Investing in property

More than 10% of all sales are for buy-to-let properties

Buying one property is enough of a headache for most of us. So you might think twice about going through the whole process again.

But more and more people are taking out second and even third mortgages, hoping to cash in on the growing market in buy-to-let properties.

More than £6bn has been sunk into second homes or investment properties in the past few years.

This makes property one of the country's most popular investments, alongside pensions, unit trusts and shares.

In theory, once the tenant is in place, the owner can sit back and count the profits - the surplus of rental income over mortgage repayments.

Rules for Renting

choose a good rental area

ask a letting agent for advice

buy to suit the market

keep an emergency fund

don't expect a quick buck

Of course, in practice things are not quite that simple.

And, like all investments, a great deal of research and care is needed before setting off on the buy-to-let route.

Slow and steady

The first thing to realise is that buy-to-let investing is not a get-rich-quick scheme. If you end up with 10% of your rental income as clear profit, you are doing well.

It also comes with a lot more hassle than an investment in shares or unit trusts.

The legal work and expenses of investing in property are far more onerous. Plus you have tenants, or at the very least property managers, to deal with.

Recent changes in the law have made it easier to be a landlord.

By using assured shorthold tenancies, the landlord has the option to renew or ask for vacant possession at the end of the rental term.

This reduces the risk of being saddled with a sitting tenant, which might make it difficult to sell a property.

This in turn has persuaded mortgage lenders, who charged much higher rates for people buying property as a commercial investment, to offer easier and cheaper loans.

Better quality accommodation

Following the changes in the legal framework, the Association of Residential Letting Agents (ARLA) started promoting buy-to-let mortgages in 1996, in an attempt to improve the market for investment properties and increase the number of rental properties on offer to tenants.

"What opened the gate is that lenders no longer held their hands up in horror at the prospect of buy-to-let, although they're just as prudent as if it were a mortgage on your own home," explains Malcolm Harrison of ARLA.

Deposits on buy-to-let purchases could be high

The standard variable mortgage rates for buy-to-let loans tends to be about 10 basis points higher than a standard home loan, for instance, 5.85% compared with 5.75%.

But an increasingly competitive buy-to-let mortgage market is forcing that rate gap to narrow.

The variety of loans now on offer is also growing and includes fixed rates and discounts, much like the home ownership market.

However, you might be asked for a sizeable deposit of up to 25% of the value of the new property.

A 'controllable' investment

What sort of people are investing in property?

"The kind of people who are buying to let has widened," says Mr Harrison. "Originally they were 40-50 year-olds who were cautious and had never really liked the stock market.

"For them it was an investment that was controllable, understandable and they could actually walk past and see it.

"Now the volatility in the stock markets, low interest rates and even concern about the reliability of pension plans has encouraged more buyers."

The good news is that as supply of rental homes has grown so has demand.

People are becoming more wary of being locked into owning a property because of the volatile market.

Higher divorce rates and short-term work contracts have also increased the number of tenants.

Location, location, location

But becoming a landlord is not without its pitfalls. Like all property buying, the key is location, according to Malcolm Harrison.

"You must go to an area where rental is a big part of the housing scene," he says.

"You wouldn't want to buy a place on the Yorkshire moors. And don't assume the right place will be on your doorstep."

Location is vital - buyers in Edinburgh have struggled to find tenants

Some people look in towns or cities with a big student population, others in places which are attracting new businesses.

But the best advice is often to consult a letting agent to get a good picture of what the market actually wants.

That sort of research can be vital.

Many people who have bought in Edinburgh, for example, have found there are already too many rental properties and demand is weak.

"Buy modestly, whether it's in Kensington or Burnley," says Mr Harrison, "and you can expect an average yield of about 8%."

But finding the right property - and flats with two bedrooms tend to give the best returns - is just the start of your new role as a landlord.

Set up a slush fund

Matthew Reeve, of south London estate agent Mercer Taylor, advises against overstretching yourself.

He suggests that a slush fund (a dollop of extra cash) is needed to run the property efficiently.

"People rely on the rent to cover the monthly mortgage payments, but there will be times when the property is empty.

" We advise they are able to cover a minimum of one month's rent when it is being repaired or is between tenants," he says.

"You need to give even quite small things a lot of thought. For instance, if the washing machine goes wrong, the tenants will want it replaced immediately, and you need to have the money for that."

It is possible to handle the letting yourself, but if you do call in a managing agent, it is likely to cost about 15% of your rental income.

"It's not a free lunch, but if you get the right property in the right place at the right price, the chances are you have a good sound investment over a long period"

Malcolm Harrison
Association of Residential Letting Agents

Matthew Reeve says buy-to-let was unheard of in his area until a couple of years ago.

At one point it made up about 15% of all sales, but that figure is now down to 10% because of rising property prices.

"Whereas you used to be able to buy something here for £70,000, those flats are now selling for £150,000," he says.

"That's good for people who have already bought, but some are finding they can only just about cover their mortgage.

"We have noticed a drop-off in buy-to-let because people can't get the returns. They're looking slightly further out from central London for places that are still close to the Tube line."

Caution is the key

There are some less obvious pitfalls for the buy-to-let owner too.

Returns are subject to fluctuations in interest rates. Higher mortgage payments mean less profit. And don't think you can just bump up the rent - you might struggle to find a tenant.

Caution is without doubt the watchword for moving into this sector.

"You must purchase for the market - don't buy somewhere because you think you would like to live there. It's vital to get advice from a letting agent before you buy," says Malcolm Harrison.

"And remember it's an investment for the medium to long-term.

"It's not a free lunch, but if you get the right property in the right place at the right price, the chances are you have a good sound investment over a long period."