The frantic pace of the buy-to-let market in recent years has died down to a respectable hum, but the market offers plenty of less traditional ways to invest in buy-to-let. From investment in development flats to residential property funds, student accommodation and holiday homes, the choice is getting broader all the time.
The different options have their own levels of complexity, risks and returns; and some require more initial investment than others. But, if researched and planned properly, all can reap rewards.
Development flats
One of the most popular options is to buy an off-plan – unbuilt or unfinished – property on a newbuild site.
Urban Logic offers discounts of up to 15 per cent of the purchase price for off-plan properties. Operations director Guy Davis explains how it works: “We negotiate a bulk discount from the developer on behalf of investors. Investors can reserve a property through us and normally exchange contracts within 28 days. By the time the property is complete, its value will have risen.”
A flat worth £100,000 with a 15 per cent discount would cost £85,000. By the time it is ready it might be worth £110,000. Investors could either let the flat or sell it on straightaway, theoretically making a £25,000 profit.
Most developers will insist on a 5 per cent deposit, and Urban Logic charges a ‘finder’s fee’ of between 2 and 4 per cent. With solicitor’s costs too, the initial investment comes to about £9–10,000. Rental income is taxable and you might have to pay capital gains tax when you sell.
Managing director of Landlord Mortgages, Lee Grandin, says: “It’s a high-risk, high-reward strategy. You have to pay a premium for off-plan properties and the valuation can be as much as 10 per cent out too, which could wipe out any savings made by the discount. But they’re good for people looking for returns in 20 to 25 years and for people who want to balance their portfolio.”
Residential property funds
Another option for alternative BTL investors is residential or commercial property funds. These funds allow customers to invest in property without the hassle of being a landlord.
The Keydata Residential Property Fund takes advantage of government incentives to create affordable homes by granting tax relief on the conversion of properties above shops and retail units.
Roddi Vaughan of Keydata says: “It’s basically a limited partnership owning about 120 properties. Investors get tax relief on their investment while the flats are being converted. When the flats are finished they will be mortgaged and the capital or value of the property released to convert more properties. Rental income will cover the mortgage payments, so the real aim of the scheme is capital growth.”
The investment, a minimum of £10,000, will be tied up for a planned term of 10 years. On the plus side once you have handed over your money, there is little else you need to do except wait for a good return in 10 years’ time. But if prices fall into negative equity, the investment is risky.
At the moment residential property funds cannot be placed in a self-invested personal pension (SIPP). But from next April the SIPP rules change and residential property funds launched after this time can be included, so expect to see many more of these funds launched.
Student accommodation
If you have children at university, buying them somewhere to live and investing at the same time might be a good option. However, unless you want to be a long-distance landlord to a house full of students, you will need help managing the property.
Campbell Property runs a You Own Your Own (YOYO) property scheme which allows parents of students in Birmingham to buy them somewhere to live. The child of the investor effectively lives in the property rent-free while rent from the other tenants covers mortgage and maintenance payments.
Clients can pick from YOYO services including: property search and location, property purchase, refurbishment and set-up,tenancy and property management. Managing director Victoria Campbell says initial investments can vary, from as little as £5,000 up front if customers opt for a 100 per cent mortgage, to £40–90,000, depending on the size of the property bought and the refurbishment needed: “The yields can be as high as 12 per cent, which is high, and they are let 50 weeks a year,” she says. On the downside, lenders are often nervous about lending on accommodation designated for students in case it later needs to be repossessed and sold. And students might not be the best tenants.
Holiday lets
An increasing number of landlords are buying property overseas in order to rent it out to tenants or holidaymakers.
In the past it was difficult to obtain the necessary finance for overseas property but lenders are now coming up with more flexible competitive products. Low-cost euro loans are popular, with the euro base rate hovering at around 2 per cent compared to the Bank of England base rate at 4.75 per cent. So borrowers pay less on a euro mortgage than they would if they borrowed in sterling.
There are also tax advantages for holiday lets over buy-to-lets too. Capital gains tax on profits when you sell is lower and you claim more of your rent to reduce the income tax bill. However, living so far away from your investment can be troublesome and you will need to employ a local agent to take care of its day-to-day maintenance and running. You will also need a good knowledge of the property market in your chosen country, especially what it is going to do in the future.
If you need a mortgage for any alternative buy-to-let investment a specialist broker can help, as some lenders are sceptical about certain schemes, while many will not lend on overseas property.
Tony Capon, head of intermediary mortgages at Derbyshire Building Society says some lenders are “a bit nervous” about builders’ discount incentives as they feel the initial valuation might have been inflated, rendering the discount negligible.
Lenders also have issues about “houses of multiple occupancy” (HMOs) and student accommodation falls into this category. Capon says: “There are certain requirements with regard to houses where there are multiple occupants not in the same family. These relate to fire safety, kitchen facilities and smoke alarms. Some lenders prefer not to touch them, while at the Derbyshire we would give it special consideration.
Holiday letting
Colin Brunt, 43, from Southend, bought a log cabin in Lapland in Finland in August 2003. The cabin is let to both Finns and tourists most of the year, but in quiet letting periods Colin takes his family there on holiday.
Colin has a euro loan, which is the European equivalent of a mortgage, and he funded half the purchase by selling some buy-to-let property he had in the UK.
“The developer arranged a loan with a Scandinavian bank over a 15 year period for 50 per cent of the value at excellent rates – currently 3 per cent,” said Colin.
“Net rental yields are around 7–8 per cent and capital growth is about 10 per cent. The apartments come with guaranteed rental income of 8 per cent for 2 years. I have been so excited with my investment that I have set myself up as an agent to sell the properties in the UK,” he added.
