New research from YouGov shows that more than half of buy-to-let landlords suffer from “money illusion” – confusing monetary gains with real gains.
The “Buy-to-let: Landlords and Mortgages 2013” report reveals that just a quarter (25%) of buy-to-let mortgage holders take inflation into account when assessing monetary gains from their property. However, more than half (51%) do not, leading them to have unrealistic expectations of the returns they envisage from their investment.
Buy-to-let landlords have seen a drop off in both median rental returns and capital gains over the past ten years. Between 2002 and 2006, they received between 4-6% in rental returns, a figure that has fallen to between 1-4% since 2007.
Over the same period, the reduction in capital gains has been even more precipitous. Before 2003, YouGov's figures show that buy-to-let landlords saw over 15% capital gains, a figure that fell to 7-8% between 2003 and 2006. However, since 2007, these have reduced further to less than 4%.
The reduction in rental returns and capital gains has gone hand in hand with a decrease in the number of buy-to-let landlords that see their properties as a long term investment. In 2008-9, 52% of buy to let landlords considered their property a long-term investment a figure that fell to 37% by 2012-13.
Meanwhile, the proportion of buy-to-let landlords who see their property portfolio as a short-term investment is now back at the levels seen before the financial crash. The YouGov Report shows that in 2013, 56% of new landlords see their buy-to-let property as short-term investments, a similar level (55%) to those who have been landlords since 2008-09. -This followed a dip among those who became new landlords in 2012, among whom only 50% saw their property as a short-term investment.
YouGov's research shows that many buy-to-let landlords do not consider key deductions from rental income when calculating rental return. While 93% think about mortgage interest payments, only 68% take account of letting agency fees and 46% budget for other management expenses.
Simon Mottram, Financial Services Consulting Director at YouGov, says: “A fair number of buy-to-let landlords appear to have unrealistic expectations of what they will get out of their properties as well as what they need to put into them. The money illusion can mask a great deal of risk that people can put themselves in because of falling returns from increasing inflation as well as the cost of additional expenses. Potential buy-to-let landlords should go into property ownership with their eyes open, being aware of the costs and potential pitfalls as well as the possible gains.”
