2023 is going to be a challenging year for landlords, so here are a few pointers from experienced landlord, Tom Entwistle, a residential and commercial landlord since the 1970s and founder of LandlordZONE.
To read more analysis on what legal and financial changes to prepare for this year, read Total Landlord's article, Key dates for landlords: What does 2023 have in store? Industry expert, Paul Shamplina's Q&A for mydeposits also contains lots of insights about the key questions that will be on landlords' minds as the year unfolds.
We live in uncertain times. Inflation at 10 per cent or so is eroding your cash savings, rising fuel, food and commodity prices are making us all poorer and although rents have remained relatively stable, they are still rising (largely down to a lack of supply), while property prices have started to decline.
The aftermath of Covid presents a year ahead with some huge challenges for landlords, but also opportunities. Among the wider public '� if not the politicians '� there's a widespread recognition that the country has major issues, a health service on the brink of collapse, industrial strife on a level not seen since the 1970s, high inflation and a stagnating if not shrinking economy.
Low unemployment levels however, so far at least, have supported property prices and could mean that the much talked about recession might be shallower than some predict.
But rising interest rates needed to combat inflation, and therefore mortgage payments, will gradually drag house prices down '� forecasts range from minus eight percent to minus 30 percent in 2023. Take your pick, but forecasts are rarely right.
Given this economic backdrop, residential landlords are also faced with two major structural changes in the lettings market: (1) New legislation which will give tenants greater protection than they've enjoyed since the rent acts pre 1980s with the effective removal of the Thatcher Government's Assured Shorthold Tenancy, and (2) The looming target deadlines around energy efficiency standards, namely the proposed drive to achieve Energy Performance Level 'C'� in rentals by 2025 and beyond.
On top of all that there's the ever changing UK tax regime, and in some parts of the UK there are even rent freezes '� rent control by another name.
Section 24 of the Finance Act 2015 introduced by the then chancellor George Osborne in April 2017 was an attempt to slow down the buy-to-let housing boom, as it was thought landlords were over-borrowing and first time buyers were being priced out.
Section 24 removed a landlord's ability to deduct mortgage interest and other finance costs (such as mortgage arrangement fees and items' depreciation) from their rental income before calculating their tax liability. This was a huge change in the way rental income is taxed, it pushes many landlords into the higher tax bracket and in some rare cases will mean they pay tax on income even if they are making a loss.
Rent freezes in my view are misguided and simply offer short term measures that some politicians, including the Mayor of London, think are the long term answer to tenants' problems.
That's far from the case and the economic literature on this shows that time and time again they distort the market, which always returns to sanity in the end, and invariably works against tenants' interests.
Well, not much to worry about in early 2023 is there?
But every cloud has a silver lining as they say; the above is cause for concern, as is the detail of the regulations coming down the track for landlords, but in investing it's usually the ones who stay the course that make the real money.
If you have decided it's time to cut and run then you've got a short window in which to do so if you want to avoid bigger losses: property prices are on the slide, you will join the crowd doing just that, and after April this year capital gains allowances drop from �12,300 (�24,600 per couple) to �6,000.
Unless you have a good reason for selling-up my advice would be to stick in and see this through. Yes, it will be tough, depending on your financing situation of course, especially if your mortgage payments are going to rise dramatically, but rental demand is going to support higher rent levels and with landlords leaving, they can only go one way.
Declining property values mean nothing in the short term. These asset prices will always rise long term and are the best hedge against inflation, it's the rental income that matters.
Indeed, lower prices mean that bargains will be out there, that's if you are looking to take advantage of the market decline and expand your portfolio.
Regulation is usually seen as a bad thing in any industry, but it also has a good side. Apart from bringing increased professionalism to the industry, if it can be enforced correctly, and unfortunately the Government does not have a good record with that, it will clear out the bad guys leaving more on the table for those who are determined to navigate the obstacles and do a good job.
However hostile to landlords it may appear from the actions of this Government, at the end of the day it needs private landlords; they have taken up the slack as social housing (council and housing associations) has declined, and as first time buyers have been unable to buy '� the last thing this Government needs in the run-up to a general election is an even greater housing crisis.
