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BLOG: The benefits of buy-to-let portfolio expansion

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Written by: John Eastgate, sales and marketing director of OneSavings Bank
15/07/2015
For nearly 20 years, the quiet but relentless momentum of structural change in the housing market has been building up.  Increasing numbers of households are renting privately with 150,000 new households created in the private rented sector (PRS) in the last year alone.

The combined effect of ongoing capital appreciation and increasing numbers of renters have acted as a ‘double whammy’ for the value of the total PRS which almost certainly climbed beyond £1 trillion in June.

Strong returns have stimulated continued investment into the sector to support this growth. Across Great Britain, landlords’ total annual returns stood at £111.5bn in March, up from £105.7bn a year ago. Per property, this represents a return of £24,221 in the past 12 months, up by 2.2 per cent compared to a year ago.

All of this has created a strong sense of optimism among landlords and property services firm LSL’s latest research shows that 24 per cent of current property investors expect to add to their holdings in the next 12 months.

Typically, landlords use capital appreciation to enable them to refinance and increase their portfolios as their equity grows. Based on conservative forecasts for house price growth, a first time landlord will be able to become a ‘second step landlord’ and secure their second property just ten years after their first – purely from the equity they have amassed.

The opportunities arising from portfolio expansion are clear in the long-term, allowing investors to benefit from price inflation on additional properties. Based on the same conservative forecast for house price growth, an investor who bought a property with the average deposit would see their equity rise by £376,876 over the next 20 years – a return of 642 per cent. However, if the same investor remortgaged and purchased a second property after ten years, they would see their total equity rise by an astonishing £616,224 – a prospective gross return of 1,049 per cent.

In order to build a larger portfolio from equity growth alone, a supportive remortgage market is necessary and we can see that this exists today. Council of Mortgage Lenders figures show the number of buy to let loans increased 19 per cent year in April, with remortgaging accounting for 53 per cent of all buy to let loans in the month. With rates extremely competitive at present, alongside increasing product variety and support from lenders, the foundations are in place for a growing number of multi-property landlords.

However, lenders quite rightly won’t support speculation. Rental income must be investors’ immediate concern, allowing them to meet the cost of home ownership each month.  This is more than the mortgage payment, as landlords will also have to cover repairs and voids between tenancies.  Most lenders will require landlords to show an excess of rent against the mortgage costs of at least 25 per cent.

Buy to let investment is not an excuse to print money. It is a business and comes with the associated effort and risks.  All prospective landlords need to carefully research their investment, considering the risks, regulations, tax implications (including the Emergency Budget announcement in relation to tax relief), and prospective costs each year, and those expanding their portfolio must not be complacent.  The best landlords review their business plan and portfolio regularly however, the long-term returns are almost unparalleled at present, especially if landlords are able to reinvest their growing equity into prudent portfolio expansion.

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