With interest rates at their current level, money in the bank is going to grow so slowly that it might as well be kept under a blanket. By contrast, property prices have soared, far outstripping inflation.
It’s important to assess all the pros and cons of an investment before jumping in. “Remember that property is a long-term game, and if you want to make money from it, never put yourself in a position where you are forced to sell,” explains Rupert Collingwood of the London Management Company.
Most observers agree that investors who put money into flats tend to generate a good return. Generally, flats make better buy-to-let investments than houses, and if your budget will stretch to a two-bedroom, two-bathroom flat.
The second bathroom might sound unnecessary, but the more flexible your buy-to-let property is, the better. When buying a property, it’s not going to be easy to spot a bargain thousands of miles away. The sort of property that is so reasonably priced it can hardly fail to appreciate in value is going to be much easier to spot in your own backyard. In addition, you will have all the vital information about schools, transport and so on at your fingertips. You will also find keeping tabs on tenants so much easier than from another town.
If you are thinking of selling your main home to raise capital and kick-start your portfolio, consider making value-adding improvements first. A loft conversion or extension – assuming you have not employed a cowboy builder – can add 20 per cent to the value of a property, according to a recent Zoopla survey.
Turning an initial investment of £200,000 into a £1 million portfolio is certainly achievable if you do your homework,” says Graham Davidson of Sequre Property Investment. “One possible strategy might be to buy eight properties costing £100,000 each, using a 75 per cent buy-to-let mortgage, and putting down a £25,000 deposit on each. “Invest intelligently in vibrant, up-and-coming cities such as Manchester and Liverpool, and you would soon be in a position to purchase four or five more similar properties.
Novice buy-to-letters are at the mercy of estate agents promising unrealistic rental yields. So don’t trust the agents, do your research and get genuinely independent advice, says Camilla Dell of Black Brick. Average rental yields in central London are a modest 2.83 per cent, and if you only have around £200,000 to invest in a buy-to-let apartment, you may do better in “outer prime” areas, such as Fulham and the City.
If you are pursuing a high-income investment strategy as a means of building a £1 million portfolio, the best tactic is to invest in premium-quality, low-cost shared accommodation for working professionals,” says Steve Bolton of Platinum Property Partners.
With the right tenants, converting a single-occupancy property into one in multiple occupation will lead to significant capital gains, covering the refurbishment costs with plenty to spare.
When you analyse why house prices have grown faster in some areas than others, you will often find that the single most important factor is improved rail links, slashing commute times.
But it is no good waiting until that new station has been built before sinking money in an area. You need to stay ahead of the game, study long-term transport plans and pinpoint areas that will get the benefit of improving rail links in five years’ time.
Keep an eye out for approved local planning applications. They can be found on local authorities’ websites and often give an early indication of areas with good long-term investment potential.
Where planning permission has been granted for major housing schemes, there is often a noticeable ripple effect years before the developments have actually been built.
BUY-TO-LET MORTGAGES: WHAT'S HAPPENING AND THE BEST DEALS
Lenders have slashed rates on buy-to-let mortgages to record lows to keep the market alive as the Chancellor cracks down.
Estate agents and banks reported a last-minute rush to buy second properties before a 3 per cent stamp duty surcharge on second homes arrived on April 1 - and lenders have slashed rates to keep landlord business coming in
The average rate two-year fixed-rate buy-to-let deal has fallen to 3.32 per cent – down from 3.59 per cent last April and 5.21 per cent in April 2011. HSBC and Virgin Money have cut rates on two-year fixes to below 2 per cent.
Virgin Money also cut rates on three-year fixed-rate buy-to-let deals to a new low of 2.48 per cent.
Average rates for five-year fixed rate buy-to-let deals are at a record low of 4 per cent, according to Money facts.
The buy-to-let mortgage you will be offered depends on your circumstances and the lender's criteria. Ideally, they prefer bigger deposits, strong rent to mortgage payments cover and healthy earnings elsewhere. This is Money's buy-to-let mortgage best buy tables and comparison tool provided by broker London & Country can help you find the right deal and fee-free get advice.
Investing in buy-to-let involves committing tens of thousands of pounds to a property and typically taking out a mortgage. When house prices rise, this means it is possible to make big leveraged gains above your mortgage debt, but when they fall your deposit gets hit and the mortgage stays the same.
Property investing has paid off handsomely for many people, both in terms of income and capital gains but it is essential that you go into it with your eyes wide open, acknowledging the potential advantages and disadvantages.
If you know someone who has invested in buy-to-let or let a property before, ask them about their experiences - warts and all.
The more knowledge you have and the more research you do, the better the chance of your investment paying off.
Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals.
Once you have the mortgage rate and likely rent sorted then you must be clinical in deciding whether your investment work out.
Don't forget to factor in maintenance costs.
What will happen if the property sits empty for a month or two?
These are all things to consider. Make sure you know how much the mortgage repayments will be and if it is a tracker allow for rates to rise.
It pays to speak to a good independent broker when looking for a buy-to-let mortgage. They can not only talk you through what deals are available but they can also help you weigh up which one is right for you and whether to fix or track.
You should still do your own research though, so that you can go into the conversation armed with the knowledge of what sort of mortgages you should be offered.
To compare different property's values use their yield: that is annual rent received as a percentage of the purchase price.
For example, a property delivering £10,000 worth of rent that costs £200,000 has a 5% yield.
Rent should be the key return for buy-to-let.
Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time.
This is tax efficient, as you can offset mortgage payments against your tax bill.
If you can get a rental return substantially over the mortgage payments, then once you have built up a good emergency fund, you can start saving or investing any extra cash.
Remember though, people rarely buy a home outright and they come with running costs, so mortgage costs, maintenance and agents fees must be worked out and they will eat into your return.
You may want to consider whether buy-to-let still beats an investment fund or trust once these costs are taken into account.
Once mortgage, costs and tax are considered, you will want the rent to build up over time and then potentially be able to use it as a deposit for further investments, or to pay off the mortgage at the end of its term.
This means you will have benefited from the income from rent, paid off the mortgage and hold the property's full capital value.
House prices are on the up right now but growth has slowed and they could fall again. If property prices dip will you be able to continue holding your investment?
Meanwhile, rates are low at the moment and that is encouraging people to invest with rent comfortably covering the mortgage, but what will you do when rates rise?
Consider too the standard variable rate you may move to after a fixed rate period. What will happen if you can't remortgage?
Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year - this gives a substantial buffer.
Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, such as a new boiler, do not invest yet.
Refs: J Flynn, S Lambert
