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Saturday, 30 October, 1999, 12:43 GMT 13:43 UK
Buy-to-let - the pros and cons
For sale boards 300
More than 10% of all sales are for buy-to-let properties
Buying a property can be enough of a headache for most of us, so you might think twice about going through the whole process again.

The Property Maze
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 2bn has been invested in this sector in the past two years.

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.

Advice on buying to let 150
Of course, in practice things are not quite that simple and, like all investments, a great deal of research and care is needed before following the buy-to-let route.

And it is not a get-rich-quick scheme - if you end up with 10% of your rental income as clear profit, you are doing well.

Until recently, it was not an attractive market to get into. But changes in the law mean it is now easier for landlords to regain possession of their properties, reducing the risk of being saddled with a sitting tenant.

That 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 started promoting buy-to-let mortgages in 1996, in an attempt to improve the quality of rented accommodation.

"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," explained Malcolm Harrison of the Association of Residential Letting Agents, which has been involved with the scheme from the beginning.

Agents' window 150
Deposits on buy-to-let purchases could be high
There is now a standard variable mortgage rate for buy-to-let, which is typically about 10 basis points above the rate for a mortgage on your own home - for instance, 5.85% compared with 5.75%.

But the variety of loans now on offer also includes fixed rates and discounts. However, you might be asked for a sizeable deposit of up to 25%.

A 'controllable' investment

"The kind of people who are buying to let has widened," Malcolm Harrison told BBC News Online. "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 rental sector has been growing recently, with more people wary of being locked into owning a property. Higher divorce rates and short-term work contracts have also increased the number of tenants.

The market can be fluid, however, with low interest rates tempting many renters to take out a mortgage for the first time.

Paragon's own research has shown that many newcomers to this market are unaware of the pitfalls of becoming a landlord.

Location, location, location

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 cautioned. "You wouldn't want to buy a place on the Yorkshire moors.

Edinburgh 150
Location is vital - buyers in Edinburgh have struggled to find tenants
"And you wouldn't buy-to-let in central London, as it's just too expensive. You need to go further afield, and don't assume the right place will be on your doorstep."

He recommends looking in university towns, or in the suburbs of big cities. But research is vital. People who have bought in Edinburgh have found there are already too many rental properties and theirs have remained unlet. Some regional cities are also reporting a shortage of tenants.

And while the highest rents can be obtained in London, a purchase in the north-west of England will give a much better yield - the amount of rent as a proportion of the value of the property.

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, suggesting a slush fund 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 told BBC News Online.

"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.

Mr Reeve said buy-to-let had been unheard of in his area until about a year ago. "Now it makes up about 16% of our current sales - it has been very popular. All the people we've spoken to are doing it because property's a good investment and they see other people making a lot of money from it," he said.

Caution is the key

"But whereas you used to be able to buy something here for 70,000, those flats are now selling for 110,000. That's good for people who have already bought, but some are finding they can only just about cover their mortgage."

And of course, the scheme is subject to fluctuations in interest rates. Higher mortgage payments mean less profit.

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," warned Malcolm Harrison of Paragon Mortgages.

"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."

See also:

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