Sort of, yes. I mean, unfortunately, if you invest in London at the moment, you’re competing with all the private equity firms that are buying up a lot of the London houses as well. London could be the next wave of growth, especially as unfortunately the UK economy is very centred on London. But certainly, I agree, if I was buying a place tomorrow, I’d probably look for a university town so you could rent it out as an ‘HMO’ to students. And probably in the North or the North East, particularly Middlesbrough, Sunderland, Newcastle, that kind of area.

PHILIPPA: Just explain what a ‘HMO’ is, Michael.

MICHAEL: ‘House [in] Multiple Occupation’ (HMO). So where you’re not renting out the house as a whole, but you’re renting it out by the room. You have to have a special licence for that.

PHILIPPA: From the local authority?

MICHAEL: From the local authority. Each room has to have its own lock on it and things like that. And usually the kitchen, or maybe even a living room, as a shared space.

The Renters’ Rights Act explained

PHILIPPA: I’m going to ask you about the new Renters’ Rights Act, because this is the thing that - there’s been a lot in the press, hasn’t there, about it. That this is supposedly the thing that’s going to make it very hard for landlords to make a living. Tell us what’s going to change under the Renters’ Rights Act. 

ANNA: The key changes, I mean, the big change is the abolition of the Section 21. So prior -

PHILIPPA: well, this is evictions.

ANNA: This is evictions, yes. So before, what has historically happened is if a landlord wants their tenant to leave, they can serve what’s called a ‘Section 21 notice’. So they’re basically saying “You’ve not done anything wrong, I just would like the property back”. And if the tenant has done something wrong, if there’s a reason for eviction such as: they’ve not paid their rent, or they’ve not followed the terms of the tenancy -

PHILIPPA: yeah -

ANNA: or they’ve caused issues with the property, they can serve a ‘Section 8’, which is a fault-based eviction. So the big change under the Renters’ Rights Act is they’re getting rid of the no-fault-based eviction. And the reason being that some landlords were using it as a way of taking out tenants from their properties that they considered to be difficult tenants. And actually the reality was that a lot of tenants, if the landlord wasn’t maintaining the property, for example, if the heating system wasn’t working and they were getting kind of frustrated with the fact that the landlord wasn’t fixing it, they would get more and more frustrated with the landlord. And the landlord could just serve a Section 21 and say, “Well, I just want you out of the property”.

So now what you have to do, if you want a tenant out of the property, is you have to serve a Section 8 and give a reason. So you just can’t ask someone to leave for no reason. For context, I’ve been a portfolio landlord for 15 years. I’ve served two Section 21 notices -

PHILIPPA: OK -

ANNA: and that’s because unfortunately we’re having to sell the properties. I’ve never served a Section 8 notice. I’ve never had to ask a tenant to leave. So for me, it doesn’t make any difference because under the new rules you can still serve a Section 8 -

PHILIPPA: yeah -

ANNA: if you want to sell the property or if you want to move back in yourself. We’re also moving to periodic tenancies, which I think is quite interesting. So rather than locking in your tenant, we’re going to be on a kind of ongoing rolling tenancy. As a landlord, you can’t ask your tenant to leave within a year, but the tenants can basically serve notice a little bit earlier. So it’s to give more flexibility to the tenants and to not be locked in.

PHILIPPA: OK, there’s a few other benefits sprinkled in there for tenants, isn’t there, Michael? 

MICHAEL: Rent review can only be once a year. You have to give two months’ notice.

PHILIPPA: You can bring a pet now, can’t you? 

MICHAEL: Yes.

ANNA: You can’t unfairly decline a request for a pet. 

PHILIPPA: OK. 

ANNA: You also can’t [as] standard say “No families, no pets, no -

PHILIPPA: children -

ANNA: no benefits” -

PHILIPPA: That’s been an issue, hasn’t it?

ANNA: One of the issues that a lot of landlords have is they feel that they’re being forced to rent to certain types of tenants. You’ll still have autonomy over your property. You can still choose who you put in your property. But if it’s a small studio flat and it’s not appropriate for a family, then just find a tenant that it’s appropriate for. But you just can’t say “No families”.

PHILIPPA: Michael, what do you recommend? Obviously better protections for tenants against unscrupulous landlords.

