It’s truly a unique time to be a landlord. Pretty much as soon as the Government started phasing out mortgage interest relief, it introduced brand new areas of expenses.
The white paper released by Levelling Up looks to make the entire rental sector within England and Wales a lot more Environmentally-friendly. The reason is because of the UK’s desire to be net zero in its carbon emissions by as early as 2050.
Pretty much everyone knows, agrees, and understands why having Eco-friendly homes is a good thing. The latest white paper release has ended up leaving a lot of landlords with a lot more questions than they have answers.
– How much is it going to cost to upgrade your rental?
– Do you end up getting your investment back with the increase in rent prices?
– Do you have access to funding?
– Should you just plain sell and purchase an already Eco-friendly property instead?
– Should you get rid of the idea of being a landlord now?
There’s a lot to break down. This article is meant to address some of the questions you might have so you can make the best decision moving forward.
- Do An EPC Evaluation
If you have a rental property, it needs to have a valid EPC. Your EPC is your Energy Performance Certificate. Here are some of the important details related to your EPC:
– An EPC that you get is valid for 10 years.
– As of 2018, every rental property needs to have a minimum EPC rating of “E.”
– Starting in 2025, every rental will need to have an EPC rating of “C.”
– You currently have to pay a penalty of £5,000 for not having the right EPC.
– Starting in 2025, you will have that penalty rise to a staggering £30,000.
Because of this, you need to pay close attention to your rental EPC. You want to look at your EPC before making any more decisions on your buy-to-let property. Figure out its current EPC and the expiration date. This can tell you a lot moving forward. In general, if your property has a “C” or higher at the moment, you can breathe a sigh of relief.
If your property has a “D” or “E,” you will want to figure something out. There’s going to be work needed to be done on your property. A good way to start is by looking at the standard suggestions on your certificate to figure out how you can boost your rental’s performance.
- How Much Will It Cost To Upgrade Your Buy-To-Let Property?
If your current property has a rating of “D,” you won’t have to do very much to get it upgraded to a “C.” It likely is a lot less work than you may assume. Some of the simplest and most minor upgrades can have you boosting your property to the next tier without having to incur major expenses in the process. Secure property development finance to make the upgrades.
With that being said, below you will find some of the numbers that could work with your typical rental property.
The Government typically recommends that you take a fabric-first approach to these things. They recommend that you start by introducing better insulation to your roof, walls, and even floors. This can help tremendously when it comes to boosting your rating. The current estimate for reaching an EPC rating of “C” is around £4,700 according to the Impact Assessment.
When it comes to monthly rent, according to Homelet Rental Index, the average sits around £1,064.
When you factor that into the equation and spread the overall cost of additions throughout the 36-month term, you can expect to incur a cost of £138 monthly which equates to around 13% of the total rental income it brings in.
For any existing tenancies where the deadline adds three additional years in some cases, the monthly cost decreases even more to around £67 which is only 6.3% of the total rental income of the property.
With this example, you are looking at pure averages. Therefore, it’s not going to be perfect. However, it’s always a good idea to hold 10% of the total rental income aside to factor in general repairs and maintenance.
- Compare The Cost Between Upgrading and Selling
One of the major decisions that every landlord is going to need to make when they are in this situation is whether or not it would be better to just sell or upgrade. Here are some of the options available:
– Keep your current rental and upgrade it.
– Sell the current rental and purchase something more Eco-friendly with the funds.
– Completely get rid of it and stop buying lettings altogether.
A lot of the answers to your questions would come from the age of the property. After all, if it’s really old, it might not be a good idea to spend all of the money upgrading it. It’s also going to depend on whether or not you own it individually or if you own it through a company.
If you are a current landlord and you have a modern rental, you likely don’t need much in the way of upgrades to boost its efficiency. This is especially true if it’s already well-insulated. However, if you own an older property, you might find that you need to sink in a lot of money into your rental which could tempt you into selling it.
Here are some of the major factors that are likely to impact your decision:
– Energy Prices
The energy prices right now are constantly changing. They are dynamic and in a constant state of flux. While there aren’t any regulations around the EPC ratings of properties occupied by owners, it still impacts the market for energy-inefficient homes. Thus, you might find there to be much less interest in prospective buyers which can lower the prices to cover the cost of upgrading.
– Selling any investment property is going to force you to pay Capital Gains Tax when you are an individual owner or investor. If you have it under a company, you’ll need to pay Corporation Tax. You also need to factor in any commissions and fees. You also need to factor in Stamp Duty. When you purchase a property for investment purposes, you will need to pay an additional 3% due to the Second Homes Supplement fee being added.
– If you own more than one rental property through a limited company, you could opt to sell one of them to get the funds needed to pay for the other upgrades required. All of the profits that you get from the upgraded rental would stay in the company and you wouldn’t be subject to paying corporation tax with it. Also, you can still claim the home improvement expenses as a legit business expense.
– When you are an individual, it’s not the same. Any profit made is going to get taxed. This is true whether you were using the funds to re-invest in another property or not. Thus, it could be that retaining your current property and making the upgrades needed is a much more logical option for your financial situation.
- What About Government Funding?
Within the white paper released, there is a phrase that appears. This phrase is, “where practical, cost effective, and affordable.” It’s not entirely known what this applies to. However, it could mean that some buy-to-let properties would be given some sort of leeway.
With that being said, the official word is that the majority of the costs are going to have to be paid out by the landlords. The Government is primarily citing the fact that you get better property valuation as the benefit of doing it.
Whether or not there will be any government funding is still a question yet to be answered. There’s also a lot of lobbying to be done to try to sway the government to foot some of the bills. The future 2024 General Election could provide some sort of pledges that help landlords with this.
Therefore, if you have a buy-to-let that is currently performing better than expected, it could be worth letting it sit until we get further clarification. You may find that grants come available sooner rather than later and the pressure that is currently being placed on energy prices could decrease which might make them less of a drastic talking point for both tenants and homebuyers.
- Plan Your Improvements For The Best Results
If you conclude that you will be upgrading your existing rental, you’ll want to have a well-optimized and managed plan to ensure that you make the costs more manageable.
You’ll want to get yourself ahead of any deadlines and set aside all of the money you need from the rental income you get monthly. This can help you avoid having negative cash flow when it comes time to make improvements. You can avoid a lot of the hassles including:
– Having to fork out paying for everything at the same time.
– Having to beat the last-minute crunch for getting things in order by 2024.
– Having to deal with the increase in labor costs as demand peaks.
– Having to worry about contractors being in limited supply when everyone else is making their upgrades to meet the deadline.
– Getting minor work done when your tenants are out at work.
– Planning major work when your tenants are on holiday to minimize disruption to their lives.