Should you or shouldn’t you? At one point the question of whether to invest in a buy-to-let property was, to many people, a no-brainer. Yes! would come their reply. But not so today. Some experts are advising, if not urging, anything from well, maybe to no, definitely not. So, what has changed? How can you minimise any emerging risks? How, finally, can you capitalise on any remaining potential rewards?
It is easy to appreciate the lure of buy-to-let. You borrow money to purchase a house. You get a tenant into that house. Their rent pays off what you owe, and some. Then you just sit back and watch your investment rise in value. When this type of investment first became available to individuals, rather than just developers, the average home was selling for around £65,000. Today, eleven years on, the average home is selling for some 290 per cent more.
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Advocates of buy-to-let insist there are still gains to be made. Hamptons International, an independent mortgage broker, refers to price predictions. Technical director Jonathan Cornell says: With predictions of 5-7 per cent growth in 2007, the housing market remains a good bet for a healthy return in the long run.
Paragon, a group of financial companies, refers to rental demand. John Heron, managing director of mortgages, says: Demand for rental properties certainly shows no signs of declining. He points to the ongoing shortage of homes and to changing social and demographic factors: There is a rising number of students, young professionals and immigrants who need rented accommodation.
Nice and easy
If all that wasn’t tempting enough, lenders are making it easier than ever to sign up to a buy-to-let mortgage. The deposit required to secure one has fallen. Borrowers used to have to provide 25 per cent of the loan value. That has fallen to 15 per cent or even 10 per cent. In some cases it can be as low as zero per cent.
The rental cover required has also fallen. Once borrowers had to be able to receive rents that equalled 150 per cent of their mortgage repayment. So, if your monthly repayment was £500 you would need to be getting in £750. Enough, in other words, to cover the costs of being a landlord: letting agency fees, maintenance costs and ‘void’ periods when the property was sitting empty. Now, however, some lenders are prepared to do business if you are receiving rents that equal just 100 percent of your mortgage payment.
What’s not to like?
If buy-to-let appeals, it’s understandable why you might ask ‘what’s not to like?’ For one thing, covering your costs on a month-to-month basis seems to be getting more difficult. For another thing, interest rates are rising. And, for yet one more thing, house prices may not necessarily go in the direction you hope.
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According to the Royal Institution of Chartered Surveyors, in recent years the yield – the amount of profit made annually – on buy-to-let has halved to 5 per cent. This drop is even more disquieting in light of the latest news from the Bank of England. Earlier this year it pushed its base rate up to 5.25 per cent.
As for house prices, it is no guarantee they will continue their current trend. Fred Harrison, executive director of the Land Research Trust and author of Boom, Bust: House Prices, Banking and the Depression of 2010, sounds a warning. He thinks prices will peak this year, and then go into freefall. You, and others, may disagree but then this is an expert who accurately anticipated the last crash.
Is there profit in property?
For those of you who maintain that buy-to-let is right for you, what is the best way forward? To help answer this question we have drawn on three sources of expertise – Mark Sismey-Durrant, chief executive of Heritable Bank; Ray Boulger, spokesperson for the independent mortgage broker John Charcol; Sarah Beeny, presenter of Channel 4’s Property Ladder. Here is their collected wisdom:
- Be sure to identify your target market properly. When looking for a matching property, remember the three golden rules: location, location, location. Check, then, for good transport links and access to desired amenities. Check too for a suitable look, feel and ambience.
- After achieving the feat of finding a property that meets this criterion, be thorough in finding out how easily, or otherwise, it can be rented out. Naturally, get quotes from three different letting agents.
- As you do your sums, always account for all the costs of being a landlord. As summarised earlier, these include letting agency fees, maintenance costs and ‘void’ periods when the property is sitting empty.
- If you are considering a property that requires some attention, prepare yourself for the challenges. Be willing to work hard to find, oversee and keep reliable tradespeople. Also be willing to keep a tight rein on a budget that could spiral out of control.
- Once you are in a position to apply for a mortgage, do, as with any purchase, shop around. Go through the pros and cons of the two main options. A fixed-rate mortgage will set your repayments, giving you peace of mind about your monthly outgoings. A tracker will give you the benefit of interest rates coming down. In addition, think about whether you would sometimes like to be able to overpay, or underpay, your repayments.
- If you have big ambitions, and see yourself building up a portfolio of buy-to-let properties, do everything possible to minimise your risks. The key to this is diversity. Invest in different types of properties, different types of markets, or different areas all together – though ideally ones you still have some local knowledge of.
- Finally, be patient. We all know what they say about rushing and fools.
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