Too late for landlords?

Is it too late to get your first buy-to-let property in the UK? That's the question lots of people are asking. There is no shortage of information. The trouble is that some surveys forecast a meltdown for property, while others are saying the outlook is good. So, what's the true story?

Since 1973 the annualised average return on property including rents has been about 16 per cent with the biggest returns in recent years. But is the housing market just a speculative bubble? What's driving all this?

Falling interest rates in recent years and rising earnings have helped, but a big factor is the change in demographics. The UK's population is getting ever bigger leading to more demand for housing overall. Unfortunately, supply has struggled to keep up.

Kate Barker in a report for the Government said the UK needs at least an extra 39,000 houses per year to close the gap between the number of new houses being built and the number of households being formed. The Government has promised more house building but many are sceptical they can deliver.

The population is also getting more mobile. There are more migrant workers, more people on temporary working contracts, more people being made redundant, more getting divorced and more students. These factors have all helped drive demand for rented accommodation and seem set to continue into the future.

However, as house prices have risen faster than rents, it has become harder for new landlords to make enough on rent to cover the interest needed to pay their mortgage loans. The gross yield (rent as a proportion of the value of the property) varies from about 4 per cent to 9 per cent. With the typical buy-to-let mortgage rate at about 6.25 per cent, you don't need to be an economist to see that you could earn more by just sticking the money in a high interest account.

Many landlords are hoping that increases in house prices in the long term will make up for any current loss of income. However, poorer novice landlords with no other source of money to draw on don't have the option of waiting for the long term. I talked to a few landlords at the recent London Homebuyer Show. Generally, the mood was positive, though all agreed it's harder to make money now. Whilst some were looking to overseas property for better growth, others were still optimistic about the UK. I couldn't find anyone selling up their whole portfolio, though this could be due to a desire to avoid big capital gains tax bills.

Most landlords expected changes in the rules on Self Invested Personal Pension Plans (SIPPS) to increase demand for UK property. The changes mean that from April 2006, you will, for the first time, be able to hold residential property in a pension plan and roll up capital gains and rents tax free. Some think this will bring a wall of money into the housing market.

Nick Goble, at Winkworths estate agents, echoes the views of many when he says: "To make [buy-to-let] work today you have to do more homework to get the right property. You must negotiate hard too. I'd advise looking in areas adjacent to places that are already trendy. Look at property above shops or ex council properties - these have the best yields." Robin Spencer, at Robinson Perkins & Jackson, in Lewisham, says: "Six per cent gross yields are possible, even in London, if you buy well."

Marsha Wright, the presenter of radio show LocationsUncovered, advises novices to "talk to people who aren't interested in selling anything to you.

For example, ring the planning department of the council. Also, try the local councillor. They'll give you lots of excellent unbiased advice."

Lea Beven, at Housemouseuk.com warns: "Don't forget tenant demand. If you know there is a shortage of two-bedroom flats to rent in an area right now, then that's what you should buy."

What about mortgage financing? Richard Ward, at www.themortgageunit.com says that buy-to-let lenders will usually not lend more than 80 or 85 per cent of the property value, although the mortgage provider, GMAC, is offering 89 per cent. Most lenders, he says, will want to see that the rent is 30 per cent more than the interest on the loan. It is the latter requirement that often scuppers mortgage applications, even when only 75 per cent of the house value is being borrowed. Standard variable rates on buy-to-let loans are usually 1.5 to 1.75 per cent above Bank of England base rates. Cheaper discount and fixed-rate deals are possible, though these usually have larger fees attached.

You need to understand legal responsibilities as a landlord too. Chris Town, at the Residential Landlords' Association, says: "There is a whole raft of regulations that will affect some shared houses as well as new rules covering deposits."

The message seems to be that it's not too late for new landlords to make money - but they have got to be prepared to work harder than ever to buy the right property.