Buy-to-let property could offer returns of over 7%
Rising rents, tight mortgage lending and a stagnant property market have created the perfect storm for the buy-to-let property market.
Yields are strong: investors in the sector pocketed an average return of 6.1% in 2011, according to buy-to-let property expert BM Solutions, with yields reaching 7% in the north of England last year.
It's all about location, location, location - picking the right area for rental potential is key.
A recent report from Savills and Rightmove found that seven London boroughs - Newham, Greenwich, Tower Hamlets, Islington, City of London, Southwark and Hackney - are forecast to deliver net total annual returns of more than 8.5% over the next 10 years.
It also expects places such as Elmbridge in Surrey, Reading, Woking and Milton Keynes to yield more than 8% over the next 10 years.
Areas that will always let quickly are typically city centres, attractive suburbs with good transport links, and areas with low unemployment.
Kesh Thukaram, a landlord and member of the Landlords Syndicate, adds: "One key factor that I have maintained is to ensure any property I have is within 0.8 miles of a Tube or train station. Transport links are of high priority and key to a quick let."
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As for the property itself, look at it objectively as an investment rather than as somewhere you personally would want to live. Try to find properties where there are "hidden value" opportunities - this could be anything from renovating the garden, removing a porch or adding an extra bathroom or bedroom. The yield can improve massively just by making small changes.
Stuart Law, managing director of property specialists Assetz, suggests looking at smaller properties such as flats, rather than big houses, because the yield is much better. "Look at properties that a first-time buyer would want to buy," he says.
"The market has been depressed over the past few years, but as the mortgage market picks up, there will be an influx of first-time buyers wanting to buy small properties. That's an efficient exit strategy."
BEST BUY-TO-LET DEALS
|Coventry||3.75%||Fixed to 31/3/14||£2,499||65%||To 31/3/14||LV|
|Nottingham||3.89%||Base +3.39% for 2 years||£1,999||75%||For 2 years||L|
|Market Harborough||4.15%||1.34% discount for term||£895||70%||None||V|
|The Mortgage Works||5.79%||Fixed to 31/5/15||2.50%||80%||To 31/5/15|
|Skipton||4.59%||Fixed to 30/6/15||£1,295||70%||To 30/6/15||R|
L = Free legal work for remortgages; R = Free valuation & legal work for remortgages; V = Free/refunded valuation.
Source: London & Country
If you're considering buying in an apartment block, Law emphasises the importance of checking the block as whole, and sounding out its management company. "Walk around the whole building and make sure it is well-maintained. Bad management - faulty lifts, rubbish in the hallways for example - can reduce rental income by 20%," he warns.
Law suggests ringing up lettings agencies posing as a landlord and asking about the demand in the area and possible rental income. Also you could ring up as a tenant and ask about average rents in the area as part of overall research.
Being flexible is paramount for a landlord, and this is true when offering the property either as furnished or unfurnished. Look at the market, research similar properties and assess their offers is. Property websites Rightmove, Prime Location and Zoopla are a good place to start.
"An unfurnished property tends to attract more long-term tenants, as they want to make it their own. Decide on the type of tenant you want, and go from there," advises Law. "But, it's always worth offering something different, too."
So you've found the property, but what about the money to buy it? The buy-to-let mortgage market has picked up with gusto lately, and interest rates are gradually coming down. There are currently 468 buy-to-let mortgages on the market.
The rates on "best-in-class" mortgages tend to gather under the 5% mark, with the best three year fix on the market at the moment hovering around 4.2%.
"Don't just look at the interest rate," warns David Whittaker, managing director of Mortgages for Business. "There's also the fee to consider. Some providers take a flat fee, or a percentage of the total mortgage, which could be up to 3%.
"Look at both charges to get a better overall picture."
Mortgages for Business (www.mortgagesforbusiness.co.uk) and Paragon (www.paragon-mortgages.co.uk) have websites with search engines that let you put in details such as property value, loan amount and rent, to find the best mortgage products.
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As a novice investor, employing a management agency is a smart move, at least at first. However, you should expect to lose around 12% of the gross rent to an agency, making a loss of around 35% a year when void periods and the cost of repairs are added.
As well as vetting tenants, checking references, collecting rent and taking care of repairs, a management agency also has a good understanding of the relevant legislation, says Matt Martin, divisional sales director at Your Move. "There are a lot of changes in legislation for landlords going on at the moment, and a management agency will keep you up-to-date with these changes," he says.
Unfortunately, there can be times when the tenants don't pay the rent. Landlords have several options for dealing with this. The tenant will already have supplied a deposit, and although this will be locked up in a deposit protection scheme, the landlord can set out an argument for keeping it. In addition, Section 21 of the Housing Act 1988 states that a landlord has a legal right to repossess the property, which can be invoked if a tenant withholds rent.
This feature was written for our sister magazine Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.