The buy-to-let initiative was launched in September 1996. An underlying aim was that the initiative should lead to a sustainable expansion in the private rented sector. By late 2002 an estimated 275,500 buy-to-let mortgages had been taken out. David Rhodes and Mark Bevan of the University of York interviewed buy-to-let landlords from a range of housing markets to explore their experiences and intentions.
- Amongst investors for whom being a landlord was not a full-time occupation, buy-to-let was being used as a form of pension planning. Most were intending to live on the rental income when they retired. Many were dissatisfied with the performance of their personal or company pension schemes, and sometimes with stocks and shares, and had switched to investing in residential property. They considered this to be a safer and better-performing investment over the medium to long term. Compared with private pension schemes, the flexibility of investing in buy-to-let was another attraction.
- Full-time, or business, buy-to-let landlords were primarily motivated by the rental income from their portfolio. Capital growth was an irrelevance for some and a bonus for others. Some full-time landlords valued capital growth as it had allowed them to expand their portfolio through remortgaging to raise deposits for new acquisitions.
- Most landlords preferred to invest in their home area, for two main reasons. First hand knowledge of an area was thought to be essential to making rational and well-informed investment decisions - investing in other areas was considered risky. Secondly, they wanted to be nearby for ease of management and maintenance.
- All landlords placed great importance on maintaining their portfolio to uphold its value. Many thought that buy-to-let had led to an increase in the supply of rented accommodation, and that it was increasingly necessary to offer good quality accommodation to attract and keep tenants.
- Most landlords had slowed portfolio expansion because capital values were increasing ahead of rents, which made the recent climate unfavourable to new investments. Most wanted to expand their portfolios, and anticipated doing so when the relationship between rents and capital values improved.
"Buy-to-let brings into the market voluntary private capital, and capital is desperately needed in the housing market. So if you can set up an open market scene whereby private individuals will voluntarily bring capital into the housing market, and thereby satisfying someone's housing need without the Government knowing anything about it, that's great news isn't it?"
The buy-to-let initiative was launched in September 1996 by the Association of Residential Letting Agents (ARLA) and four lenders. It expanded rapidly to the current situation in which a wide range of buy-to-let products are available from numerous lenders. An underlying aim of the initiative was that it should lead to a sustainable expansion in the size of the private rented sector. By the end of 2002 there were 275,500 outstanding buy-to-let mortgages, some being remortgages of earlier loans, worth a total of over £24 billion.
Part-time landlords, who were in employment or self-employment, were investing in buy-to-let as a pension plan. Most intended to retain their investments when they retired and live on the rental income. Some thought that they might rationalise their portfolio, selling the least well-performing lettings to pay off the mortgages on others, and thereby enhance their net rental income. A very small minority expected to sell their portfolio and re-invest the equity elsewhere to provide a retirement income. The size of the part-time landlords' portfolios was determined by what they saw as necessary to provide for their retirement. The average portfolio amongst these landlords was six properties, although most wanted to invest in more when the relationship between capital values and rents improved.
Capital growth was important for the part-time landlords, sometimes because they expected to sell some or all of their lettings, but usually because it increased their future options. One of the great attractions of investing in residential property over other more traditional forms of pension planning was the flexibility it offered. Although these landlords had a broad strategy for the future, they placed significant value on having a range of options about exactly when and what they might do depending on their personal circumstances and the state of the rental market. Another attraction of buy-to-let was that residential property was viewed as a much safer and dependable form of investment than many of the alternatives, such as personal pension schemes or equities.
Amongst the full-time buy-to-let landlords, the current rental income was of greatest importance. Several of these investors had become full-time landlords relatively recently: the favourable market conditions since the mid-1990s of substantial capital growth (allowing remortgaging of earlier loans to raise deposits for new acquisitions) and increasingly cheap buy-to-let mortgages had made rapid portfolio expansion possible. However, many of these landlords were indifferent to capital growth, whilst others simply regarded it as an added bonus to the rental income. The size of the full-time landlords' portfolios was usually related to the amount of rental income they required. The average portfolio size of the full-time landlords was 47 lettings, although again most wanted more properties when market conditions improved.
Choice of investment area
The study was built around six case study areas that differed in terms of the local housing market conditions and geographical location. All the landlords interviewed had investments in one of these areas. Despite being differing housing markets, most landlords had decided to invest only in their home area, although some had invested in an area in which they had previously lived. In only a few instances had landlords invested in an area where they had never lived, and usually there was some other personal connection, such as a child at university.