MICHAEL: Yes.

PHILIPPA: I mean, that’s obviously going to be a good thing. Landlords need protections against unscrupulous tenants too. And that’s the thing that’s not often discussed, isn’t it?

MICHAEL: Yes, you could still evict somebody for not paying the rent. So that’s OK, I guess. And then if they do any criminal damage to the property, obviously you can call the police and things like that. I guess what this will help is scrupulous landlords, because if some of the slum landlords leave the industry, there’ll be less Buy-to-Lets and then rents will go up actually. So rental prices going up will only be better for the landlords that are doing the right things.

PHILIPPA: This legislation kicks in in May, is that right?

MICHAEL: 1 May.

ANNA: It starts being implemented on 1 May. There are other measures that are coming in later. For example, there’s a [Private Rented Sector] (PRS) database, so you’re going to have to register all your properties and yourself, but that’s coming in later.

Are landlords really leaving the market?

PHILIPPA: As I say, there has been a lot of talk about this in the press. It’s been a long time coming. Are you seeing it move market prices? Is it being perceived as a bad thing for landlords or a good thing for landlords?

MICHAEL: I’d say it’s stopped market prices moving -

PHILIPPA: it has? -

MICHAEL: is what’s really the thing.

PHILIPPA: Oh, really? A massive effect.

MICHAEL: Market prices were going up 20% a year in terms of house prices in some areas up until about [1 April] 2016, which was when they brought in the 3% second property Stamp Duty [on purchases over £40,000]. And since then, and especially since 2023-ish, house prices have been flat for large amounts of the country, especially the South East. So I wouldn’t say it’s moving the market, it’s stopped the movement that was already there.

ANNA: See, I personally don’t agree that it’s changing the prices. The difference I’m seeing is there’s a lot of landlords, particularly who have been in the been landlords for years and years, who are now very upset about the - because it’s not just the Renters’ Rights Act, there’s a lot of other regulation coming in, there’s tax changes that are hitting landlords. Specifically landlords. There’s extra taxes and it just keeps coming over the last, certainly since I’ve been doing it, 15 years. There’s additional taxes, then there’s Making Tax Digital, then there’s the Renters’ Rights Act, then there’s [Energy Performance Certificate] (EPC) regulations.

So it’s this kind of snowball effect and people, what I’m seeing particularly through my social media content is that landlords are very unhappy with the complete - with landlords feeling like they’re being targeted. So what I’m seeing is people are leaving the markets. 100% agree. Rents are phenomenal now. The people who are being ultimately affected the most are the tenants. There’s not very many houses. So I think it’s one-in-three landlords are currently planning to sell.

PHILIPPA: So that’s going to drive rents up even further? 

ANNA: 100%. And it’s the tenants that suffer. 

PHILIPPA: I mean, well, OK, well, let’s talk about investment returns then, because as you say, it’s a mixed picture, but it certainly isn’t a ‘don’t-touch-it-with-a-bargepole’ investment market. It’s fair to say it’s messy compared to other investments because there’s all this paperwork. You’re dealing with tenants, real people. Maybe you’re dealing with pets and kids and all that sort of thing as well. You don’t just buy it and forget about it, do you? There’s a lot of work.

MICHAEL: Depends. You can get a lettings agent to do all the work for you if you want.

PHILIPPA: It costs you, doesn’t it, though?

MICHAEL: Well, yes. Or if you’re - a lot of people are tradesmen maybe, and if they go into it themselves, they might know how to fix things themselves and then that sort of saves a lot of their costs.

Understanding rental yields

PHILIPPA: We should talk about rental yields, shouldn’t we?

MICHAEL: Yes.

PHILIPPA: Because we’re kind of getting ahead of ourselves. Landlords talk about their investment in terms of ‘yields’, ‘property yields’. Just run us through exactly what that means. 

MICHAEL: Well, [a] yield is usually calculated as a percentage of the total house price in terms of the amount of rent you get per year. So for example, and for easy maths, if you’re buying a £100,000 house and it’s going to get £500 rent a month, £500 times 12 is £6,000. £6,000 is 6% of £100,000. So that property would have [a] 6% yield.

