The Intermediary Mortgage Lenders Association (IMLA) has published a new report seeking to gain a better understanding of Private Rented Sector (PRS) providers.

IMLA says its Landlord Survey explodes the myth of the well-heeled investor easily able to absorb increasing costs without passing them on to their more financially-constrained tenants. Instead, the report reveals a market predominantly supplied by small businesspeople making modest profits out of their rented properties – and those with mortgages facing the prospect of struggling to break even in the next two years, with their cost of borrowing soaring by an anticipated 80% as they refinance off historically low fixed rates.

The research unveiled the following facts about a landlord’s typical financial position:

• Median average annual rental income: £14,000
• Median average annual profit: Less than £9,000
• Average expected increase in annual interest payments by 2025: £7,700

The report found that contrary to popular belief, most landlords do not have significant resources to draw on outside their rental business. On average, landlords’ non-rental income is roughly in line with tenant income, except in London where tenants earn substantially more.

• Landlord median average non-rental income (national, including London): £39,000
• PRS tenant median average income (national): £37,000
• PRS tenant median average income (London): £50,000

The research found that 80% of landlords own one or two properties, making up 61% of private rented stock, while 13% are classed as portfolio landlords (owning four or more properties) accounting for 39%. Despite a surge in the number of landlords setting up corporate structures since the removal of tax deduction for interest rates in 2017, only 10% of all rented property is held in limited companies, with 90% still held in personal names. Just 3% of the UK PRS is owned by institutional investors.

Changes to tax and legislation have already impacted the viability of many of these small businesses. While only 36% of respondents in this research believed they were paying more tax as a result of the removal of the mortgage interest deduction, based on the income data supplied by respondents, IMLA calculates that 58% will actually be paying more tax. Meanwhile, 64% of respondents said increased regulation had hiked their costs, rising to 73% of portfolio landlords. When asked what impact a mandatory rent freeze would have on their rental business, 7% said they would be forced to sell property or exit the market.

Despite the serious challenges to their business, the one heartening takeaway from this report is that the majority of landlords are committed to remaining in the PRS for the longer term. In contrast to widespread predictions of a mass exodus, 53% of mortgaged landlords plan to buy more rental property over the next five years, as do 25% of unmortgaged investors. Only 21% and 17% respectively say they will sell property in that timeframe. This may reflect a desire to meet rising tenant demand, and is welcome news in a sector which desperately needs supply.

It is worth noting that this research included both mortgaged (38%) and unmortgaged (62%) landlords, and that the average Return on Investment (ROI) across the board was 3.7%. Some politicians seem to subscribe to the vision that corporate or institutional investors could help to address affordability issues in the PRS. This modest ROI suggests otherwise, and that the PRS will continue to rely on small businesses for supply.

Kate Davies, executive director of IMLA, said: “The PRS plays a vital role in the UK’s housing landscape, providing homes to 20% of households. While a great deal of attention is, quite rightly, paid to the difficulties faced by tenants, there has been surprisingly little understanding of landlord finances and the strains on these, until now.

“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, while debt-free landlords may well do the same in order to make an adequate return, even if that is lower than current returns available elsewhere.

“There are tough times ahead for all parties in the PRS, and it is in everyone’s interest to understand the pressures involved. Landlords’ tenacity is to be commended – it is a great relief that so many plan to stay in the sector and increase supply when they can. Policymakers should beware adopting any policies which could upset what is already a delicate balance, and ensure they do nothing further to deter the small businesses which form the backbone of the PRS from continuing to invest.”

IMLA is inviting all parties with an interest in the PRS, including tenant lobby groups, central government and local authorities, to enter a dialogue to better understand the landlord position and improve the way in which the sector functions for its customer base of tenants.