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
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
people
Arts and Entertainment
Bianca Miller and Katie Bulmer-Cooke are scrutinised by Lord Sugar's aide Nick Hewer on The Apprentice final
tvBut Bianca Miller has taken on board his comments over pricing
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
PROMOTED VIDEO
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
in picturesWounded and mangy husky puppy rescued from dump
News
newsAstonishing moment a kangaroo takes down a drone
Property search
Property search
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Project Director / Operations Director

£50000 per annum: Recruitment Genius: This is an incredible opportunity for a ...

Recruitment Genius: Sales Administrator

£16000 - £17000 per annum: Recruitment Genius: A Sales Administrator is requir...

Recruitment Genius: EWI / IWI Installer

£23000 - £25000 per annum: Recruitment Genius: This leading provider of design...

Ashdown Group: IT Support Analyst - Chessington

£25000 per annum: Ashdown Group: IT Service Desk Analyst - Chessington, Surrey...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'