The buy-to-let investment market has been decimated by the recession and landlords are grappling with the financial consequences. The difficulties they face have also been compounded by increased government levies and taxes.
Previously they were enticed to invest by the government with hefty tax reliefs – such as Section 23 and Section 50 tax incentive properties – but now landlords are dealing with increased taxes, following a series of measures introduced in recent budgets.
And it is the amateur buyers who invested during the boom years that have been hit the hardest.
This time last year, the reduction on mortgage interest tax relief on investment loans came into effect, following the April 2009 budget.
The interest relief was reduced by 25 per cent, increasing pressure on landlords.
However, the key problems they face are more fundamental.
In the subsequent 12 months, the difficulties facing landlords have mounted, driven by the recession and the ailing property market. The problems they now face are a further decline in rents, a continued oversupply of rental property, a further fall in property prices and, in many cases, higher mortgage interest rates.
To add further cost to an already difficult situation, the €200 non principal private residence (NPPR) tax, basically a tax on a second home or investment property, was implemented after the supplementary budget last year.
The tax was due at the end of September and again at the end of March. By now, investors should have paid the charge twice on each investment property, otherwise they are incurring penalties.
Increased interest rates are also a cause of concern for landlords. Ratings agent Fitch believes there is a high risk that the number of people defaulting on mortgage repayments is set to increase. Its latest report notes that Irish landlords appear to be under particular pressure, as arrears levels in buy-to-let mortgages are significantly higher than for home loans.
As a result of the increased costs for landlords and the property downturn, it’s not surprising that there has been a dramatic decline in the number of buy-to-let investors entering the market and in the overall share investors hold of the residential market.
The latest Irish Banking Federation (IBF) figures confirm this.
The IBF figures show that the residential investment letting segment of the mortgage market contracted significantly last year. In the last three months of 2009, the segment continued to decrease in both volume and market share terms.
Buy-to-let now represents less than 5 per cent of the overall mortgage market, compared to about 25 per cent during the boom years.
Of the total 45,818 mortgage draw downs last year, the IBF figures show that just 3,018 of them (6.5 per cent) related to the residential investment letting segment of the market. By the final quarter of last year, that percentage was just 4.8 per cent. By comparison, in the final quarter of 2006, 14.1 per cent of the overall mortgage draw downs were for buy tolet investments.
Michael Dowling, spokesman for the Independent Mortgage Advisor Federation, said there was a whole combination of factors, which were mitigating against any potential investment.
‘‘There’s no real demand from people to buy, despite the argument that it’s a better time to buy because of the lower prices,” he said. ‘‘There’s no real appetite. While taxes continue to increase it won’t change.
‘‘The yield is more attractive now, but the maximum amount of finance on offer is 75 per cent of the purchase price and that loan-to-value ratio could go down to 50 per cent. Investors are being forced to put in a greater contribution.”
The cheapest standard variable rate on the market for investment loans is with AIB, at 4.2 per cent.
The bank’s three year fixed rate on investment loans is 4.65 per cent. But interest rates are likely to increase in the coming months.
Dowling said the current sentiment and circumstances marked an end of such investment for the foreseeable future.
For existing landlords, Dowling said they should ensure that they registered each new tenancy with the PRTB or they could not claim mortgage interest relief on the investment. It costs €70 to register each new tenancy.
The greatest issue facing landlords, according to Dowling, is the risk of what would happen if the government decided to abolish mortgage interest relief altogether.
‘‘It would save €1.2 billion for the exchequer,” he said. ‘‘For a government under pressure, it’s still on the agenda. It’s a far more palatable decision than doing the same for residential loans or introducing water rates.”
But Dowling said such a measure would have ramifications for the property market and the resulting failure of investors to maintain loan repayments.
Margaret McCormick of the Irish Property Owner’s Association, which represents about 5,000 landlords, said the precarious position of many buy-to-let investors was being exacerbated by flaws in the relevant legislation. She said the incidents of tenants breaking lease agreements and battles to evict tenants, who could not or simply would not pay rent, had increased.
