The buy-to-let market has been rocked by lower rents falling short of mortgages, writes Caroline Madden
DURING THE boom years, it became de rigeuer for any self-respecting investor to have at least one buy-to-let property in their portfolio.
In fact, the lure of easy money in the form of capital appreciation created a whole new generation of landlords: there are now more than 110,000 landlords registered with the Private Residential Tenancies Board (PRTB).
Unfortunately, many rental properties have turned out to be white elephants rather than cash cows, and property investors are now finding themselves squeezed on all sides.
Although owner-occupiers have benefited from recent interest-rate cuts, investors have not been so fortunate. Unless they have a tracker mortgage, rate cuts are not being passed on to investors by their lenders.
“Pressure has been put on lenders to pass on decreases to homeowners, but buy-to-let mortgages are . . . a different category, and in most cases, the banks are not passing them on at all,” observes Michael Dowling of the Irish Mortgage Advisers’ Federation.
“The buy-to-let customer is still paying quite expensive rates at the moment relative to the cost of funds that banks are paying and, equally, relative to the cost of loans for homeowners,” Dowling continues.
“It’s a way of compensating for the cost of passing them [decreases] on to homeowners and the cost that they [lenders] are continuing to carry on the tracker mortgages which they have on their books, which, they will argue, are costing them money at the moment.”
Furthermore, instead of reaping the benefits of capital appreciation as anticipated, investors have been hit by sharp reductions in the value of their properties. Property prices have fallen by between 30 and 35 per cent in the last 18 months, Dowling says, and some investors now find themselves in negative equity (ie their mortgage exceeds the value of their property).
Even if they want to wash their hands of the whole thing and sell up, they can’t because new investors are virtually non-existent, so they have little choice but to continue renting it out.
Just to compound their problems, rents are spiralling downwards and some landlords now find that rental income is falling short of their monthly mortgage repayments.
“It’s never a good idea, but there are people out there who have to top up every month from their wages their rental properties,” says Margaret McCormick of the Irish Property Owners Association.
The supply of rental properties has soared but demand has fallen off as migrant workers leave the country.
This has left some investors in the nightmare scenario of being unable to find tenants and having to service the entire mortgage on a property that is falling in value. Unfortunately, banks are not particularly sympathetic to their plight should they get into difficulties.
“There’s a protocol that exists now in terms of how banks are to deal with customers who have got problems with their mortgages, where their mortgage is secured against the family home,” according to Dowling.
He adds that banks have recently given a commitment that they will not start repossession proceedings for a minimum of six months.
However, he says these measures relate purely to homeowners and do not extend to buy-to-let customers.
“Certainly I find that, whether you’re trying to reschedule or put in place arrangements for a customer that’s got into difficulties, it’s always far more difficult to try and put something into play where the properties offered as security are buy-to-let investments.”
Lenders are quite amenable to granting a moratorium or deferment on mortgage payments where it relates to the customer’s home, he says, but if it’s an investment property, they’re less flexible.
It is estimated that as many as 35,000 new homes lie empty across the State. Many investors rather unwisely bought properties off-plan without even visiting the area in what are now effectively ghost town developments.
In many cases, the main attraction was the section 23 tax relief on offer in designated areas.
Apart from their mortgage burden, owners of these unoccupied investment properties face a number of other concerns.
According to Hibernian Aviva, insurance cover for investment properties may be restricted if there are protracted periods when no tenants occupy the property – for example, more than 30 days.
“Restrictions can range from increased policy excess for damage claims of €500-plus per incident, to exclusion of certain covers such as water-leak damage, vandalism or break-in/theft damage,” the insurer explained.
That’s not the only cost associated with leaving a property lying idle. According to a spokesman for the Royal Institute of the Architects of Ireland, any property that isn’t occupied or regularly inspected will deteriorate over time.
Properties built to comply with new energy standards are likely to have been fitted with heat-recovery systems, which have to be run even if there’s no one living in the property (otherwise mould will grow very quickly) – which adds to the investor’s costs.