PHILIPPA: But obviously it’s not really what you pocket, is it? Because you have all the costs of: owning the property, and managing the property, and letting the property, to come out of that calculation.

MICHAEL: Yes, yield is usually calculated before costs.

PHILIPPA: How do you accurately assess the return on your investment?

ANNA: For me personally, and what I find works best for my clients, is investing in the North, areas like Liverpool and Newcastle. Because we’ve talked about the fact that in London, property prices are potentially going down, I think, in the last year. Whereas in the North [West], they’re going up by, I think it’s like 3%. But when you look at specifically places like Liverpool and Newcastle, I think Liverpool went up by 7% in the last year. So if you had invested in Liverpool a year ago, you’d potentially get a 7% increase in house prices.

MICHAEL: It’s also about sort of predicting where the next set of growth is going to come. So a lot of people at the moment are maybe buying in places where, for example, High Speed 2 (HS2) is going to stop. Or places where there’s expected to be a surge in house prices, for example, around Bedfordshire, they’re building a new sort of Disney World, Universal Studios theme park.

So people are buying near there because they’re thinking, “OK, I could use that as an Airbnb”. So it’s predicting where the next set of growth is coming. Then also looking at how you can maximise the returns in terms of - you could buy it in a limited company nowadays. If you’re definitely sure “I’m never going to move into this property, it’s always going to be a Buy-to-Let”, you could buy it in a limited company name. And then even if you’re a higher rate taxpayer, you’re only paying tax on the rent you, or the money, that you take out of the business.

ANNA: Yeah, in Corporation Tax. But yeah, 100%. You’ve got to, and this is the thing, you’ve got to be strategic in how you’re investing. So you’re absolutely right. You’ve got to be looking at buying in a limited company. You’ve got to be buying in areas that you know there’s going to be long-term growth. So again, the North East and the North West has been predicted to go up the most in value over the next five years. For me, you talked about the hassle. I’m very kind of lazy. I want as much return for as little effort as possible. So I want to buy a nice cheap property in Liverpool. I want to renovate the property. Any money that goes into the property, I want to recycle, like refinance, pull my money back out. So no money’s in the deal. Put a beautiful family in, let it run long term, go up in value, forget about it.

PHILIPPA: So you get income and ideally growth?

ANNA: Exactly. 

PHILIPPA: Capital growth. So the value of the property goes up. This is the joy supposedly, isn’t it, of property investment?

ANNA: Yeah.

PHILIPPA: How long do you tend to keep your properties, Anna? Because you said you’re about to, you’re divesting in the South so you can invest in the North, but how long would you normally hold one?

ANNA: Forever, basically. We’re keeping some of our better properties, like our stronger returning properties. And what we’re basically doing, any properties as the tenants move out that maybe aren’t performing so good, we’re kind of letting those go. And then we’re then investing in the North.

PHILIPPA: So that’s the other thing to remember, isn’t it? It’s a very illiquid asset -

ANNA: yes -

PHILIPPA: property. You can’t just get your money back when you want it.

ANNA: It’s, for us, we, the properties is the primary business, the primary income, but we also do other things. So I do social media, I do my mentoring, my husband does some property management, he does service accommodation management. So I think when we started we only had the properties and it’s tricky -

PHILIPPA: yeah -

ANNA: when you’re starting. But I actually personally think if I was starting again, I’d probably do it slightly differently. I would’ve built my portfolio, not pulled any income out of it, built it to a point where it could then support me, and then I’d start drawing down. And that’s what I recommend my clients do. Sometimes it’s just not possible. Like, we weren’t in a position that was possible. We had to draw down straight away. 

PHILIPPA: Yeah, you’ve got to live on something, right -

ANNA: exactly -

PHILIPPA: while you’re doing it. Yeah. 

ANNA: But certainly if I was advising someone who’s interested in doing property, I’d be saying Buy-to-Lets in the North, make it very passive, hands-off. But build enough of a property portfolio because two or three [properties] isn’t going to be life-changing. If you can recycle your money, pull money out of the properties and keep building. You don’t need 100 properties, you just need a good kind of 10 properties would be enough, 20 maybe.

PHILIPPA: OK.

ANNA: And then you can draw down, if you’re investing the right properties in the right area, you can then draw down an income and it’s passive property income. If they’re the right properties with the right tenants in, it’s very hands-off. So we homeschool because we’re able to do so because the properties support us.

