Rent generation fuels a buy-to-let bonanza

Published 06th Jun 2011

Rising rents, cheaper mortgage deals and positive house price forecasts are behind a huge resurgence of interest in buying property to let.

Mortgage lenders, brokers and estate agents are reporting a sharp upturn in business as investors take note of Britain’s growing army of tenants. The appeal is clear – rental returns of ten per cent or more are not uncommon, even before hoped-for price increases.

But investors still need substantial deposits to get mortgages. In the current patchy property market they also need to identify the areas and types of property where tenants want to live.

Buy-to-let remains controversial. Speculative landlords, often buying unsuitable and overpriced properties in pursuit of rapid price gains, are seen as contributing to the 2008 banking crisis and the demise of lenders such as Bradford & Bingley.

Landlords are also blamed for locking ordinary people out of the market. Last week’s ‘generation rent’ report, commissioned by Halifax, found that three quarters of 20 to 45-yearolds want to own a home, while two in three believe they will never afford to.

First-time buyers in today’s tougher mortgage market need to find a deposit of £30,000 – or £50,000 in London. As a result, lending to first-timers has slumped to a record low. Lending to cash-rich investors, on the other hand, is rising. Both the number of lenders offering landlord loans and the volume of landlord lending grew by 20 per cent last year.

Nigel Terrington, chief executive of specialist landlord lender Paragon, says: ‘We are in the midst of a significant change in housing ownership, with the proportion of households in privately rented homes growing.

‘This is not a short-term blip. Landlords are benefiting from unprecedented levels of tenant demand, resulting in improved pricing power and rental yields. The current environment is attracting experienced landlords who may have been inactive during the credit crunch back into the market. It is also appealing to new landlords.’

Housing shortages are expected to increase rental demand and prices. The Centre for Economics and Business Research think tank last week predicted annual price rises of four per cent over the next four years because not enough homes are being built.

London, with its diverse economy, high demand and acute housing shortage, is firmly on the radar of investors. Stephen Ludlow, director of ludlowthompson.com, an estate and lettings agency specialising in inner-London flats, says: ‘I’m a London agent, so I may be biased, but given the city’s expected population growth it is difficult to see how there will ever be enough stock to meet demand.’

Other cities also offer opportunities. Lynsey Sweales, 31, a self-employed marketing consultant, owns six buy-to-let properties in her home town of Norwich, bought between 2001 and 2006.

The properties are one or two bedroom flats or houses, either in small blocks or on the edge of newer housing estates. Lynsey, whose first job was in the mortgage industry, is hands-on as she knows Norwich’s property market intimately.

Four of her six properties have been vacated so far this year, three of which she immediately rented out again, in two cases with higher rents.

The fourth property, which had been neglected by the former tenant and needs about £1,000 of refurbishment, became free late last month. Lynsey has already had a number of inquiries.

But Lynsey’s experience, like that of most serious landlords, has not been one of easy riches. Buying two properties at high 2006 prices means she is heavily mortgaged – about 70 to 80 per cent – across her portfolio. One-off costs, such as refurbishments, bite into returns.

‘It is a good market right now,’ she says. ‘If I had available money, I would invest further. But currently my rental income covers my costs, nothing more. And with interest rates likely to rise I am being cautious.’

Lynsey, who is active in the National Landlords’ Association, has several tips for aspirant investors.

‘Maintain good communication with your tenants,’ she urges. ‘Have an emergency fund equivalent to four or five months’ rent per property and aim for longer tenancy agreements, such as 12 months, which enable both parties to budget.'

CASH PILE: Ex-council flat offers a ten per cent reward

It's a three-bedroom, former council flat in a 1950s block in Mile End, east London, and is being marketed by London agent Ludlow Thompson at £250,000.

The flat currently fetches £400 a week in rent. That creates a headline yield – the rental return divided by cost – of 8.3 per cent. But by borrowing, even at today’s higher mortgage rates, landlords can enhance that return.

A current best-buy landlord mortgage, for example, is Coventry Building Society’s three-year fixed rate of 4.75 per cent. To qualify you need a minimum 35 per cent deposit (£87,500) and £5,000 for stamp duty, legal, loan arrangement and other upfront fees.

The monthly interest-only mortgage costs would be £643, which when added to the flat’s service charge of £115 a month, plus insurance, would leave a net monthly income of about £800, or £9,600 a year. Putting that £9,600 against the initial capital outlay of £92,500 gives a pre-tax return of 10.3 per cent.

But the calculations assume the flat is let constantly at £400 a week with no empty periods or ‘voids’ and no allowance is made for maintenance and repairs.

Higher mortgage rates after the three-year fix, or a fall in the flat’s value, or anything else that might affect its future mortgageability, all pose substantial risks.

Source: ' ThisIsMoney '

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