Investors who have succeeded in finding tenants and generating an income from their rental properties, but who have failed to declare this income for tax purposes, are more likely to find the taxman breathing down their neck in the near future.
Last year, the Revenue Commissioners undertook a number of regional projects (outside of its main audit programme), specifically aimed at investigating landlords in the private, rented sector, to monitor tax-compliance in the sector.
One such investigation in the Border Midlands and Western (BMW) region examined Rent 1 forms (used by tenants to claim tax relief on their rental payments) and resulted in a tax yield of €58,239. Rent payments by the Health Service Executive were also examined, and this has resulted in a tax yield of €76,198.
New legislation is expected to be passed soon which will enable Revenue to ramp up its investigations into recalcitrant landlords. When the legislation comes into force, it will allow Revenue to access the landlord database of the PRTB in full, enabling it to cross-check details in the database with declared rental income.
Buy-to-let investors are also facing a number of new expenses for the first time this year (see panel) which will put a further strain on their finances. So in the face of these myriad difficulties, how is our landlord class faring?
Dowling says: “I am seeing a growing number of investors who are getting into financial difficulties in comparison to customers who have got home loans.
“I would say half of the customers that I am dealing with who have difficulties are investors and particularly those who have multiple units.”
Until now, investors with multiple properties may have been able to subsidise a shortfall in one property with income from another. Now though, if they have a number of units that are failing to attract tenants, landlords are being forced to reduce their asking rents considerably in order to avoid having several vacant properties on their hands.
“That’s impacting on the mortgage repayments because there isn’t sufficient income coming in even to service the interest element of the mortgage repayments, so it’s a growing problem,” Dowling says.
“It’s an incredible turnaround and unfortunately a lot of people went into it without fully appreciating all of what’s involved in buying an investment property.”
Many investors were simply following the herd. “Their next-door neighbour or their brother or their sister had one, so they felt they were losing out on something if they didn’t have one,” he says.
Unfortunately, property investing hasn’t turned out to be easy money by any stretch of the imagination.
Curtains: main costs now facing landlords
LANDLORDS ARE feeling the pinch this year. Not only are rents falling but the list of expenses they face has grown considerably longer. Here are the main running costs for which landlords may have to budget:
1. Building Energy Rating (BER):
As of January 1st, all homes for sale or rent are required to have a BER certificate, which indicates how energy efficient the property is. There is no set fee for getting a BER assessment carried out, as it depends on the type of property, but it usually costs at least €300.
"Like everything else, you've got to shop around to get the best value on it," advises Margaret McCormick of the Irish Property Owners' Association. "There are assessors doing it more reasonably than others."
2. New rental accommodation standards:
New legal standards are due to come into force next month that will sound a death knell for the traditional bedsit, where toilet facilities are shared with other tenants.
While this may be very welcome news for tenants, many landlords will face considerable costs in bringing their properties up to scratch.
The new standards will apply to all new first-time lettings from February onwards, but existing lettings will be given a four-year phasing-in period to comply with the new provisions.
According to McCormick, in many cases individual bedsits may not be big enough to accommodate a bathroom, so landlords may have to integrate bedsits into larger units which, she says, will reduce the total income from the property.
3. Second home levy
A €200 levy on second homes and residential investment properties was unveiled in October's Budget.
4. Tenancy registration:
All landlords are obliged to register tenancies with the Private Residential Tenancies Board (PRTB). The registration fee is €70 for each tenancy.
5. Apartment management fees:
Management fees are a growing area of concern for owners of apartments, including buy-to-let investors, as they can be exorbitant and tend to increase each year.
"It wouldn't be unusual to be paying €1,700 or €1,800 a year for a typical two-bed apartment in Dublin," says Michael Dowling of the Irish Mortgage Advisers Federation. "If you're only getting €1,000 or €1,100 a month in rent for your apartment, that's a month and a half's rent that's gone purely in servicing the management fee."
CAROLINE MADDEN
