Mark Dampier: Buy-to-let may be no shelter for your cash

The analyst

The British love of housing is legendary; the stuff of dinner parties and potential general election defeats. Over the past 20 years a new breed of investor has emerged: the buy-to-letter. Generally they have done well in a period of falling interest rates. Not only have they achieved a good yield but a fair measure of capital appreciation too.

Much has been written on the UK housing market over the past week. I wonder for how much longer the impressive returns on buy-to-let investments can continue. More concerning are the poor comparisons I see between buy-to-let and cash deposits.

The dramatic fall in interest rates over the past few years has left many people scrabbling around for better investment returns. Buy-to-let increased by 19 per cent in volume and 31 per cent in value last year, according to the Council for Mortgage Lenders.

This coincides with deposit rates falling to around 1.5 per cent. News media in particular give headline yields on buy-to-let of 5 per cent to 6 per cent. In an extremely superficial comparison the yield of course is far superior to cash deposit. Yet interestingly in a time when the rest of the financial services industry is rightly being asked to be more transparent on fees, the unregulated buy-to-let industry, along with many television programmes devoted to property, has little to say on costs or fees.

I am not anti buy-to-let, but it is a little more complicated than buying the house next door. The professional or more savvy buy-to-let investors tend to seek out properties under the stamp duty threshold in unpopular areas with yields of 8 per cent plus. My worry is a new brand of investor is emerging who believes buy-to-let is a safer alternative home for their capital than the bank or building society. In this case, is a yield of 5 per cent to 6 per cent enough and is this the yield you actually receive?

I would argue it isn't and I also think buy-to-let investors have to accept they are unlikely to receive any yield for the first year at least. The costs of buying the property must be considered, particularly if the purchase price is above the stamp duty threshold. Add solicitor costs, service fees if it is a leasehold property, and management costs and most of the first year's yield will probably disappear.

Other costs must also be considered. The property might need furnishing and landlord's insurance would also be prudent. There are also maintenance and repairs to consider. At the very least these can be time consuming and a hassle. The alternative is to pay a company to manage the property on your behalf, thus incurring further costs. Buy-to-let properties are also prone to periods of vacancy when there will be no rent coming in. These other costs could easily cut the headline 5 per cent to 6 per cent yield in half. Finally, it must be remembered that secondary property can be illiquid – it could be difficult to sell quickly if you require your capital back.

Many buy-to-let investors are also failing to consider the impact of rising interest rates, in my view. At some stage interest rates will have to rise again. The summer of 2015 is being predicted as the most likely time; convenient for the coalition government given that it would be after an election. Should cash deposit rates rise to say 4 per cent or 5 per cent, buy-to-let investments will start to look less attractive in comparison. Some might point to capital appreciation as being able to compensate, but once you delve below the headlines it becomes clear that outside London there has been virtually no recovery in property prices.

I am a natural cynic of politicians who are famous for their policies designed to please the electorate in the run-up to a general election. The funding programmes the government has designed are more useful to help that feelgood factor. There will be a price to pay, in my view, but this won't come until after the election. Unless you are a professional buy-to-let investor be careful. Buying the flat or house next door is not true buy-to-let. Do your sums carefully and I think you will find you want a yield well north of 5.5 per cent to make it really worthwhile.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
i100
Sport
footballFollow the latest news from tonight's friendly
Arts and Entertainment
arts + ents
Arts and Entertainment
All the people: Graham Coxon, Damon Albarn, Alex James and Dave Rowntree
musicThe Magic Whip, album review
News
people
News
Presenter Jack Nicholson and George Clooney pose in the press room after 'Argo' won the trophy for Best Picture during the 85th Annual Academy Awards on February 24, 2013 in Hollywood.
people
News
The two faces revealed by the ultraviolet light
Scholars left shaken after ultraviolet light reveals faces staring at them from medieval manuscripts
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Marketing Manager - B2B, Corporate - City, London

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Loren Hughes: Financial Accountant

    £45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

    Sheridan Maine: Finance Analyst

    Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

    Day In a Page

    Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

    Machine Gun America

    The amusement park where teenagers go to shoot a huge range of automatic weapons
    The ethics of pet food: Why are we are so selective in how we show animals our love?

    The ethics of pet food

    Why are we are so selective in how we show animals our love?
    11 best bedside tables

    11 best bedside tables

    It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell