Letting Property; License to print money?

To make up for the general dearth of empirical data available on the PRS, we at the NLA conduct quite a lot of primary research.

This enables us to back up our policy positions, strengthens our position with Government and stakeholders and generally makes the Association a more ‘useful’ partner to those who make policy.

It also means that we sometimes uncover interesting, if occasionally surprising, things about the UK’s landlord population. For instance, since the Association established a quarterly survey panel, two simple truths have been evident:

(1) Not all landlords make a profit, many just break even, some even make a loss. Not that everyone believes this – particularly against the backdrop of headlines implying that every rental property is accompanied by a license to print money.

(2) The more properties you have, the more likely you are to make a profit. Not rocket science, but generally true.

Of course these aren’t the surprising results. The element of surprise comes from the fact that over recent months even some large portfolio landlords have started to declare a loss.

For the first time since the survey began the percentage of portfolio landlords (>20 properties) making a loss is on the rise – reaching eight per cent for the last quarter of 2011.

So, how come I keep reading in the newspapers that landlords are ‘raking it in’?

A lot of this seems to stem from a simple misunderstanding about the costs of providing housing.

A former Secretary of State recently asked the NLA to explain how we could argue against the accusation that landlords are guilty of profiteering. He based this on a simple rental yield calculation which illustrated that gross return can indeed be quite attractive considering the Base Rate remains welded to 0.5 per cent.

Give it a try with this calculator:

[wolframalphawidget id=”d0ab3bfa5ebcd995f488c3a90256291a” output=”lightbox” width=”350″ height=”250″]

However, what good is knowing your gross yield if you then ignore all of your costs. It is akin to running your household budget purely on your salary before tax.

I suggest that anyone interested in the true income most providers of housing can expect take a look at the next calculator instead.

[wolframalphawidget id=”b31af0e125cd4e8238db5db06912d6a2″ width=”300″]

Bearing in mind this ignores countless other costs from management fees and service charges to local licensing fees. (Without even beginning to consider tax liability).

Next time I’m asked why landlords can’t simply lower their rents I’ll certainly point out the difference between these two results.

Note: These calculators are intended as a very basic illustration to add a bit of fun to an otherwise dry subject, they are not a business planning tool.

5 thoughts on “Letting Property; License to print money?

  1. The reason many landlords make a loss apart from mortgages is the high cost of maintenance and in particular bringing properties up to an acceptable standard to satisfy the raft of legal requirements. I am a landlord who has 1 property I let and I have yet to see a profit and am running at a loss. However, I believe I am providing a property to a standard I would expect if I was to live in it. I do not see why some landlords should get away with letting property they would not consider living in. As a member of the NLA I believe that local Councils should do more to penalise bad landlords as most landlords are professional and ethical people.

  2. What the majority of Small landlords are doing, is not making a profit on the month to month stuff. But rather, viewing it as a very long term investment for their retirement.

    How else, would you be able to aquire free houses at the end of your 25 year term ?

  3. Very interesting graphs. I am retired and supplement my pension with rent from 4 properties 2 ex-council flats in S London (value £250,000 ea, rent £300 p.w.) 2 off-plan Sussex (£200,000 ea, £160 p.w.). No mortgage. London service chg £4500 total. My wife (75) enjoys this as a hobby and tenant/landlord relations are good but London agents fees at change of tenant exorbitant (11% + VAT min). Renovations, voids etc all extra. Should we sell London flats? A constant topic for argument! We think our rents are realistic.

    1. I can only think of one or two (London) agents that charge as much as 11% for let only fees. You need to shop around as there are many reputable agents out there charging a lot less for a very good service. Most of our clients enjoy iro 8% for lettings and 4% for management.

  4. One of the awful home truths about buy to let is that generally (with notable exceptions) the worse the area, the greater the yield and therefore usually the greater the profit.

    To make the most profit you have to buy in areas where people don’t have much capital and then let to tenants on benefits. Thus it’s cheap to buy but there is still a huge demand for accommodation. Unfortunately this isn’t ideal for landlords of a more caring/sensitive disposition and really more suits the Phil Mitchell type of landlord!

    Really though it’s a bit of sliding scale with the nicer the area the greater the opportunity for capital appreciation but the lower the yield whilst at the other end the opposite applies.

Leave a Reply