As house prices continue to power ahead, the appeal of buy-to-let investments shows no sign of waning, offering the prospects of both income and capital growth.
And, with disappointing returns from pensions saving and the stock market in recent years, it is little wonder that people have looked to the security of bricks and mortar to save for their future.
But questions have remained about buy-to-let as a sensible investment for the non- professional.
Doomsayers have been calling the top of the housing market for more than three years and common sense tells us this cant go on for ever. The question is: is there enough puff left in the bubble for money still to be made?
At the end of last year, figures from the Department for Constitutional Affairs revealed that an increasing number of owners were having their properties repossessed, and evidence from auctioneers suggests that many of these are buy-to-let investors hit by rising interest payments and oversupply of properties to rent in some areas.
James Kersh, director of Merseyside auctioneer Sutton Kersh, says: In 2006, Sutton Kersh experienced a 20 per cent rise in the totals raised from their auctions compared with 2005.
A large proportion of this increase can be attributed to the significant rise in the number of failed buy-to-let commercial and residential properties which are now being offered for sale at auction.
Gary Murphy, partner in auctioneer Allsops residential auction team, said: Last autumn 40 per cent of our catalogue contained distressed sales. But he adds: This, however, does not appear to indicate a slowdown in the residential property market, as these lots are always enthusiastically re-absorbed.
A changing market
So, the market is still moving, but also changing. Research by Landlord Mortgages, the UKs largest specialist buy-to-let broker, found that as many as 92 per cent of would-be buy-to-let investors never actually get beyond dreaming about property ownership or researching the possibilities.
This is no bad thing for those unprepared for the challenges of buy-to-let, as the exercise is never risk-free.
Lee Grandin, managing director of Landlord Mortgages, says: Of those consumers who buy a buy-to-let property, the majority (77 per cent) never expand their portfolio with additional purchases.
But of those who do take the plunge it seems that the age of investors is falling. Nearly 26 per cent of new investors who own just one buy-to-let property are aged between 26 and 35, according to the latest research from Mortgage Trust. This age group also makes up 16 per cent of all buy-to-let investors with up to three properties, compared to 14 per cent six months ago.
John Heron, Mortgage Trusts managing director, said: Traditionally buy-to-let has been perceived as something for the more mature investor. However, recently we have been witnessing an increase in the number of younger professionals choosing to make a considered and long-term investment in property.
So, if you want to dip your toe in the water, how do you go about it?
Along with the traditional exhortation of location, location, location, you should add research times 10. If you are not up to it yourself, it is essential to get professional advice on the type of property you intend to buy, its maintenance and the financing.
1. Research the market
Choosing the right area is vital. This starts with choosing the right town: are you letting to City high flyers, students, immigrant communities? Who will the tenants be, and is the area already saturated with rental properties, which will depress your rent and could lead to voids if there are too many landlords chasing too few tenants?
2. Research the property
This includes the structural and cosmetic condition of the property and the area where it is situated.
Will you need to do extensive repairs or alterations? Is the property right for the demographics of the area? You are not going to let to a family in a run-down student area. Students will not want to live in a leafy suburb, even if you split the house into bedsits.
Remember, you are buying to let, not choosing a home. You need to buy a property for its rental potential. Can the living space be maximised for instance, an extra reception room converted to a bedroom if you are letting to students? You might like a large garden for yourself, but will the tenants maintain it, or will you have to pay a gardener?
Needless to say, never buy a property you have not examined thoroughly a temptation that sometimes occurs at auctions.
3. Research the likely needs of your tenants
On a local scale, think of the needs of your tenants. Is the property near shops and transport? If you are going for the family market, is it near schools? If you are going for the student market, how close is it to the local college and the town centre and entertainment facilities? There is nothing students like less than a long and expensive taxi ride home after a night out.
4. Research the availability of help, advice and services
Are there reliable letting agents in the area, if you dont want to manage the property yourself? What about cleaners and maintenance services to keep the property up to scratch between lets? You dont want to have a void because the boiler is faulty and you cant get a repair man out.
5. Research the time you will need to devote to the property
Are you capable of all the record-keeping and administration that comes with being a landlord or can you afford to pay someone else to do it?
6. Research the regulations
There are myriad rules to follow, ranging from issues such as ensuring the safety of appliances to dealing with the new tenancy deposit scheme.
7. Research the financial implications of letting
You are obviously going to want the best mortgage deal on offer. Can you find this yourself?
According to a survey undertaken by BDRC for Alliance & Leicester Mortgages, more than half of landlords (55 per cent) rely on advisers to make them aware of new buy-to-let deals, giving advice on the deals and arranging the actual mortgage with the buy-to-let lender.
Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, says: It is clear that advice plays an important part for buy-to-let investors. Landlords need their advisers to obtain information that they cant easily get hold of themselves, as well as helping them get the best mortgage product for their needs.
8. Research ancillary financial issues
As well as getting the best loan deal, have a plan B if things dont work out. It is all very well saying you will pay the mortgage with the rent, but what if you have a void, or the tenant falls behind with the rent because of illness or unemployment? It could be months before you cover your arrears, and you may not cover them at all. You may incur court costs in getting an eviction.
Frank Wessely, client partner of Vantis Business Recovery, says that, when problems occur, many mortgage companies will often not allow landlords any leeway and apply to Court for early repossession.
According to Wessely, part of the problem lies in amateur investors failing to factor in costs such as buildings insurance, maintenance and management fees or voids.
9. Research the pitfalls of new builds
Areas of fast development become quickly saturated, and you may find your property hard to let, particularly if developers are offering good deals in the same apartment block to househunters who may be tempted to buy instead of rent from you.
Eighteen months ag
o Portman Building Society became the first lender to refuse to offer buy-to-let mortgages on new-builds, while other lenders increased the deposits for new-builds to 25 per cent of the propertys value, compared with 15 per cent for other buy-to-let loans.
Portman said it was concerned that developers were distorting the actual prices at which properties were changing hands with incentives such as stamp duty paid and gifted deposits, to get round the ceiling of 85 per cent of the purchase price of buy-to-lets.
Choosing a new property in an attempt to avoid the cost of repairs could also be a mistake.
Lee Grandin says: The Association of Residential Letting Agents (ARLA) recently revealed that, with the exception of London, landlords are most likely to opt for properties that are less than 10 years old. This is a very worrying statistic, as it means that, rather than purchasing a property and making improvements to add value, these property investors are heavily reliant on capital appreciation.
This is not a problem in a steadily growing market, but, if the market should fall, investors could find themselves owing their lender money.
10. Research your exit strategy
You may be planning to invest for many years ahead, but what if circumstances change? If your property portfolio increases in value, how will you realise your gains are you aware of all the tax implications of property-owning? Grandin forecasts that, as the BTL market grows, we will see an increasing number of landlords being forced to hold on to properties they may wish to sell in order to avoid huge capital gains tax bills.
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