Eligibility rules for Buy-to-Let mortgages

PHILIPPA: This all sounds very nice, doesn’t it? I’m going to talk about the difficult stuff. I’m going to talk about mortgages. So tell me, because obviously for newcomers to this, the mortgage you’re going to get for a Buy-to-Let isn’t the same as one you get from property you’re buying for yourself. How does it work?

MICHAEL: Well, you can go interest only at least, unlike with a lot of residential buyers who, if you want to get an interest-only mortgage on a residential property, they’ll often demand things like a suitable investment strategy in the background that’s going to pay it off eventually, or at least a certain amount of deposit, or some lenders won’t do it at all.

Whereas with Buy-to-Let, you can go interest-only. OK, which will lower your monthly payments quite a lot. And then if you do make a decent profit and you want to pay down your mortgage, there’s nothing to stop you overpaying. Usually you can overpay 10% of the [mortgage] balance per year. It does depend on the lender though.

PHILIPPA: Interest rates?

MICHAEL: There’s a bit of a conflict going on in the Middle East and as a result -

PHILIPPA: it’s all a bit unpredictable, isn’t it? 

MICHAEL: Interest rates have shot up. You’re not getting a lot less than 5% without a fee nowadays. So yeah, at the time of recording, hopefully it will calm down soon.

PHILIPPA: So Anna, you fix everything, do you? 

ANNA: Yeah. So yeah, we typically, so we’ll buy the property, we’ll refinance. If we’re able to pull all of the initial funds back out, we’ll refinance - it depends on what’s going on with the market. We obviously speak to a good mortgage broker. We’ve got a very good mortgage broker. And we’ll, if we’ve pulled all our money up, we’ll fix for five years. If for any reason there’s, I don’t know, the rates have gone up, we’re expecting them to possibly come down, or if something, if we’ve had to leave any money in the deal, then we’ll just do it for two years to make sure.

PHILIPPA: Deposit, you need a bigger deposit.

MICHAEL: Yes, at least 20% - 

PHILIPPA: So this is a serious barrier for most people, isn’t it? Because that’s a lot of money -

MICHAEL: quite often 25%. Really, you get much better rates at 25% than 20%. But 20% you might get away with it, if it’s a small flat and it’s going to get enough rent to cover the rest. And then even the rest of the money, the other 75% or the other 80%, it’s down to how much rent the surveyor agrees it’s going to get. And surveyors are very prudent and very mean at times.

PHILIPPA: Well, of course, that’s true.

ANNA: It’s true. It’s true!

PHILIPPA: They’re acting for the lender, right? They’re not acting for the purchaser -

MICHAEL: of course -

PHILIPPA: so they’ve got to be cautious -

MICHAEL: of course. Of course. And it has to be in a lettable condition at the point when you apply for the mortgage. There’s a type of mortgage called ‘Refurbished-to-Let’ where that doesn’t apply. But most Buy-to-Let lenders, especially most of your high street lenders, it has to be in lettable condition. So it can’t have damp, mould, fire damage, anything like that. A lot of the sort of places that tradesmen think, “Well, I can fix this up”, you won’t just simply get a Buy-to-Let mortgage on it at all, to be honest.

ANNA: No -

PHILIPPA: so you have to do that when you have the capital to do that yourself -

ANNA: so, well, ‘bridging’ is usually [part of it, particularly if you’re wanting to pull your money back out, like anything you put, like if you’re structuring to recycle your money, then usually you’d use bridging and then you’d go to Buy-to-Let mortgage once it’s rentable.

PHILIPPA: Well, I mean, so many costs to think about. Solicitor, obviously you’re going to need a solicitor.

MICHAEL: Yes. 

ANNA: A good solicitor, especially. 

MICHAEL: You’re probably looking at about £400 upfront and then £2,000 at the end. More if it’s leasehold, more if it’s a more expensive property. 

PHILIPPA: Can you do your own conveyancing? Is it a bad idea? It’s a bad, bad idea? -

ANNA: did you know -

PHILIPPA: you should see your face! 

ANNA: I actually looked into this not too long ago. You can technically. 

