Investing for income: Let your property work for you

Why buy a house that you never intend to move into? To rent it out to gain a regular source of income, just as millions of others do.
Craig Storey and Alison Godson have just splashed out pounds 76,000 on a two-bedroom house in Cheltenham. But they don't plan to move in after they've finished renovating it in March - they hope to find a tenant.

"We had saved up quite a bit in a deposit account and thought it would be a good idea to invest it in property," says Alison. "We hope that the rental income will mean it pays for itself, and eventually grows so that we can pay off the mortgage, retire early and live off the income."

The couple renovated their own house eight years ago and were keen to work on another property. By investing their savings in it, they're hoping to build up a decent nest egg without taking any of the risks associated with the stock market.

Using property as a way to create a regular income has become big business. Around two million households rent private accommodation, and that figure is growing. The rise is encouraging more people to shy away from increasingly volatile stock market investments and pick up an investment which pays a regular income - through rent - as well as offering long term growth, through the rising property market.

This has taken off in the last two years or so because of an initiative from the Association of Residential Letting Agents (Arla), which has around 1,250 members throughout the UK who are professional letting and property management agents.

It set up its Buy-to-Let initiative in September 1996 to encourage growth in the private rented sector. The aim of the initiative was to encourage lenders to make loans available to private investor landlords.

"In the past two years we have honed the attractions and opportunities of this form of property investment," says Andrew Reeves, the Arla National Council member responsible for the Buy-to-Let scheme. "Buy-to-Let gives the investor a solid investment to walk past, and a hedge that can be seen and touched."

Clydesdale Bank became the eighth member to join. The other seven are Capital Home Loans, First Active, Halifax Mortgage Services, Mortgage Express, NatWest Mortgage Services, Paragon Mortgages and Woolwich Direct. They each offer a range of Buy-To-Let loan schemes, including fixed and capped rates, that aim to be as comprehensive and competitive as the range of loans available for normal home ownership.

There are a number of lenders offering Buy-to-Let mortgages outside the Arla scheme, including the Alliance & Leicester, Bank of Scotland, Chelsea, and Yorkshire Bank. UCB Home Loans, for instance, launched its Second Property Mortgage at the end of last year, offering a two-year fixed rate of 6.99 per cent. With a minimum loan of pounds 25,000 and maximum pounds 250,000, the loan is aimed at customers buying a second, or third, property for rental purposes, and includes a 1 per cent cashback.

Alison and Craig took out their second mortgage through the Chelsea Building Society, which required the couple to have a 20 per cent deposit, and charged them 0.25 per cent above standard variable rates. "We recognised that currently buying a second home to let out is a very attractive prospect," says Darren Stevens of the Chelsea.

Independent financial advisers have mixed views about buy-to-let as an investment. For starters, they warn that property prices will not always increase. "We always advise clients that they must be prepared to invest for up to 10 years and ride out any storms," says Mark Howard of Maddison Monetary Management, a firm of independent financial advisers.

There can also be problems with tenants, of course. "We warn clients to be prepared for non-payment of rent, solicitor's letters, and finally eviction," says Mr Howard.

Damage to property is a further worry for prospective landlords. "They must be prepared to spend a lot of money when a tenant leaves in order to bring it up to scratch once more, and held deposits do not always cover the expense.

"But for people who need little borrowings this can be a good long-term investment area, especially compared with the returns offered by many deposit-based investments," he points out. But he warns: "People who need to mortgage heavily are in a far worse position, as they need to be collecting some heavy rent in order to make a profit on a monthly basis."

Lenders expect a "loan to value" on the property of 75-80 per cent, and are prepared to advance between pounds 15,000 and up to pounds 500,000, although First Active is unique in offering up to pounds 1m per property. The length of loan varies between five and 30 years, although Halifax Mortgage Services and Mortgage Express are prepared to lend for 45 years.

Confusingly, most lenders operate different structures in working out income multiples. As you'd expect, most take into consideration the expected rental income, but the level of that varies widely.

Manchester Building Society, for instance, lends up to six times the annual rental income. The Bank of Scotland, on the other hand, operates on the basis that it will lend on the standard basis of three times one income plus one times the second or 2.5 times joint income, less the existing mortgage, plus five times the rental income.

Lenders can be as aggressive in the buy-to-let arena as they are in the general market place. At the time of going to press, it was possible to pick up a 6.74 fixed rate for up to 10 years through the Yorkshire Bank, or a 6.99 capped rate until 2002 through Alliance & Leicester.