Investing in an area of which they had firsthand knowledge was seen as being a rational and relatively low-risk strategy, with the result that many landlords had never considered investing elsewhere. The landlords thought it crucial to have a good local knowledge of house prices, rent levels, and which locality to target to reach their preferred type of tenant.
Management and maintenance
Another reason why many landlords had decided to invest locally was for ease of management and maintenance. They attached great importance to these matters, often out of self-interest. Adequately maintaining their properties was seen as being important to uphold their capital value, with a 'stitch in time' attitude being prevalent. The upkeep of their properties was also widely viewed as being important to 'beat the competition'. Landlords in all areas were of the view that tenants now had more choice, largely due to the influx of buy-to-let investors. The result of this over-supply was that attracting tenants was thought to be increasingly driven by the quality of accommodation on offer. Some buy-to-let investors pointed to a beneficial impact of this situation in that what they referred to as 'older style' or 'slum landlords' would be forced out of business.
The general attitude was that, having attracted 'good' tenants in the first place, the landlords then wanted to keep them. In this respect, responding promptly to maintenance requirements was perhaps regarded as the central focus of good management practice. Besides minimising turnover, other advantages of being a good manager included that tenants would be more likely to treat the property well and that rent would be paid on time.
Setting the rent
Most landlords were 'rent maximisers', setting their rents at the 'going rate'. They would either leave setting the rent to their letting agent (if they were using one) or would research prices in local letting agencies and newspapers. Landlords who were letting to students had usually contacted university accommodation offices to ascertain the level of rent that students were willing to pay. A few landlords had experienced a dual market, with tenants being willing to pay a higher rent for the same property if it was let through a letting agent rather than by the landlords themselves.
Some landlords were 'turnover minimisers', and were pitching their rents at slightly below the market level in order to encourage their tenants to stay on for as long as possible. Setting the rent at below the market also attracted a larger number of applications, giving landlords a wider choice of tenant.
Most part-time landlords considered that they were covering the costs of their investments from their rental income. Most thought that they were about breaking even, whilst a net rental income was being achieved by a few, although any surplus was usually being set aside in a 'repairs fund'. Some of the landlords' investments were making a loss, either because of increased void rates or because of falling rent levels. These were thought to be caused by an increase in supply that had resulted from more buy-to-let landlords entering the market. The part-time landlords were generally philosophical about not covering their costs, viewing it as an undesirable but accepted risk of the investment. Most were prepared to 'subsidise' rents if necessary (so long as they could reasonably afford to do so) in order to achieve their longer-term aim of a future net rental income when they retired.
Full-time landlords were invariably obtaining a net rental income on each letting. Often they would purchase property that needed renovating or that had development potential, as these were ways in which they could add value to their investment. They tended to dispose of any under-performing lettings, and had strict, although differing, investment criteria at the outset to ensure that this was unlikely to be necessary. For example, one landlord would not invest in any property that would not achieve a net rental yield of at least eight per cent, another expected the rental income on each investment to be at least 150 per cent of the mortgage repayment, and another aimed to achieve an annual net income of £3,500 on each letting.
The landlords in the study were taking a medium to long-term view of their investments, which suggests a degree of stability to the expansion in the private rented sector that has resulted from the buy-to-let initiative. There was little evidence of a speculative approach. The landlords were either looking to the future to plan for their retirement, or it was their main or sole form of livelihood. None of the landlords in the study were expecting to reduce their portfolio size. Most wanted to expand when the relationship between capital values and rent levels improved. This situation raises a note of caution in that most of these landlords have only been investing over a period of time that has been characterised by low interest rates, growing capital values and rising rent levels, poorly performing stocks and shares and pension schemes, and an increasing demand for private rented accommodation. Several of the landlords themselves pointed to their good fortune in having entered the market within this period. It is therefore unclear how buy-to-let landlords may respond to different economic conditions, such as a rise in interest rates, nor how the more recent entrants are faring due to the tighter margins that are currently available as a result of rises in property prices.
About the project
The research was completed by David Rhodes and Mark Bevan at the Centre for Housing Policy at the University of York. Qualitative face-to-face interviews were held with 47 landlords with an investment in one of the six differing case study areas of Canterbury, Edinburgh, Leicester, Manchester, The Isle of Dogs (London E14) and Wandsworth (London SW18). It cannot be assumed that the landlords who were interviewed were representative of all buy-to-let landlords, as they elected to participate in the research. Interviews were held with an established letting agent in each case study area, and contextual interviews were held with ten organisations that had differing forms of involvement with buy-to-let.