The headlong rush for rentals: money & homes

Penny Jackson reports on the Buy-to-Let scheme

A dinner party conversation these days is more likely to be "So have you bought a property for investment, yet?" rather than "How much is your house worth?" The buoyancy of the rental market has created a new breed of property investor: the home-owner with some cash to spare.

Before the property slump, a more expensive house might have seemed the obvious financial path to take, but the trauma of negative equity has left everyone more cautious. Owners learnt to their cost that houses can go down as well as up in value and although they now wish to take advantage of a strengthening property market, this time they will not risk the family home.

It was during the recession that the rented sector took off. The traditional first-time buyer felt it safer to rent, while lettings became a lifeline for those stuck with a home they couldn't sell. Landlords at this time also saw the benefits of the 1988 Housing Act that ended the "fair rent system" as well as giving them the right to recover property at the end of a tenancy. Owning and letting began to look attractive to those who had never considered it before.

Reports of high rental yields and a strengthening sales market have further encouraged people to shift their finances into an investment they can walk round the corner and inspect. This was a key factor in John Derby's decision to become a landlord. He wanted to be able to keep a close eye on his investment. In his fifties with the mortgage on a family home in London almost paid off, he found himself cash rich after a redundancy payment and bought when the market was low. "I paid pounds 45,000 for a one- bedroom flat in Acton, which was a bargain because it had off-street parking. I spent pounds 5,000 doing it up and I let it for pounds 165 a week," says Mr Derby.

"Initially I was paying 16 per cent to an agent who managed everything. But after I bought a second flat I decided to look after them myself. If a flat does need a plumber, say, a letting agent has no incentive to keep costs down. I now pay 8 per cent to an agent for finding and vetting tenants and handling the references and contracts."

What else has he learnt about the role of a landlord? "Choose a place that is easy to let, not because you like it, and do it up to good standard - second-hand furniture is out of the question. Always go round immediately a tenant has a problem and never accept hard-luck stories about late rent. I came down like a ton of bricks when it happened to me," adds Mr Derby.

However, anyone who wishes to take out a loan under the new Buy-to-Let initiative has to use the management services of an agent who belongs to the Association of Residential Letting Agents (ARLA), a self regulatory body with professional indemnity cover. The ARLA scheme has brought on board four mortgage lenders who offer loans of up to 80 per cent of a property's value, in line with the rates for owner-occupiers and take rental income into account for servicing the loan.

Since it was launched, letting agents - in the south-east in particular - have been swamped with callers. Andrew Reeves, an ARLA letting agent in Bromley, has seen the numbers increase tenfold in the past few months. "A great many people with a strong asset base now wish to provide for their retirement instead of relying on a pension fund or other form of investment. After five or 10 years of rental income they intend to sell and enjoy the capital appreciation."

Although prime central London has led the rental boom, it is an exceptional market fuelled by company lets - Savills says it accounts for 42 per cent of their business - and a strong overseas element.

Ian Dickson, of the Winkworth estate agency, says there has been a rush of professional people with capital to spare, and now one in 10 buyers in his area, Shepherds Bush in London, intends to let. "Flats as large as possible, especially architecturally unattractive ones, are a sensible choice of investment. We recently sold one to an accountant in his late twenties for pounds 90,000. It is now being let for pounds 275 a week, giving an exceptionally high return of 15 per cent. I have a former council flat for sale at present which brings in the same return. It will have almost zero capital growth, though."

New landlords elsewhere are targetting students as a rich source of rental income. In Nottingham, Tony Pinks of Savills, sees a growing number of people who have been left money buying into multiple occupancy properties or regulated tenancies because they can expect to see gross returns of up to 20 per cent. While in Plymouth, where property prices are not high, student accommodation can produce yields of some 18 per cent net, says Edward Heaton of Stratton Creber. However, under the Buy-to-Let scheme some lenders will not consider loans for property let to groups of students.

And there are dangers lurking. The rental boom has seen the mushrooming of letting agents and neither landlord nor tenant is protected from the cowboy operator. This year has seen the collapse of two London agencies, and there are fears that embezzlement is on the increase.

Simon Agace, chairman of Winkworth, whose branches throughout London have been kept busy from the interest in rentals, is very concerned about the headlong rush to invest in rentals. "It is not for widows and orphans. Rental levels may go higher, but they may go down. Supply could outstrip demand in certain areas. And, of course, interest rates could go up. It is essential that people consult a reputable letting agent or chartered surveyor for a building audit before buying."

Mr Agace warns of the need to have money put aside for a rainy day. "The rental side has grown faster than sales, and as with all booms the bust could follow.No one should buy for an investment just because they were told at a dinner party that it was a brilliant thing to do."

ARLA Buy-to-Let hotline: 01923-896555. The Joseph Rowntree Foundation Index of Private Rents and Yields is available free from The Centre of Housing Policy, University of York.