Should landlords avoid older properties due to changing EPC rules?

With major changes to energy efficiency standards for buy-to-let due to come into force from 2025, your clients may be wondering what to do for the best. Lorenzo Satchell, Together’s Specialist Account Manager for London and the South, shares his take on what EPC changes mean for landlords, whether they’re seasoned pros or considering their first investment.

“Older properties have always been a favourite with buy-to-let landlords, whether it’s two-up, two-down terraces offering the perfect first home for young professionals or larger Victorian villas prime for converting into houses in multiple occupation (HMOs).

“But where older properties may offer more room for development (and potentially a greater return on investment), new regulations around energy ratings may mean older rental properties suddenly look far less attractive to the landlord looking for a good return.

“The proposed Minimum Energy Standards for rented properties will shift from an E rating to a C rating under the new rules, and making changes isn’t optional. The new regulations will be introduced for new tenancies first from 2025, followed by all tenancies from 2028.

“However, with 60% of the UK’s current housing stock still rated D or below, the scale of the challenge is clear. Making these necessary changes to rental properties can be disruptive and costly to landlords – particularly as research puts the average upgrade bill at between £6,000 and £10,000.

“And that may mean your clients who would usually go for something older where they can add value may be reconsidering how they manage their portfolio between now and 2025.”

If not now, when?

“Your clients may think it’s worth putting off any improvement work, but getting an older property up to scratch can take longer and cost more than you think. Plus, not making sufficient changes by the time the new regulations take effect could see landlords hit with a fine of up to £30,000. Properties that don’t comply also can’t be re-let until they meet the required standard, so the repercussions could be much greater than a fine and a delayed renovation bill. No landlord wants an empty rental property that’s not paying its way.

“So, what should landlords do? After all, the rental market is booming with property in high demand and older properties continue to be readily available, which could prove attractive for landlords willing to put in a bit of work.

“My patch, in London and the South, continues to be lucrative, with Rightmove’s latest data highlighting a rebound in demand in London as people return to the office to work and move closer to major cities, or at least within comfortable commuting distance of work. So it’s clear buy-to-let is still a viable investment. But for many landlords the sums aren’t as straightforward as they used to be, which may prevent some taking the plunge, or cause existing landlords to rethink their portfolio now.”

Do the new regulations mean older properties aren’t an option?

“Absolutely not. While data shows that homes built before 1900 generally have an E rating or lower, all is not lost if your client does have older homes in their portfolio, or has their eye on a historic property. With a little time and money, older homes can be brought up to the required standard, and the improvements they make could even make their property more attractive to potential tenants.

“If they’re adding to their portfolio and don’t have sitting tenants, improvements that increase the energy efficiency of a property – like installing a new boiler and double glazing – can be lumped in with other renovation work and factored into any potential borrowing, all in one go. Or, if they have tenants in place, making less intrusive improvements like adding cavity wall insulation or switching to LED lighting could mean you hang on to that trustworthy tenant for longer and reduce the need and cost of remarketing your property, while moving them closer to hitting the 2025 requirements.

“Plus, if they’re considering liquidating some of their stock over the next few years, a property with a better EPC rating is likely to attract a better price and more attention from buyers who aren’t up for renovating themselves.

“We’re also seeing more first-time landlords taking an interest in older properties. Those currently renting in London, for example, might not have the deposit (or the income) available to purchases an expensive first home in the city, but can afford a property which is suitable to let further afield. We’ve experienced cases recently where these first-time landlords decide to purchase a property they can add value to (such as an older building with a low EPC rating) and let it out for a while, providing them with a second income and the opportunity to grow their deposit for their own home in London in the future.”

Wouldn’t it be easier for them to go with new builds that already meet EPC standards?

“While insights suggest a lot of landlords are buying new builds which already meet the energy efficiency standards instead of holding out for a doer-upper at auction, there are challenges, in both availability and yield.

“Landlords buying off plan, or choosing an almost-new property that’s ready to move into, are competing not only with other landlords but with private homebuyers who don’t have an appetite for DIY, and will most likely pay a premium for the convenience. And with prices continuing to rise, it’s unlikely that the yield on a new rental property will be as strong.”

How can smart financing options help your Buy to Let clients?

“Whether your client is looking to do some general upgrades and include energy efficiency measures into the cost, or need to do a whole raft of improvements just to bring their property up to scratch, short term funding like a bridging loan or a longer-term arrangement such as a second charge loan could prove a good choice.

Securing a bridging loan against a rental property, or another property in their portfolio could allow them to make the necessary investment– if they’ll need less than 12 months to complete the required work. After they’ve made the improvements, and potentially increased the value of the property, you could help them refinance onto a new buy-to-let mortgage.

“Alternatively, if they’ve got a great deal on their current mortgage and they don’t want to refinance, or if they want to make improvements over a longer period of time, a second charge loan could be more suitable. The second charge mortgage will run alongside, but independent of their current one – so if they want it to end sooner than their existing buy-to-let mortgage, it can. In fact, they can borrow over as little as four years.”

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