By Julian Knight
BBC News Online personal finance reporter
Buy-to-let investments have become increasingly popular in recent years, but some experts warn the market is overheating. Are the current crop of wannabe buy-to let investors at risk? BBC News Online quizzed delegates at a master class for buy-to-let investors.
Could small buy-to-let investors end up being swamped?
Looking around the room the investors who had moved into the buy-to-let market in the 1990s stood out a mile.
Pale chinos, open neck checked Ralph Lauren shirt, summer weight cotton jacket all topped off with a light tan and a designer watch.
Wealthy and relaxed, they made up roughly half the delegates attending the Association of Residential Letting Agents (ARLA) buy-to-let master class.
Patrick, 35, from London, who had given up a career in the City in the mid-nineties to become a landlord, typified the buy-to-let nouveau-riche breed.
He started out by buying a couple of ex-local authority properties in south London and then rode the UK housing boom, using the capital growth of one property to buy others.
Patrick currently owns two dozen properties, many in some of the capital's premier locations.
"I was attracted to the mix of steady returns and capital growth and in the past decade I have seen that in spades."
"In truth, property beats deposit account savings, the stock market and a pension hands down. But you must be prepared to do your homework," Patrick said.
The master class held at the Royal College of Physicians in London attracted its fair share of potential landlords.
Scribbling furiously as the experts dissected market prospects, the wannabe landlords looked less prosperous and relaxed than the delegates who had already taken the buy-to-let plunge.
After all, in 2004 those considering entering the buy-to-let market face a tricky dilemma.
The usual questions of location and furnishing take a back seat to the number one topic - are UK house prices about to crash?
The first-time buyer is a dying breed. In 2003 first-time buyers made up less than 30% of all house purchasers, the lowest level ever.
Buy-to-let investors have stepped into the breach often borrowing on the increased value of their main home to fund their purchase.
According to investment bank Durlacher this has helped create a "speculative bubble" in the UK housing market which is set to burst soon.
Ominously, Durlacher suggested the housing market bust could be "very messy" with prices falling 30% from current levels.
One speaker, Geoff Laird of Paragon mortgages, told delegates that the fundamentals of undersupply of housing and the increasing formation of households made buy-to-let a good long-term bet.
However, Mr Laird did warn delegates that interest rate rises would hit recent buy-to-let investors hardest, putting larger established landlords in pole position to pick up cheap properties.
Richard Carvell, 39, a plumber from south east London who is thinking of investing in buy-to-let, admitted he was concerned about a slump in the market.
"The possibility that we could be on the cusp of a housing market crash is a major worry, particularly as I would have to borrow against my main home to fund a buy-to-let purchase."
Richard Carvell: Research is key
"The only things I can do to protect myself is to cost everything, factor in a rise in interest rates and research the market thoroughly," Richard told BBC News Online.
Richard, who is self-employed, identified not having a pension as the main reason behind his buy-to-let ambition.
"Property, unlike a pension, is something tangible. I believe I have enough time before retirement age to ride the peaks and troughs of the property market," he said.
But recent research from the Pensions Policy Institute (PPI) suggests Richard's faith in property as a means of retirement provision could be misplaced.
Over the past five years the returns on both types of investment do not stand comparison, the PPI survey said.
Rising house prices have made many homeowners wealthy while pensions have been bogged down in a mire of mis-selling and stock market underperformance.
But over the very long term the picture is radically different.
Pension funds have risen by an average of 11.6% a year since 1970, while homes have grown by 11.1% a year, the PPI research found.
What is more, timing is critical when it comes to investing in property.
Buy at the bottom, when the auction signs proliferate, and recent history suggests strong capital growth.
But buy prior to a steep rise in interest rates and it can mean years of negative equity.
And Patrick, the long-standing buy-to-let investor, is sure as to the scenario most likely to play out next.
"The party is over and there are worse times ahead. Most experienced buy-to-let investors I know are reviewing their portfolios."
My first buy-to-let was in 1988 when everyone advised me that house prices would see double digit growth for the foreseeable future. I sat in negative equity for the next 14 years. I took the plunge again in a big way from 1997 to 1999 when the "experts" were warning people about the housing market never recovering. As with all investments, do your own research.
