We're increasingly a nation of landlords, turning to real estate to shore up our paltry pensions. But are canny investors still taking the plunge into buy-to-let property? The good news is that, by buying shrewdly and manipulating finances, it remains feasible to build up a sizeable portfolio, comprising of anything from two or three to hundreds of units in a relatively short period of time.
Is it a good idea, though? Clearly, if your entire worldly wealth is in bricks and mortar, you would be exposed should the market slump, so, ideally, it ought to be part of a wider investment portfolio. Having said that, if you own, for example, three small flats rather than one large house, there's less risk of no rental income at all.
So, is now a good time to start building a buy-to-let portfolio? According to the Council of Mortgage Lenders (CML), investors consider that interest rates are currently on an upward trend, which could mean a market slowdown. But rates are still historically low and strong tenant demand continues. "Fundamentally, the rental market remains sound and looks set to continue to offer good long-term prospects for astute investors," concludes the CML.
How to begin
Starting out in investment is a nerve-wracking experience, and it's crucial to learn everything you can about the principles involved before you even start looking at property - especially given the recent legislation aimed at landlords.
Read one of the many books on offer, and check out seminars run at major exhibitions, such as the Property Investor Show. But be wary of advertised property investment seminars that promise to make your fortune - most are thinly disguised sales pitches.
For many novices, it's easiest to go to a property investment consultancy (or sourcing agent), such as Assetz. These firms scour the market and do bulk deals with developers - in the UK and abroad - into which they channel their clients' money. They are not regulated, so it's very much a case of 'buyer beware', but they do access deals that many private investors would struggle to find.
Stuart Law, of Assetz, says that £20,000-£25,000 cash plus a buy-to-let mortgage is enough to get started.
Mr Law explains: "At that level, you can invest speculatively hoping that prices will go up, and you can build up equity that way. Speculative investors are typically channelled into new-build properties. The attraction is the discount, which can be up to 15 per cent, when the developer wants to get rid of the last few units in a development.
"Investors who buy well can refinance [remortgage] more or less straightaway after completion, because the property is immediately worth more on the open market than they paid. That extra money can then be put in the bank to cover costs while you find a tenant but, once the rental income starts flowing in, covering your mortgage interest, you can go and buy another property. But you do need always to keep a cash cushion to cover the risk that you won't be receiving any rent, with which to pay the mortgage," he adds.
Mr Law estimates that, even given the expected slowdown in property prices going forward, investors might be able to "double up their portfolio every two to three years - so, after 10 years, eight properties might be achievable".
Investors with more cash - for example, £50,000 to £75,000 - are in a position to build a different kind of portfolio with Assetz. "[Rather than buying speculatively with a view to quick capital growth] the aim is to build your rental income and eliminate all your mortgage debt over a period of 10 to 15 years," explains Mr Law. He estimates that, over that time frame, each £50,000 invested should be generating an income of approximately £15,000 a year.
Other sourcing agents, such as Property for Life, prioritise the property's long-term capital growth, rather than a rental income stream for their clients.
"Ideally, you'd be looking at a portfolio timescale of 20 to 30 years for really good growth," says Adam Woolley, of Property for Life.
If you do use an agent or consultant, ensure that you know exactly where your money is going. Be wary, for example, of schemes where the agent has negotiated discounts on a large 'job lot' of units in a single development to sell on to landlord clients, as competition for tenants could be stiff when the purchases are complete.
Some investors bypass sourcing agents, though, preferring to find and negotiate their own deals on new or second-hand properties. Lee Grandin, of specialist lender Landlord Mortgages, emphasises the importance of getting the figures right in such circumstances. "Historically, buy-to-let mortgages have had a maximum loan-to-property value of 85 per cent," he says. "It's now possible to borrow as much as 90 per cent but, for novices, it's sensible to stick with 85 per cent. It means you can be a little less strict about rent levels, if necessary, and yet still cover your mortgage."
Mr Grandin's other rule of thumb is not to look at a property unless it will deliver a 6 per cent gross rental yield (see box right).
The UK average is approximately 5.2 per cent, according to the Association of Residential Letting Agents (ARLA), so you're basically looking for a bargain that will achieve a good rent, relative to the amount you've paid for it.
As Mr Grandin observes, you therefore need to: "Look out for circumstances where you can add value to a property, either buying something cheap that needs work, or negotiating a lower price (for example, because the seller needs to move fast)."
He maintains that, even in a fairly flat market, canny investors should be able to add 10-15 per cent of value in a year - then they could remortgage to release the next deposit.
"You don't necessarily have to go far," he continues. "In fact, it's sensible for landlords to start looking in a familiar market. One of our top landlords only buys properties in Walthamstow, London - he's got about 120 now. But, if the figures don't stack up, be prepared to look further afield."
Useful contacts
- Property Investor Show (Birmingham, 23-25 March 2007): www.propertyinvestor.co.uk
- Homebuyer Show (London, 2-4 March 2007): www.homebuyerevents.co.uk
- Property Investors Network: www.propertyinvestorsnetwork.co.uk Runs sales-free seminars for investors
- Assetz: www.assetz.co.uk
- Property for Life: www.propertyforlife.com
- Landlord Mortgages: www.landlordmortgages.co.uk
- National Landlords Association: www.landlords.org.uk
Property funds
As an alternative for people with money but no time for direct property investment, it's worth looking at specialist property funds.
Ordinary property unit trusts are not comparable because they focus on commercial property and do not generally borrow money to increase returns.
By contrast, specialist funds - available from managers such as Cordea Savills and Close Brothers, through independent financial advisers - offer access to ready-made residential portfolios, comprising upwards of 30 properties, without the hassle of being a landlord, or the risks attached to a portfolio concentrated in a few individual properties.
The downsides include the high entry levels (expect £50,000-plus), and a typical commitment of five to seven years. But Stuart Law, of Assetz - which runs property funds, as well as sourcing individual properties for clients - says that net returns for investors in Assetz' funds average approximately 15 per cent a year. They're particularly useful if you're interested in more exotic foreign property markets. For example, PropertyBourse (www.propertybourse.com) runs a fund investing in Polish residential property.
Finding the right property
When choosing investment locations, ask yourself: do you want to be near your investment to manage it yourself, or will you use an agent? Can you afford the 15 per cent required for a deposit in these locations?
Ask several local letting agents about local rental yields. It's worth posing as a potential tenant to double-check that they're not talking up the yields.
Meet all the estate agents in the area, even the tattier ones - many buyers won't bother with them, but you might find a bargain. As a general rule, sell through smart agents and buy through tatty-looking ones.
Also, visit as many properties as you can. Some experienced landlords check out as many as 25 properties before committing themselves - there are no shortcuts.
When you finally find a property, make sure you bargain. To that end, learn as much as possible about the seller's personal circumstances. You're looking for loopholes that could help you seal a better deal.
And get a full survey. You need to know about any potential problems for which you'll be liable as landlord. You may also find structural issues that will help get the price down.
But don't pay over the odds. Check out neighbouring prices using the Land Register, www.landregistry.gov.uk.
