Spot the next hot location

You can still make money from buy-to-let properties, but you need to know where to look. It may be that you need to consider locations 100s of miles away from your own backdoor, say property experts.

Unless you happen to live in one of the current property hotspots, which include Edinburgh, Oxford, Southampton and Manchester, you may have a better chance of cashing in on rising property prices and rental returns if you buy a little further afield.

It’s received wisdom that investing close to home in an area you know well is practical for buy-to-let landlords.

“It’s true that there are downsides to buying a place some distance from where you live,” admits David Lawrenson, author of Successful Property Letting: How to Make Money in Buy-to-Let and buy-to-let advice website www.lettingfocus.com

“For a start, you may have to pay a letting agent to find a tenant for you, which costs around 10 per cent of the rental value of the property, plus VAT,” he says.

“Added to that, if you pay an agent to manage the property, you will have to hand over around 3 to 5 per cent of the amount you earn in rent, plus VAT, bringing the total to 16 per cent, which is expensive.”

Location, location, location

Making easy money from buy-to-let isn’t as straightforward as it was three years ago when house prices were rocketing. So choosing the right property in the right area is more important than ever.

Phil Spencer, presenter of Channel 4’s Location, Location, Location says: “While I absolutely believe there is still a big future in buy-to-let – and I’ve just bought two buy-to-let properties myself – investors today, and over the next few years, are going to have to be a lot more careful and a lot more strategic about what they buy and where.”

Another reason margins are tightening is the increased number of property investors who have piled into the market in recent years. In certain areas, market saturation means tenants now have such a wide choice of properties to rent, competition between landlords is so tough rents are being forced down.

“You have to do your research, get to know the area and read the local papers to keep in touch with prices,” according to James Mayne, spokesman with mortgage adviser Purely Mortgages.

He adds: “It’s also worth considering buying a place in an area where you used to live. For example, if you now live in the south east but are originally from Newcastle or Leeds, buying a rental property back home may be easier, as you already have knowledge of the local area,” says Mayne.

Mortgage lenders have no problem with prospective landlords buying outside their immediate locale.

David Hollingworth of mortgage brokers London & Country says: “Lenders make their lending decisions based on what a valuer or lettings agent tells them about rental values in the area, they won’t be concerned about how near to the property you live.”

Hard cash

Buy-to-let mortgages require a larger deposit than most residential loans, so you’ll probably need to put down at least 15 per cent of the value of the place you are buying.

“Northern Rock is the mainstream lender that tends to offer the highest loans, of up to 87 per cent LTV,” says Hollingworth: “But lenders have to be convinced that the rental returns stack up and the property is worth the money.”

Now the margins on buy-to-let are tighter you have to be able to cover the mortgage should it lie empty for a couple of months at a time, as well as paying for maintenance costs, adds Lawrenson.

“There are still opportunities out there but where once rental income would be higher than the monthly mortgage payments, now it’s more likely to break even, so it’s become more important to make sure you’re getting capital (house price) growth,” says Lawrenson.

The next big thing

Finding the next property hotspot generally involves picking out areas set for regeneration.

Lawrenson suggests buyers get in on the ripple effect and snap up homes in areas adjacent to popular up and coming areas. Also target more established areas, as it’s likely that the surrounding areas will prosper over time, he says.

“Don’t go for places where there are lots of other rental properties around,” Lawrenson says: “You need to be in areas where supply is restricted, and rental properties are in demand.”

Once you have identified the area where you would like to buy a property, make life a little easier by getting a long-term tenant, says Mayne.

“This offers you a bit more security, and may save you some extra travelling, as you won’t have to check out new tenants as often,” he says.

“Get to know the local area and people to keep in touch with developments in the area. Get recommendations for local plumbers and electricians, so you know who to call if the property needs some work doing to it.”