House Doctor: 'Is buy-to-let a good way for my friends and me to own a home?'

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The Independent Online

Question: Two long-standing friends and I, all in our late twenties, can't afford to buy on our own. But we want to club together our £47,500 savings and buy a small £150,000 house in Newcastle and rent it out to students. Hopefully, in five years, we'll be able to sell it for more than we bought it and use the gains to buy our own places. Is it a reasonable idea?

J Hull, by email

Answer: Your tilt at the housing ladder is an intriguing reversal of that taken by most; buy-to-let speculation before home ownership. Buy-to-let played a major part in overheating the property market during the 10 years to the end of 2007, so, post-crash, it's an ironic twist to see a generation of buyers trying to use it as a way to grab hold of the first rung of the ladder. However, you may be biting off more than you can chew.

First, despite a large joint deposit – which would give you a 31 per cent equity stake and ensure a fairly competitive mortgage at a loan-to-value of 69 per cent – your youth and inexperience will count against you.

"A major issue that will limit choices with lenders is the fact that you are all first-time buyers and don't own other property," David Hollingworth at broker London & Country warns. "A lot of lenders will not lend to landlords that don't own their own homes."

Second, your short timeframe is a huge obstacle. "The risk is that in five years, the property won't have risen enough in value to generate a big-enough deposit for each of you to buy your own place," Melanie Bien of broker Private Finance says.

"Money invested in property is tricky to access, and in what is already a depressed housing market, you are buying in an area predicted to be hardest-hit by public-sector job cuts."

You've other costs to factor in as well: paying an agency to find tenants; running costs; upkeep; abiding by new landlord regulation protecting tenants' deposits; and how to cover the mortgage payments if you face a "void" period without anyone to live there.

Your deposit will stand you in good stead, though, and there are lenders who will consider you, including Barclays, Northern Rock and NatWest. And student towns do represent one of the brighter spots of the buy-to-let property market. According to agent Knight Frank, rents rose on average by 2.2 per cent across England and Wales in the year to September 2010.

housedoctor@independent.co.uk

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