PHILIPPA: You can?

ANNA: Highly wouldn’t recommend it.

MICHAEL: I think if a client said that, I’d start crying.

PHILIPPA: OK. The general suggestion here is that that’s something you need -

MICHAEL: unless you’re a conveyancer yourself -

PHILIPPA: to be very careful about. 

ANNA: A tip I’d also say is that look at finding a solicitor in the North because they’re cheaper. In this day and age, you can have a solicitor anywhere.

MICHAEL: But unfortunately -

PHILIPPA: - it’s an interesting thought because you don’t naturally think that, do you? You think local, don’t you? But you don’t have to -

MICHAEL: but unfortunately, conveyancers tend to compete on how cheap they are rather than how good they are -

ANNA: yeah -

MICHAEL: which is why it often takes six months to go through nowadays from the point you put your offer in to the point you get the keys, because you’ll send your conveyancer an email and you won’t get a reply for a week - if you do at all!

ANNA: Exactly.

PHILIPPA: Yes, responsiveness of lawyers has become something of a talking point, hasn’t it?

MICHAEL: So check out the reviews and make sure they’re half decent. Maybe pick a reputable firm rather than just the cheapest one you can find.

Stamp Duty on second properties

MICHAEL: And then there’s all kinds of other costs, the 5% second property Stamp Duty, or 3% -

PHILIPPA: yes, I wanted to ask you about Stamp Duty. Stamp Duty is the kicker, isn’t it? Talk us through how that works. Not the same as buying somewhere for yourself. 

MICHAEL: OK, well, how long have you got?

PHILIPPA: Long enough for this one because it’s a very big factor. 

MICHAEL: It’s 0%, everything between £0 and £125,000, 2% on everything between £125,000 and £250,000, and then 5% of the amount above £250,000. If you go above £1.5 million, there’s even a higher Stamp Duty, if you’re that rich. But there’s an extra 5% surcharge on the whole purchase price.

PHILIPPA: So this is really a lot of money to find, and you have to pay it straight away, don’t you?

MICHAEL: For example, on a £100,000 property, because it’s below the £125,000 threshold, it’d only be £5,000. But on a £250,000 property, it’d be 5% of that £250,000 figure as the additional property surcharge. So £12,500, plus 2% of everything between £125,000 and £250,000. So plus an extra £2,500. So you’re looking at £15,000 total Stamp Duty.

PHILIPPA: It’s a lot of money.

ANNA: It’s also probably worth noting that if you’re owning, if you’re buying the property in your own name, it’s actually slightly different if you’re buying in a limited company.

PHILIPPA: In a company, yeah. Understood. Presumably this is creating artificial thresholds in terms of the value of properties because people don’t want to nudge over the next -

MICHAEL: no, because -

PHILIPPA: no, not a problem? -

MICHAEL: you’re only paying the next threshold on the amount above that price. 

PHILIPPA: It’s psychological, isn’t it?

MICHAEL: Yeah, but if you bought for £126,000, for example, you’re only paying that extra 2% Stamp Duty on that extra £1,000 above £125,000.

PHILIPPA: Just to nail this point home, if you’re a UK resident, you’re buying a residential freehold property for £292,000, so there or thereabouts average. It’s your second property, Stamp Duty: £19,200. It’s a lot of money.

MICHAEL: Yes. You’re basically paying 10% on that. 10% on that extra £42,000 above £250,000.

PHILIPPA: Do potential Buy-to-Let landlords always know this when they come to you and talk about it?

MICHAEL: 90% of them aren’t in for a shock when I say, “By the way, you have to pay second property Stamp Duty”. 10% jump out of their chair!

Building a property portfolio

PHILIPPA: Anna, another reason for holding onto your properties for a long time? 

ANNA: Yeah, absolutely.

PHILIPPA: Because the more you turn them over, obviously every time you buy a new one. So what you’re doing right now, divesting things in the South, buying in the North, that’s going to be a big thing for you to factor in.

ANNA: All the costs, they do rack up. They definitely do. And particularly if you’re then buying using bridging as well, that’s very expensive finance as well. But yeah, the legal fees, the finance fees, the Stamp Duty. For me, I very much approach this like a business. So it’s not me paying, it’s the house paying. But I think this is why so many landlords are upset at how things have gone, because it’s this extra Stamp Duty that’s only payable for landlords and obviously second homeowners.

