What's the best bet in buy-to-let?

The benefits of new-build could outstrip the economics of renovating old homes, says Penny Jackson. But, as ever, it all depends on location, location, location

Bricks and mortar can seem a solid refuge for savings when stockmarkets behave like rollercoasters and clouds loom over the economic horizon. Buying to let has proved its worth in a few years to those who have become landlords for the first time.

Much of the attraction for investors in London and hot-spots throughout the country has been capital growth. Purchases that proved less than ideal for the rental market have nevertheless rewarded their owners by increasing in value. Whether this can continue is much debated, but what is generally agreed is that an investment made for the long term following sound guidelines is increasingly regarded as security for the future.

This is more than likely to include those investors who have had their fingers burned, says Simon Hodson, of Blenheim Bishop, the residential development agent. "Their perception was that they understood the new technology field. It had taken over from the old manufacturing industry and was the way forward. Then when a number took a bath they realised they had no idea what was going on and they had no control over their investment. With a property they do have control, and if everything goes wrong they still have an asset."

Among those with available funds are those still biding their time for the right moment to buy. "There are still a lot of people with money to invest who are waiting like vultures for prices to fall," says Hugh Obbard who runs a company that buys, refurbishes and lets properties for clients in central London. "But the over-cautious who have been sitting on the sidelines have denied themselves the profits that others have clearly enjoyed."

In the past year he has invested some £60m on behalf of investors who like the idea of buying a property to let that needs work, as long as they don't have to organise it.

"In a classic seller's market the last man in can feel foolish if he pays a premium then sees no price movement. I think we are heading for a static market, but our attitude is one very much of adding value to a property.We have our team of in-house designers and builders, so there is no question of anyone turning their back on a job as soon as it is finished." Workmen can start on a property as soon as the sale is completed, so it can be swiftly readied and furnished for tenants.

In the early Nineties, Mr Obbard returned here from Hong Kong to find property values in free fall. But what struck him forcibly in London was that the prices in Kensington and Chelsea and other prime areas had held up far better than elsewhere. "For those looking for assurance of medium to long-term performance we still believe it is hard to better a sensibly geared property in a sophisticated and mature property market, particularly against a backdrop of low interest rates."

Using average interest rates and returns, and assuming modest growth over five years, he would expect the investment would be self-financing and show a return on equity of approximately 100 per cent. He uses as an example someone with approximately £150,000 to invest who buys a property at £450,000 with buying costs of £17,000, plus refurbishment and other expenses adding up to £45,000. The total investment value is £512,000. After taking on an 80 per cent mortgage of £360,000, and assuming a borrowing rate of 6.25 per cent, a gross yield of 6.5 per cent and annual house price inflation of 5 per cent per annum, he arrives at the 100 per cent return on capital.

For anyone embarking on the path of investor landlord, finding the right property for the purpose is a daunting enough task in itself. Laying down a deposit with a developer and acquiring a place "fresh off the shelf" also has its advantages.

At Hamptons International, one of the most common questions asked by potential rental investors is whether a new development or period conversion would make the more suitable investment. To be able to answer this more precisely, over 18 months they compared the performance of two flats in Kensington. When Royal Gate Kensington was completed at the end of 1998 it was valued at £500,000.

An elegant, period, second-floor apartment nearby of a similar size would have been worth £475,000 then. By the middle of last year, the value of the new-build had increased by 35 per cent, and the older apartment had grown by 52 per cent. But the gross yields of the new property were higher because they could charge better rents, and they had lower long-term costs.

Hamptons say the key issues in any investor's decision are timing of the purchase, price, rental values, car parking, lease and service charges. But however compelling the reasons to consider property as an alternative home for a lump sum of money, the warning issued by Hugh Obbard has a ring all too familiar to anyone with Marconi shares. "Investments in residential property may go up or down."

Hugh Obbard and Associates: 020-7373 2300