A mass exodus of landlords threatens just that, and build-to-rent in the numbers being built will not save the Government.
What coping strategies can you use in the face of these challenges?
Running any business is a challenge, but in difficult economic times it's particularly hard. Survival and coming out on top over the long run, in my view, means:
Key priorities for 2023
The Renters' Reform Bill began with a consultation in April 2019, when the Ministry of Housing, Communities and Local Government consulted on proposals to end '�no-fault' evictions by repealing section 21 of the Housing Act 1988 and extending the grounds for possession under Section 8, amongst a host of other controversial changes.
Things ground to a halt during Covid, but it appears the Government is determined to introduce the new measures in 2023. The full measures are outlined in the Government's proposals for the Renters' Reform Bill and in its A Fairer Private Rented Sector White Paper released in June 2022.
Paul Shamplina (pictured), Chief Commercial Officer HFIS group says of the proposed new rules: 'I think it is unlikely that the final Bill will pass before the end of 2023, meaning there is still time for landlords to influence change.
"While I'm not suggesting that there is likely to be a U-turn on any of the elements that have been included, I do believe landlords' collective voices have an opportunity to show the Government what will and won't work'�'� Read Paul's Q&A for mydeposits for more of his thoughts on the key questions for landlords in 2023.
The increased security afforded tenants under the new rules will have important implications for tenancy management. First point to make here: most tenancies (I say 95 percent of them) go without a hitch - the tenants pay their rent on time and look after the property. It's that other five per cent that worry landlords.
With a new regime that puts the decision as to who and when to evict - if you do get a bad tenant - into the hands of a judge or tribunal, then you had better have some good evidence to convince them it's necessary.
Better still you need to up-grade your tenant assessment or verification skills to ensure you eliminate 99 per cent of the bad ones '� unfortunately you will never eliminate all your risk, but that's landlording!
In my view the other rules included in the White Paper's twelve point plan are fairly easily dealt with by a responsible landlord, indeed they will be meeting these concerns already.
One of the main thrusts of the new legislation under this 12 point 'plan of action'� is the condition of rental properties and the drive to halve the number of non-decent homes by bringing in the Decent Homes Standard to private rentals for the first time.
The new legislation will give tenants the power - and extend the scope of the Rent Repayment Order process - to allow tenants to reclaim rent for substandard housing, while at the same time increasing their security of tenure. This could be a real threat to those landlords with housing that's not up to the Decent Homes Standard.
This issue of standards, to some extent, relates to the proposed improvements in the energy efficiency ratings of rentals, from the present minimum of EPC 'E'�, possibly to as high as 'C'� by 2025 for new tenancies (2028 for existing ones).
This is a big ask for some of the older types of housing and flats for instance, so it needs some serious appraisal calculations by landlords '� are these older properties worth the investment needed to bring them up to the Decent Homes Standard and EPC level 'C'�, or should they be disposed of? Five to fifteen thousand pounds are the estimates being bandied around, and that's not considering the logistical problems of upgrading a tenanted property.
The other big challenge in 2023 for some of you landlords with mortgages will be the hike in rates and payments that you may face. Most buy to let landlords are on interest only variable rate or fixed rate mortgages ending soon, so speak to your mortgage broker at your earliest opportunity. Even if you have to fix at a higher rate than you would like, the increased certainty may be worth it.
Something worth considering if you have not done so already, or especially if you intend to grow your portfolio, is forming a limited company to operate within.
There are issues with transferring existing properties into a limited company ownership, capital gains tax and stamp duty for example, plus mortgage rates are less favourable, but the tax advantages may outweigh all this. Speak to a financial advisor before making any changes along these lines.
More advice
Now, more than ever, landlords should be doing all they can to mitigate the risks involved with owning a buy to let property so you're not left out of pocket if things go wrong.
Read Total Landlord's latest article, 7 tips to protect you and your property, for solid practical advice on what you can do to protect both your rented property and your finances this year and beyond.
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