Personal Finance: The case for becoming a landlord
Guarding against rate movements, making repayments when you want, remortgaging on better terms, or buying a house to let it out
At first sight, residential property investment might not seem attractive. After all, to get anything like a decent house you need a lot of money, particularly in the South.
In fact, this sort of investment is easier than you might think thanks to the increasing number of buy-to-let schemes available from banks, building societies and other lenders.
The appeal of such schemes is that while you are renting out a property you earn a good income; 10 per cent of the purchase price, before costs, is a reasonable annual expectation. Then, when you sell, you could make a decent capital gain.
Around 30 lenders offer mortgages for investors buying to let. That includes seven members of the Association of Residential Letting Agents (Arla), a group set up in 1996 to promote buy-to-let schemes.
Arla helps prospective landlords find properties, though to use its scheme you must borrow from an Arla member and use the money to manage the property. It is possible to borrow up to 80 per cent of the purchase price of a property.
Lenders usually offer loans on the basis of the rent you will be able to secure from a property, rather than studying your income. Several, for example, require a potential gross monthly rental income of at least 130 per cent of the monthly mortgage payment.
The rates on buy-to-let mortgages are typically slightly higher than those on conventional loans. But Ray Boulger of John Charcol, the mortgage broker, says buy-to-let interest rates are falling steadily: "There are some very competitive fixed-rate mortgages available."
John Charcol has been offering buy-to-let loans with an annual interest rate fixed at 6.95 per cent for five years. Simon Tyler, at Chase de Vere, is offering deals at 6.75 per cent fixed for 10 years. Variable rates are available too, so investors must decide whether to opt for certainty about the size of future mortgage payments or whether to bet on interest rates falling in the coming years.
First, however, you need to find a suitable house. "The return on investment properties is very different around the country so location is very important," says Mr Boulger. In general, he adds, London and the university towns offer the best returns, with properties in rural areas being less attractive.
Investors also need to decide whether to appoint an agent to manage a property. Letting agents offer valuable help as they will find and liaise with tenants, sort out the legal issues and collect the rent. The downside is that you will typically have to hand over 15 per cent of each month's rent to your agent as a fee for the work.
Residential property investment is not without risk. Whatever happens, you will have to pay the mortgage, so it is important to keep your costs low. Expect normal running costs, including insurance, to reduce your 10 per cent annual yield to 7 to 8 per cent. There is also the possibility of unexpected costs such as a repair bill. Moreover, if one tenant leaves and it takes time to find a new resident, you will also lose out. In the worst case, you may have to pay legal fees to shift a tenant who does not pay the rent.
Then there is tax. A second home that you rent out is classed as a business asset. So you will have to pay tax on your rental income, though you can set mortgage interest and other costs, but not the cost of furnishing the house, against this.
You may also have to pay capital gains tax on any profits you make when you sell.
It is by no means certain you will make a profit on the sale of your property. House prices have soared in recent years but don't forget the negative equity crisis a few years ago.
If you are investing for the long term, you stand a good chance of reasonable gains, but don't depend on it.
Buying to let is still a potentially attractive investment, not least because of increasing demand for rented accommodation.
At the same time supply is limited. Just 10 per cent of the UK housing stock is currently rented compared with 30 per cent or more in most European countries.
Contact: Arla, 01923 896555.
David Prosser is features editor of `Investors Chronicle'.
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