Buy-to-let booms as investors seek real returns

Landlords have prospered as tenant numbers rise and mortgage rates fall. Alister Foye reports

With the price of gold apparently falling off a cliff and savings rates so low that only a handful of accounts keep pace with inflation, more people are looking at buy-to-let for long term returns. No surprise, therefore, that property industry data show the number of private landlords is set to top a million in the next couple of years.

Key to this increase in interest – Council for Mortgage Lenders figures show buy-to-let lending is up 10 per cent on 2011 – is the opening of the loan tap, via the Bank of England's £80bn Funding for Lending scheme. "This has had a material impact on lending by improving liquidity generally," says John Heron, the director of mortgages at specialist lender, Paragon. "It has also put downward pressure on interest rates, which helps first-time investors."

Another factor is the steady rise in rental need in the past few years. "We are seeing increasing tenant demand and a shortage of properties," says Phil Rickards of BM Solutions, one the largest buy-to-let lenders and part of Lloyds Banking Group.

"This may be due to first-time buyers opting to rent while saving for a deposit, or families looking to secure school places by renting properties in the catchment area. Inward migration is certainly a factor, with 500,000 people coming to the UK each year and few immediately becoming homeowners," adds Mr Rickards.

As for investment returns, Countrywide, the UK's largest lettings agent, say the average rental yield is 6.2 per cent gross a year, which compares favourably with current savings rates and stock market performance.

So, how does a first-time buy-to-let investor start the process? "For us, the decision is down to the right people and the right property," says Mr Heron. "We assess the financial capability of the investor, but also have to be satisfied that the rental proposition is viable."

Paragon employs its own surveyors to check the sustainability of any rental proposition, based on their local knowledge. "This underpins value to the investor and provides security to us," adds Mr Heron.

The choice of mortgage is vital, with a range of products and rates now available to first-time investors, both interest-only and repayment. "The past few months have seen rates fall by as much as 1 per cent on certain mortgages," says Ray Boulger of the broker John Charcoal, "However, the best rates still require a 25 per cent deposit, although a few lenders are offering higher loan to value products at the moment."

The majority of buy-to-let mortgages are interest-only, but does that carry an inherent risk? "All lenders' loan-to-rental yield calculations assume an interest-only mortgage," says Mr Boulger, "Otherwise the rental income might not cover the higher payments of a repayment loan, especially when all the other associated buy to let costs are added.

"With most buy-to-let mortgages offered at 75 per cent loan-to-value, and lenders expecting any rental income to be 125 per cent of the loan, there is a fair bit of headroom should house prices fall."

The type of property is also important; many investors got their fingers burnt on new-build in 2008. Although, Daniel Treasure, the managing director of London property firm Lourdes, believes new build are not always a risk.

"The London Docklands market was built on buy-to-let investment. In 2009, prices slumped by up to 15 per cent and rents by up to 10 per cent, which theoretically presented a double whammy for buy-to-let investors," he says. "However, many would-be purchasers decided to rent instead, quickly pushing up rental demand. By 2010, rental prices had recovered to their pre-credit crunch peak and have remained steady ever since."

Once finance is secured, the next question is how to manage the property and tenants. "Any landlord has about 70 pieces of legislation to comply with," says Ian Potter, the managing director of the Association of Residential Lettings Agents (ARLA). "And then there's managing tenants, handling rental and deposit payments and maintenance. This is a lot for any private investor to manage on their own."

A lettings agent can, therefore, offer a valuable service; but at a cost of up to 15 per cent of a month's rent. But, choose your agent carefully, as the lettings industry is yet to be regulated. ARLA licenses its members – almost 7,000 agents handling over 600,000 tenancies – to offer landlords and tenants reassurances over issues such as money protection. "Landlords who use ARLA-registered agents have peace of mind knowing that should a tenant not pay, they are protected. It also works for tenants as it guarantees deposits comply with legislation and are held by a third party."

Mr Treasure recommends landlords use an agent who is accredited by at least one of following voluntary associations: ARLA, Safe Agent, National Approved Lettings Scheme, National Association of Estate Agents and The Property Ombudsman. "These show landlords and tenants they are dealing with an agent who is fully trained, has an audited client account and follows stringent rules with independent redress," he says.

Mark Jones, 30, owns four buy-to-lets in Leeds through an investment partnership with his brothers. They began the venture three years ago, buying two new-build three-bedroom semi-detached houses with interest-only mortgages and 25 per cent deposits. "We knew the area well and made sure we priced them very competitively." They used an agent to help find tenants, and soon let both properties to young professionals.

The next two properties – one three-bed semi-detached, and a two-bed end terrace in the same area – were purchased about 18 months ago. This time, they successfully marketed the properties themselves. The brothers also manage the homes: "In my experience, if you use an agent and there is a problem, the first thing they do is call you anyway; so we decided to do it ourselves and save the money."

Mr Jones says they have begun to enjoy a return of between 7-9 per cent. "Buy-to-let has been a great investment for us and will be for years to come. But research is vital: know your area, know your rental market and be realistic with prices. After all, having a property empty for a month can wipe out your annual profit."

Discover more property articles at Homes and Property
PROMOTED VIDEO
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
people
Life and Style
techApp to start sending headlines, TV clips and ads to your phone
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
Life and Style
tech
Property search
Property search
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Principal Arboricultural Consultant

£35000 Per Annum: The Green Recruitment Company: Job Title: Principal Arboricu...

Trainee Digital Forensic Analyst

£17000 - £18000 Per Annum: Clearwater People Solutions Ltd: Trainee Digital Fo...

Legal Recruitment Consultant

Highly Competitive Salary + Commission: Austen Lloyd: BRISTOL BASED - DEALING ...

Planning Manager (Training, Learning and Development) - London

£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment