Buy-to-let: The rise of the professional landlord

The buy-to-let (BTL) market has changed significantly in the last few years, largely due to a number of economic factors which have made BTL investments less beneficial for non-professional landlords.

Up until very recently, a large number of BTL investors were those who had inherited homes, or had held on to previous properties when moving – dubbed as the ‘accidental’ landlords.

Casual investors also looked favourably at BTL properties as a way to boost their income, especially heading into retirement. High house price growth, stable borrowing costs, attractive rental yields and tax reliefs made BTL properties a relatively safe option for non-professional landlords.

Challenges for landlords

However, here we are in 2024 and the picture is very different. Gradually, we have seen more and more ‘accidental’ and casual landlords leave the market, owing to turbulent economic conditions over the past couple of years.

Challenges started in 2020, when landlords could no longer reduce tax bills by recognising mortgage expenses from rental income. Landlords now receive a tax-credit based on 20% of their mortgage interest payments, which presents issues for those who are, or have been, pushed into a higher or additional tax bracket.

In April of this year, capital gains tax allowance was cut to £3,000 – having previously stood at £6,000, and £12,000 not long before that. As a result, those selling a property now face a heftier tax bill, especially those who have held a property for a longer period of time and thus seen higher price growth.

Many landlords will be feeling the pinch of the cost-of-living crisis, with rising costs and bills adding to the challenges posed by high interest rates, which will have had an impact on those who have had to remortgage in the past two years.

Even with increased rents, these factors have meant that yields have been less prosperous for landlords compared to when they first started in the BTL space.

Opportunities for professional landlords

Despite all the challenges, the news is perhaps more positive for professional landlords. Whilst recent times have been less favourable for non-portfolio landlords (those with less than four properties), opportunities have been presenting themselves for professional landlords (those working as a landlord full time with over four properties).

Many will have capitalised on stalling house prices over the past year to add to their portfolios, with a large proportion of landlords now turning towards higher-yield options.

As rental demand continues to grow and outpace the supply of sufficient stock, professional landlords have set their plans on property types such as houses in multiple occupation (HMOs).

In both 2022 and 2023, HMOs made up just over a quarter (27%) of all Shawbrook’s buy-to-let business. However, as landlords have placed increased emphasis on diversifying their portfolios, this number has already risen to more than a third (34%) in 2024.

HMO rental yields lend themselves better to mortgage lending in a higher interest rate environment, and the more frequent turnover of tenants allows landlords to constantly set rental prices in line with the market. Some landlords have also been able to convert existing single let properties into HMOs to increase their income streams.

The rise of semi-commercial properties

Landlords are also increasingly turning their attention to semi-commercial properties. Shawbrook has already seen applications almost double this year compared to 2023.

Retail units with flats above are proving the most popular, making up 60% of applications received by Shawbrook. The added benefit of having both commercial and residential space means that landlords can take advantage of higher yields with a mix of income streams.

Energy efficiency remains key

Though the current government’s energy performance certificate (EPC) regulation overhaul has been scrapped, professional landlords have continued to make changes to their properties to enhance efficiency; helping their tenants in the current financial climate, but also making their properties most cost effective whilst energy bills remain high.

Limited companies

Higher numbers of BTL purchases being made through a company structure indicates the professionalisation of the market, and the increase in HMO and semi-commercial investment shows that professional landlords have managed to remain agile to navigate the high interest rate environment, and have been able to grow their businesses despite a challenging property landscape.

Though this year is still laying down obstacles for landlords to overcome, greater professionalisation of the BTL market has seen portfolio landlords use them to their advantage to diversify their portfolios, grow their businesses and future-proof their strategies.

Emma Cox is MD of Real Estate at Shawbrook