The prevalent notion of landlords as affluent investors easily absorbing escalating expenses without affecting their tenants’ financial burden is being challenged by a recent report released by the Intermediary Mortgage Lenders Association (IMLA). The study, derived from the Landlord Survey, paints a picture of the rental market primarily consisting of small-scale entrepreneurs, earning modest profits from their rented properties.
Contrary to popular belief, the report highlights that these landlords, many of whom operate as small businesses, face challenges in maintaining profitability. With impending increases in borrowing costs—a projected 80% surge as they transition from historically low fixed rates—it’s anticipated that a considerable portion will struggle to break even within the next two years.
The financial snapshot provided by the report showcases a stark reality:
- Median average annual rental income: £14,000
- Median average annual profit: Less than £9,000
- Anticipated rise in monthly interest payments by 2025: £7,700
Most significantly, it reveals that the typical landlord’s financial resources are limited, mirroring the income levels of their tenants, except in London where tenants earn substantially more.
Kate Davies, the executive director of IMLA, expressed concerns, stating, “Our research shows that many landlords are small businesses with modest financial turnover and trading profits, facing rapidly rising costs. Sadly, reality dictates that many mortgaged landlords will have no choice but to increase rents in order to keep their businesses viable.”
The study unveils that the majority of landlords—80% of whom own one or two properties—are not shielded from these financial pressures. Despite a surge in landlords setting up corporate structures after the removal of tax deductions in 2017, only a small fraction (10%) of rented properties are held in limited companies, with the vast majority (90%) held in personal names. Institutional investors own merely 3% of the UK Private Rented Sector (PRS).
Tax changes and legislative alterations have notably affected the viability of these small enterprises. While only 36% of respondents believe they are paying more tax due to the removal of mortgage interest deductions, IMLA estimates that 58% may actually face increased tax burdens.
Approximately 64% of respondents indicated that new regulations had driven up their operational costs, with 7% contemplating an exit from the market due to mandatory rent freezes.
Despite these challenges, there remains a commitment among landlords to persist in the PRS. More than half (53%) plan to acquire additional rental properties in the next five years, indicating a continued desire for investment. Conversely, only 21% intend to sell their rental properties during that period.
As the landscape of the rental market navigates these turbulent financial waters, the report underscores the fragile equilibrium and urges policymakers to tread cautiously to avoid deterring these small businesses that form the backbone of the PRS.