But then you have things like the mortgage interest rates used to be, and it should be a tax deduction, because it’s an interest on a business loan. But because it’s a landlord, it’s like, “Oh no, now it’s not”. But when you have all these additional taxes specifically for landlords, and then you have the Renters’ Right Act that’s very much pitched as “We’re going to make it better for tenants”, and there’s no kind of talk about helping the landlords. This is the snowball effect and this is why people are very unhappy.

PHILIPPA: There is a kind of narrative about landlords being ‘the bad guys’, isn’t there?

ANNA: Yeah.

PHILIPPA: And that it’s kind of OK to give them a bit of a kicking. Is that the sense in the market now, that landlords are slightly being victimised with some of this stuff? Because I was looking, some local authorities, they do landlords’ licences as well, don’t they? Which is an additional thing you have to pay. How does that work?

ANNA: Yeah, you have it in Liverpool. So basically, it - and again, it’s - I think that the reason I’m OK with a lot of the changes is I understand the reason behind the changes. Because when you have areas like Liverpool where you used to be able to, not that long ago, buy a £50,000 house and rent it out for a really good rental yield - people would just buy them up. They would be so far from where they lived, and it was kind of out of sight, out of mind. So they didn’t look after them. And there are a lot of landlords who just don’t maintain the properties [and] don’t treat the tenants properly. So in some areas they bring in the licensing to make sure that it’s a certain standard.

PHILIPPA: And how does that work then?

ANNA: So basically when you buy a property, it’s kind of renovated, rented out, you get a licence with the council.

PHILIPPA: What sort of money are we talking about?

ANNA: It’s a few hundred pounds usually -

PHILIPPA: OK, so nothing too crazy -

ANNA: it depends. Yeah, but the thing is when you factor in all of the different costs, it adds up a lot. 

MICHAEL: I mean, the honest intention of the powers that be bringing in these rules is to make it easier for first-time buyers by making it more difficult for landlords. Because before [1 April] 2016, when they brought in the 3% second property Stamp Duty, most - well, a large amount of properties were simply going to landlords. But an easier way to make it easier for first-time buyers would simply be to build more houses.

PHILIPPA: And there’s still the affordability, isn’t there, for first-time buyers? 

MICHAEL: Yes.

PHILIPPA: It’s not like it’s making it - and I mean, it may be, I suppose the argument is it might marginally suppress prices, but not enough to make it affordable for people to buy.

MICHAEL: Yes. And as Anna said, it does in some cases make it more difficult for renters, because you’re just renting for more money because there’s less Buy-to-Lets out there.

PHILIPPA: I think the other cost we haven’t really talked about, and that is letting agent commissions, management fees. What sort of numbers are we talking about? 

ANNA: 10% plus VAT typically for the management side of things. And then depending on the area and the property and the letting agent, you’d pay a tenant find fee as well. It’s really, really important when you’re talking to letting agents and you’re asking their fees, find out exactly what is included and what’s not.

So the letting agent I use in Liverpool, one of the reasons I love her, is because she used to work for a letting agent and what they were doing was they were just taking more and more out of that. They would offer a ‘fully managed service’ and they were taking more and more out of that, to the point where she was like, “What does the fully managed service actually cover?”.

PHILIPPA: So fully managed wasn’t really fully managed. 

ANNA: So exactly. So she started her own letting agency and now everything is included and she’s just very fair and very, and she’s great with the tenants as well and managing the properties. So -

PHILIPPA: Because those fees can go high. They can go up to 15%, can’t they? 

ANNA: Yeah. 

MICHAEL: Some letting agents even give you guaranteed rent. So we’ll give you ‘X’ amount even if there’s no tenant. But obviously it’s not what you would get, it’s well below the market value.

PHILIPPA: And not an open market value. 

MICHAEL: Yeah, exactly.

The risk and reward of buying at auction

PHILIPPA: I’m just going to ask you both one thing, which is, do you ever buy at auction?

