Wednesday, 5 June 2013

Find the Key that makes Buy-to-Let Pay

With savings rates at an all-time low and stock markets increasingly volatile, many ordinary people now view becoming an amateur landlord as the safest way of generating inflation-beating returns.

However, many would-be investors still have one nagging question to ask: have I left it too late?

Cheap mortgages and sluggish property prices, especially outside London, have made buy-to-let affordable for many, says Mark Ellis at broker SPF Private Clients.

“Interest rates have been at historic lows for more than four years and that shows no sign of changing,” he says. “Lenders are also easing their criteria, which makes it easier to get a mortgage.”

In addition, Ellis points out that landlords benefit from strong tenant demand, as many first-time buyers can’t muster large enough deposits to buy a property of their own and are forced to continue renting instead.

With the UK population rising and housing in short supply, tenant demand should remain high, according to Ben Thompson at the Legal & General Mortgage Club.

“If you buy the right property, you can generate healthy investment income now, with capital growth in the years to come,” he says.

But don’t invest in the hope of making a fast buck, says Ashley Brown from broker Money-Sprite. “The days of double-digit house price rises are gone. Buy-to-let is primarily about generating income and you should view it as a medium to long-term investment.”

In the short term, your property may even fall in value, he warns.

“But if you are getting strong rental returns every month, then over 10 or 15 years, your investment will pay dividends,” he says.

Interest rates may be low now but the only way is up, so the key is to play safe.

“If you are generating only enough rent to cover your mortgage now, you could be in trouble when rates rise,” says Brown.

You also have to put a lot of time and effort into finding a right property, he adds.

“Buy somewhere close to where you live, especially if you plan to manage the place yourself, because you don’t want to have to drive hundreds of miles when something goes wrong,” he says.

“A large local employer, such as a university or hospital, should ensure strong tenant demand.”

Becoming a landlord is much harder than setting up a savings account or investing in stocks and shares.

“You have to upgrade and maintain your property, and brace yourself for bad tenants, which is part and parcel of being a landlord,” says Brown.

“You can mitigate the risks by hiring a reputable letting agent to vet prospective tenants, but this will come at a cost.”

Buy-to-let is a safe haven compared with the stormy waters of the stock market, says David Whittaker, from specialist buy-to-let broker, Mortgages for Business. “It should remain strong for years to come, and the chances of a property market crash are remote, so you certainly haven’t left it too late to invest.”

The downside is that selling up isn’t always easy.

“You could get stuck with a property you don’t want, leaving you exposed if house prices fall,” warns Whittaker.

Buy-to-let investors may also face tougher competition as first-time buyers creep back into the market, with numbers rising by 15 per cent in April to 22,000, according to figures from LSL Property Services.

This is making it harder to snare bargain properties, says Mark Dyason, director of broker Edinburgh Mortgage Advice.

Another concern is that rents are beginning to slow down. The average UK rent rose just 0.8 per cent in the last 12 months, according to the Countrywide Monthly Lettings Index.

Rents in inner-London actually fell by a dramatic 6.3 per cent, and by 4.1 per cent across the South-east.

Further figures from Countrywide show the average buy-to-let property generates income of £842 a month but the amount you actually receive depends on the size of your property and location.

A one-bedroom flat in England, Scotland and Wales typically generates £679 a month, whereas a property with four or more bedrooms earns £1,392.

Before investing, you must work out the likely yield on your chosen property. This is calculated as the income you earn divided by the cost of the property. Cheaper properties often produce higher yields.

At present, Wales offers the highest average yield at 6.7 per cent, followed by the Midlands and the North at 6.5 per cent.

Yields in pricey inner-London are lowest of all at just 4.6 per cent.

Nationally, the average yield is 6.2 per cent, three times the rate you will get on a Best Buy savings account in the current low-interest environment.

If you’re tempted to get into buy-to-let, do your sums carefully and don’t overstretch yourself, advises Ellis.

“Avoid borrowing to the max,” he says.

“But keep some money for emergencies, and to pay your mortgage during so-called ‘void’ periods, when your property lies empty because you can’t find a tenant.”

Even when you have acquired a property, expect complications. Nine out of 10 landlords believe that complex tax, licensing and regulatory changes will make their lives tougher in the coming months, according to lender Paragon Mortgages.

In addition, the Government has even suggested that landlords must check the immigration status of tenants, although this proposal is likely to get watered down.

If your property is a house in multiple occupation (HMO), with three tenants or more sharing joint facilities, you must also meet new standards and obligations.