The landlords who pay rent

Even if you're a tenant yourself, you can still start a property empire. By Stephen Pritchard

Homes in eight out of 10 towns are now out of the reach of first-time buyers, according to the lender Halifax. As a result, would-be homeowners are having to be more creative about how to step on the property ladder.

One option is to rent their main home, but to buy a property in a cheaper area and then let it out. The idea is that the second property will deliver some equity growth, and possibly some income too. Rising house prices should, if all goes according to plan, allow the owner to build up a deposit in order to buy a place to live in a few years down the line.

This was exactly the thinking that led Paul Doran to buy a property in Bournemouth several years ago. Although he was in his first job, he wanted to get on the property ladder. But he knew he would not stay in Bournemouth forever, so he picked a property with good rental potential.

"When I moved to London, I let the property out for two years whilst I rented in the capital," explains Doran, who now runs his own PR firm. " When the time was right I used equity from the property in Bournemouth to pay for our wedding and towards a deposit for a London house."

How easy is it to become both landlord and tenant?

Buying a buy-to-let property quite straightforward, as long as you find the right property. Buy-to-let mortgages are not based on the buyer's salary or other measures of affordability. Instead, the mortgage company is looking for a rental income that will cover the mortgage interest and a margin to spare.

A few years ago, buy-to-let lenders were looking for a rental income that equated to 125 or 130 per cent of the monthly mortgage interest. They would also want a hefty deposit, typically either 25 or 15 per cent.

But according to Jonathan Moore, the marketing director of the specialist brokers Mortgages for Business, this has now changed. Lenders might only ask for a rental income of 110 or 115 per cent of the monthly mortgage interest, and a handful will now lend up to 90 per cent of the property's value. A few lenders, he cautions, are wary of new-build properties as it is hard to predict the resale value or the rental yield, but most are open to proposals from landlords who have done research.

"We see more and more people buying property to let out in one area whilst they live in another, both among people setting out on the property ladder and professional landlords," he says. "What they look for is the areas with the best potential for capital growth. That is often now the areas around the main cities."

Landlords, for their part, carry out fewer checks on a potential tenant's financial circumstances than mortgage lenders.

If anything, having taken on the responsibility of owning and letting out a property makes a would-be tenant more attractive.

What happens when I buy a property to live in?

If someone with a buy-to-let property sells it before they start to look for a home to buy and live in, it will have little or no impact on buying. Their credit history will show they have managed the buy-to-let mortgage, and this will generally be a plus. They will, if the markets have gone in their favour, have a decent deposit to put down and this will cut the costs of buying by giving access to the best mortgage rates on the market.

Home-buyers who plan to keep their buy-to-let property may face questions from lenders about covering the mortgage during any unlet periods, but it is highly unlikely to prevent them buying a residence.

Buying a property in a cheaper area is a bonus, because the mortgage payments will be more affordable, should the property be unlet. Anyone looking to buy a property to let out should also consider the tax implications. The rules for capital gains tax (CGT) exemptions are more generous for people who let out properties that were once their main residence, although there are time limits. Potentially, however, CGT is due on any increase in equity over £8,800.

Landlords can offset interest, letting agent fees and reasonable maintenance costs against their profit.