Green Deal Sends Warning to Buy-to-Let Landlords

A law that will take effect on 2018 is forcing buy-to-let investors to make their properties energy efficient or they cease renting them out. If investors fail to make the necessary improvements, one in ten buy-to-let homes will be unlettable in five years time.

According to The Telegraph via , the law states that landlords must not rent out properties if they bear the two lowest energy ratings – F and G. Intended improvements to change their energy ratings must have them done by April 2018 at the latest.  In a report published by the English Housing survey early February, 11.4% of homes in the private rented sector were rated F or G in 2011.  

Privately let homes had low energy efficiency ratings mainly because of poor insulation.  More than 12% of homes in the private letting sector had no double glazing.  The Government is still studying whether the ban on renting out houses with poor energy ratings will take effect on a specified date or after the end of an existing contract.

To help buy-to-let investors respond to this matter quickly, the National Landlord’s Association has introduced a scheme based on the government’s new Green Deal program.  This means, investors can take a loan for energy-efficiency improvements and will be repaid through the property’s electricity bill.  In the scheme, the reduced energy bills balance the loan repayments, which results in no net cost for both the landlord and the tenant.

Despite the noble cause, this is an unwelcome surprise to Britain’s growing number of buy-to-let investors. Such are growing due to the promise of bigger rental incomes compared to poor returns offered on cash deposits rentals that yield an average of 6% according to real estate agent Savills.

If you are thinking of getting into the buy-to-let business, consider the following:

Put more that 10-15% of your assets in an investment property. A ₤1 million worth of assets puts you at a better position than having just ₤100,000.

Do not over borrow.  It is recommended that you put up at least 50% equity then borrow the rest.  You should also have a backup plan in case your investor decides to bail out.

Research the market very thoughtfully.  Make sure the area and the property are both attractive to renters.  Think about what they need, as what you envision for yourself might not work for them. Consider plenty of bedrooms or good proximity to schools, train stations and anything of essence to them. Visit the area at different times of the day and find out if the area is prone to risks like floods or crime. 

Be prepared for competition.  Business may be good at the beginning, but once other investors take notice, competition is inevitable.  This may bring down costs of rent in the future.

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