ANNA: So yeah, I would. I 100% would. Again, there’s - it’s understanding how they work. There’s two different types of property auction: there’s modern method of auction, then there’s a traditional auction. The modern method is more of a hybrid. It’s a little bit - so you can use mortgages, for example. You can’t use mortgages through traditional. I personally would do traditional because you can get better prices.

MICHAEL: You can do mortgages through traditional auctions. It’s just a big risk. It’s a big risk because if it gets downvalued, well, you’re committed to paying that 10% and you can’t back out of it.

ANNA: But the timing as well, because normally you have like 28 days to complete and it’s very hard to complete in 28 days with the mortgage.

MICHAEL: That’s quite often [when] people come to me and say, “I’ve already had my bid accepted, can you get me a mortgage?”. At which point I get another couple of grey hairs.

PHILIPPA: You roll your eyes. 

MICHAEL: Yeah.

PHILIPPA: I mean, there’s so much to think about with all this. I suppose, yeah, if we were wrapping this up, what I’d ask you is, it’s relatively complicated. You have to think about it quite hard. It can be a bit management intensive depending on which way you do it. But income growth, if you’re smart about it, it can be great. I mean, Anna, you’re obviously still keen. None of this has put you off.

ANNA: No, I think, I think the thing for me is I’m a real numbers nerd. I’ve got a maths degree and I love numbers and puzzles. And I think that’s why I love property, because I love the business of property. But I definitely think if you don’t have a clear plan and you’re not kind of educated on what you’re doing, I suppose it’s like with any kind of investment, you have to do it the right way. There’s a right way of doing it and a wrong way.

PHILIPPA: Is it ever going to stack up just having one or two? 

ANNA: Oh, it’s a good question. I - oh, it’s a really good question. I don’t think so. I kind of, I mean, sometimes I talk to people and they just say, “I just want one property. I want to be on a repayment. I want to pay it down and that’s going to be my pension”.

PHILIPPA: I think most people think that. They don’t imagine themselves owning 10, do they?

ANNA: For me, it’s the risk. If you have one property, one tenant, one income from that, because even if you just have three, I’m like, “don’t get one, get three ideally, because it just diversifies the risk”. Because if a tenant moves out and you need to renovate the property, that’s all your income gone. So for me, it’s a really good investment vehicle done in the right way.

PHILIPPA: Let me just tie this off by asking for your best tip on picking a property. What is it when you see it you think, “Nope”. And what is it when you see it you think, “Oh yeah, that one might work for me”.

ANNA: So for me personally, it’s a mid-level renovation. So [it] looks worse than it is. So if we go into a property and it needs, say it’s worth, kind of done up £110,000 and it’s on for £100,000 - it’s just the costs are just going to - you’re just not going to make any good return on that.

PHILIPPA: Yeah.

ANNA: If it’s a full renovation, needs £50,000 worth of work and it’s discounted by £50,000, again, you might as well just buy one that’s done up. If you go for a property where it looks really dated and old-fashioned, but the owner has rewired it, it’s got a new heating system -

PHILIPPA: nice -

ANNA: all the big stuff’s done, but it’s priced like -

PHILIPPA: cosmetic -

ANNA: yes. But it’s priced like it needs a load of work done. So for me, the mid-level looks worse than it is, is the best kind of property.

PHILIPPA: Do you agree with that, Michael?

MICHAEL: Yes, I think the sort of house that makes a good Buy-to-Let isn’t the same as the sort of house you want to live in. The perfect three bedroom semi-detached house in a suburban area isn’t usually bought by a landlord. The property in the cheap location that’s three bedrooms might sell for £100,000 less than the property in the nice location, that has three bedrooms, but you won’t get that much less rent.

PHILIPPA: Yeah. So it’s a completely different mindset.

ANNA: Yeah.

PHILIPPA: Really fascinating conversation. Thank you both very much. 

MICHAEL: Thank you for having us.

PHILIPPA: So much to talk about.

ANNA: Thank you.

PHILIPPA: If you found this episode valuable, subscribe to The Pension Confident Podcast so you never miss an episode. Curious whether it’s ever too late to start saving for retirement? Well, next month we’ll explore what it takes to begin with £0 pension savings at 50 years of age.

And just a final reminder, anything discussed on the podcast shouldn’t be regarded as financial advice or as legal advice, and when investing, your capital is at risk. Thanks for being with us.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.