‘‘It can be quite difficult and quite costly for landlords when tenants remain in situ without paying rent,” she said. ‘‘It can be a long drawn-out process to get a tenant who is failing to pay their rent out of the property.”
Housing minister Michael Finneran has recognised the issue and has outlined plans to tighten up the loopholes in the Residential Tenancies Act.
Currently, if a tenant fails to make a rent payment, the landlord has to issue a notice in writing demanding payment of rent within 14 days. But if a tenant fails to pay, terminating a tenancy and the number of days’ notice depends on the length of the lease agreement.
The major issue for landlords and tenants alike is that the majority don’t know exactly what their rights are under the act. The Private Residential Tenancies Board (PRTB) was established in 2004 to resolve disputes between landlords and tenants, operate a national tenancy registration system, and provide information and policy advice on the private rented sector.
The PRTB dispute resolution service replaces the courts in relation to the majority of landlord and tenant disputes.
However, to ensure a fair and neutral service to both parties, the PRTB cannot provide legal advice or specific guidance to either party in relation to their dispute. Therefore it is up to the landlord to approach the PRTB or engage a solicitor.
Dublin-based firm Landlord Solutions has emerged from the collapse of the property market and the complications for landlords arising from the recession.
It was founded last year by Joe McGinley and a group of solicitors and letting agents when they recognised how complicated it could be for amateur landlords encountering problems with bad tenants.
‘‘With the turn of the economy and the way things have gone, I saw the opportunity opening up,” said McGinley, who has six years’ experience as a letting agent.
‘‘There are similar companies operating in Britain. I knew someone who had used the service over there, and that’s where I got the idea from.”
The company’s founders realised that falling property prices, falling rents and demands for rent reductions were dramatically changing the landscape for landlords. They developed a fixed-cost service to help amateur landlords to overcome problems with defaulting tenants.
They aim to do this without incurring huge legal costs on top of mounting lost rental income, and while recognising the landlords’ obligations in respect of the tenants.
Three of the directors of Landlord Solutions are also directors of property firm McGinley Farrelly and O’Connor.
McGinley said initially he believed it would be ‘‘fat-cat landlords from old money’’ who would use their service. But it has, in fact, typically been young-to-middle-aged people who bought a property as an investment.
‘‘It’s definitely not the traditional landlord with five or more properties and very wealthy,” he said. ‘‘A lot of our clients have made small mistakes when they rented the property and it came back to bite them.
‘‘The majority of cases we deal with are with first-time landlords, who are usually in their late 30s or 40s or retired, and in most cases bought the property as an investment either for their children or their pension.”
Most of the cases Landlord Solutions is currently dealing with are related to rent arrears.
McGinley said many landlords were not financially savvy and made simple mistakes, such as failing to check their bank accounts to see if their tenant had paid.
‘‘A lot of landlords would be using the rent that comes in to pay mortgages, so they’d have the rent going directly into a mortgage account, which isn’t their current account. They wouldn’t be checking it and suddenly they are six months in arrears.”
Marcus O’Connor, a director with Landlord Solutions, and a former PRTB adjudicator, said that, in one recent rent arrears case, a widower was renting out a two-bedroom apartment in Dublin city centre as her only source of income.
The tenant, a man, was €4,000 in arrears. The landlord called the tenant on a Wednesday and he promised faithfully that he would pay by the following Monday.
‘‘The landlord came down to the apartment on Monday evening to find that the apartment was empty, along with a number of items gone, including the showerhead,” he said.
Landlord Solutions has found where the tenant has moved and has served a notice on the tenant to pay the outstanding rent. O’Connor said the tenant will be brought in front of the PRTB and a demand for rent in arrears will be requested, along with the costs associated with replacing the items he took.
McGinley said some of the rent arrears were because the tenants were genuinely in financial difficulty, but that there were also tenants who were merely opportunists.
McGinley said most of the cases were resolved within a few weeks. The company is handling about 20 clients a week.
The services cost from €99 to €895, depending on the situation and whether Landlord Solutions has to represent the client in front of the PRTB and whether there is an appeal. For the foreseeable future, McGinley believes that the service will be in demand.
He said that whether or not the economy improved, there would always be problems between landlords and tenants.
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