Buy-to-let
Despite the general stagnation in the property market, the buy-to-let sector remains relatively buoyant; according to the Council of Mortgage Lenders, buy-to-let investment in the UK rose by 22% in 2010. The attraction is obvious; currently, you’re looking at a minimum of about £400 per month to rent a one-bedroom flat in London, so on paper, it would seem like a way of making significant returns on an investment as well as an attractive career option. However, buying-to-let is no get rich quick scheme and there’s a lot of competition out there.
To ensure the property will pay off, it’s important to weigh up its potential to make money both now and in the future. Buy-to-let investors need to carefully assess the types of people who would be attracted to the property.
Consider its strengths and weaknesses compared to similar properties and, while the advice of your estate agent will be of some help, they are only going to be looking at the short term and will not necessarily be thinking about an investment that is going to bring in money well into the future.
Buy-to-let investors also need to add into the equation the fact that the property will not always be rented for 12 months a year. Even if you do find the ideal tenant, there is no guarantee he or she will stay for a long time thereby guaranteeing you a solid monthly income.
For example if you were to buy a £275,000 two-bedroom property to rent in South London, the figures might not be quite what you would expect. An estimated £1,000 a month rent with an average of one empty month a year would leave you with an annual income of £11,000.
Once you have deducted costs, including the management fee in some cases, furnishings, maintenance and repairs this figure ends up nearer the £8,000 mark. While not to be sniffed at, this means you would need to be paying significantly less than this on the mortgage for the property over the year before you begin to see a decent profit.
And of course there’s the additional costs, both in time and money, of maintaining, running and furnishing (if necessary) the property, all of which need to be taken into account. You can employ a management agency to help cut down on the hassle of finding the right tenants and then dealing with their problems, but they will take up to 15% of your rent for the privilege.
Greg Heywood started building up a portfolio of properties in 1993. He got to the stage of renting out up to 30 properties at any one time. Having built up enough capital, he set up his own estate agency in Milton Keynes called The Step, which offers alternatives to simply selling houses – such as a part-exchange package. At one stage, the company was the biggest buyer of residential properties in the UK. The company also offers services such as a part exchange service on properties. Currently turning over an annual £35m, Haywood said the buy-to-let market proved more problematic than expected.
“You have to make sure you can keep up with the emotional demand, so be prepared for the stress that it involves. There are also financial worries, even if the rent you’re bringing in exceeds the mortgage on the property. Unforeseen costs can crop up, such as maintenance and compliance issues.”
From these sort of figures it’s clear that buying-to-let, like stepping out on any new career, still requires a thorough examination of your personal finances. Rental income needs to outstrip mortgage interest payments by between 25 and 50% because if there is a gap in the rental period you will have to stump up yourself. Could you afford to pay both the loan on an investment property and the mortgage on your own house if you had no rent coming in?
While buying-to-let is clearly a viable business opportunity don’t rush into a rental property and end up overstretching your finances, because the returns may not be as much as you think.