Are you trying to tough it out in the buy-to-let market? It's a tough nut to crack
Loan options have improved for landlords, but it's still tricky making sums add up, writes John Cradden
As far as investments go, buy-to-let property might seem attractive at first glance if you have the funds, but the crisis in the rental property market - along with competition for the few opportunities that exist - means it's a tough nut to crack and not for the faint-hearted.
But if you're determined to get into the market, or are already a landlord but want to maintain your portfolio or extend it, what are the financing options available? And what other factors should you bear in mind?
A new €200m buy-to-let mortgage fund launched last month targets property investors looking to either buy into the market or refinance their investment properties.
The new product - from ICS Mortgages and Dilosk - is open to both individuals and firms and has variable rates starting at 4.49pc on a loan-to-value of 50pc or less. There is also a 10-year interest-only option, too.
Trevor Grant of Dublin-based financial advisors Affinity Advisors says the new fund is a welcome addition to what is and remains a fairly limited buy-to-let mortgage market. "Until the arrival of Pepper into the mortgage market early last year there was effectively no availability of buy-to-let finance in the market," he said.
Certainly the big banks have been reluctant to go back into the market with all guns blazing having been burnt by arrears issues with some buy-to-let mortgage holders because they made finance to easy to come by.
So while it remains to be seen how popular the ICS/Dilosk fund will be, Grant says there is a "level of pent-up demand for this type of finance" - but it won't come from first-time investors.
"Primarily it will come from those who bought for cash over the past number of years, borrowers whose existing arrangements are coming to an end with their existing providers and those professional investors who are seeking new opportunities.
"Anyone thinking of become a landlord needs to think carefully about doing so and fully understand the underlying financial consequences of becoming one."
Meanwhile, rents continue to rise sharply. According to Daft.ie, rents rose by an average of 11.7pc between July and September 2016, the biggest 12-month increase in the entire Daft.ie rental report series, which started back in 2002. Rents are now 5pc higher than the last peak of 2008.
But amid the mess that is the property market at the moment, you'll be up against competition from a range of buyers for the limited supply of suitable properties.
Property strategist Carol Tallon believes the new fund isn't necessarily going to help anyone trying to get into the market, never mind extend their portfolio.
Fighting for scraps
"Buy-to-let investors have been fighting for the scraps of the market for the last two or three years. They are struggling to compete with institutional investors, approved housing bodies and local authorities for tenanted or tenant-ready units, and this is going to heat up the market further," she said.
"Like the help-to-buy scheme, this extra funding might sound like a positive thing for the market but - in reality - it's not particularly helpful at this time. The only interference that will impact the market in a positive way involves incentivising developments, which means incentives for developers."
Making the sums work could be made more difficult if you own property in one of the newly-designated 'rent pressure zones', where annual rent rises have been capped at 4pc. These include the cities of Dublin, Cork and Galway and a number of towns in Meath, Kildare, Wicklow and Cork counties.
Tallon recently commissioned rental valuations from an agent in Dublin showing what she says is the discrepancy between market value and the maximum rent that can be obtained for a studio apartment in Dublin 8. Under the new rent cap legislation the studio "must be let at €450 per month when it's actually worth €850 per month".
Certainly these zones present a problem if you are letting a property at below the current market rental value, or have simply not reviewed the rent for a number of years. So if an apartment is being let out at half its market value, it can only be increased by 4pc a year, even with new tenants.
According to the Private Residential Tenancies board, some 40,000 landlords have left the sector since 2012, and more are likely to leave with the new caps, many property experts have warned. But if you're already committed, Ronan Lyons, economist with Daft,ie, says the opportunities may lie in more rural markets and smaller properties. "I would always recommend looking at the average yields as a way of people spotting where is a good investment from an income point of view. This doesn't always match perceptions, as more fashionable areas tend to have higher prices, relative to rents, and thus lower yields," Lyons says.
Therefore, he says, there are rural markets where one and two-bed apartments have quite high yields due to a combination of over-supply from the bubble (which is pushing down sale prices) and strong rental demand (as there is little appetite for buying smaller properties).
But what adds to the conundrum for landlords is that one of the conditions of the ICS/Dilosk fund (besides a maximum LTV of 70pc and an €80,000 minimum property value) is that any property you buy with their finance must be located in Dublin, Kildare, Wicklow, Meath, Louth, Galway, Cork and Limerick, and for properties in other urban centres with population greater than 10,000 people. Many of these areas have just been designated rent pressure zones.
Tallon agrees that areas not designated in this way, such as Waterford city or Limerick city, will be likely targets for low-value residential investors (ie less than €200,000).
The latest rental report from Daft.ie shows that the average monthly mortgage payment on a one-bed apartment (based on a 30-year, 3.75pc variable rate mortgage with 85pc LTV) would be €235, while the average rent would be €542, with similar mortgage-to-rent ratios in Limerick and other areas.
The report also shows clearly that, across the board, the profit margin gets squeezed the bigger the property, particularly with four- and five-bed properties.
First-time investors should still be extremely cautious when considering of investing in property, says Grant. "They should ensure that they are fully au fait with the financial and tax implications and obligations of a being a landlord and ensure that they have suitable cash reserves to absorb and unexpected costs or void periods incurred."
In the last Budget, Minister for Finance Michael Noonan increased the tax relief on mortgage interest against rental income from 75pc to 80pc in 2017, and signalled that the relief should return to 100pc by 2021.
There are several expenses relating to being a landlord that are fully tax-deductible, including insurance, local service charges, repairs and maintenance, registering with the PTRB and estate agency or property management fees.
Indeed, the more properties you have, the more it may make sense to hire a property management firm or agent to look after it unless you intend to become a full time landlord.
An alternative for those who want exposure to property but without the maintenance costs, the phone calls, dealing with difficult tenants and so on, is to buy shares in a real estate investment trust. So, in other words, if you can't beat them at this game, you can join them instead.
Sunday Indo Business