Fundamentally, prices are set by the "Herd", so it is important to analyse their buying power and intentions so you can get well ahead of them. The current situation can only lead to a property crash: interest rates are rising, the herd are panic buying, and first-time buyers are rare. Cynically, the government are likely to shore up the prices until after the general election in an attempt to convert the naive feel good factor into votes.
Every Tom, Dick and Sharon now own buy-to-let properties
Tim, Dhahran, Saudi Arabia
Birmingham is oversupplied with buy-to-let apartments, rents have declined by some 10% in three months. I live in an apartment that overlooks the canal that cost £225,000, I pay rent of £725 a month. This is already in the negative yield area. Even more apartments are being built and this will only add to the oversupply and downward pressure on rents.
John, Birmingham, UK
I purchased a one bedroom flat as a buy-to-let in 1992 and have had spectacular returns in terms of rental income and capital growth. I have just sold the property for a price that seems astronomically high. Having said that I'm actually very glad to see the back of it. Despite being a buy-to-let success story in terms of return, it hasn't been money for old rope and at times has been an absolute nightmare.
Paul Dobbs, Bristol
Being on an average salary of £16,000 a year at 25 years old I cannot afford a garage let alone a house. It sounds selfish, I know, but I am desperately hoping there will be a crash, as this is the only possible way I will be able to afford a house of my own
Stephen Ash, Cardiff
The current prices of houses in the UK (particularly those in the South East) and the potential rental yields just don't make good investment sense, the only factor that makes the current buy-to-let market attractive is equity gain, and this is coming increasingly under attack from the lack of first-time buyers and rising interest rates. It is also worth noting that part of the reason there is a housing stock shortage for single property buyers, is the buy-to-let market, take this investment bubble away and you have a huge jump in supply.
Chris Kennaird, Plumpton Green, West Sussex
I think all the pension collapses and scandals of the last few years are responsible. People want tangible assets held in their own names. Even though they know it results in a badly balanced portfolio they figure it won't disappear overnight.
Buy to let greed will pop the house price bubble. Every Tom, Dick and Sharon now own buy-to-let properties. With rental income now falling below mortgage repayments in London and interest rates going up the writing is on the wall for new buy-to-letters. As for the old hats they have choices either ride the waves or cash in while their capital is still high. I will be cashing in - now.
Barney, London, England
Yes, property can provide a pension. The recent survey assumed use of the capital from a property investment to fund living. The point is to buy the property and live on the rental income once the capital is repaid. Of course this also leaves the property as an asset for your dependents instead of the pension fund disappearing when the annuity (which you are forced to buy) finishes.
Alan, Bristol England
Though I have seen significant gains in asset values since I started about three years ago, realistically I have made no money at all on rental income when refurbishment and maintenance are factored in, and that's over three properties. I wouldn't buy now, I went through the 1980s boom and bust and though I would give house price rises another few months, my bet is a dip sometime round the October November period. Lets hope its not a crash!
Simon Mallett, UK, Maidstone
I agree with Patrick. You have to cash in your chips whilst on a winning streak, leave it too late and you could lose your shirt. When prices start to slide, there will be no buyers until the market nears the bottom, which is why there is no such thing as a soft landing.
Steve, Margate, England
Pensions are just an excuse to keep the financial wizards in a long-term job. After saving for so long we cannot get back how much we want and further more have to buy an annuity. What cheek? It's daylight robbery. And we pay them charges if they mess it up. Property, only setback is the inheritance tax, other than that you know it's yours and no one can touch it.
I hope it heads down the plug hole. These buy-to-let merchants are taking advantage of people who cannot afford to buy their first home now that prices have risen to silly levels. They're forced to rent and in all probability will never be able to get on the housing ladder because they're being ripped off by high rent payments and cannot afford a mortgage of their own.
Louise, Lincoln, UK
I feel that the market will crash as soon as interest rates go up another 2%. There will be bucket-loads of home owners coming off 3 to 4% fixed rates in about 18 months' time who will suddenly see more than a doubling of their monthly payments. Sadly, this is likely to mean a return of repossessions and confidence in the market will be demolished. Having said this, I would invest in buy-to-let property. A pension is only worthwhile because of the tax breaks.
David Swaddle, Twickenham, England
I am in a position to enter the buy-to-let market right now, but am choosing not to do so as I think all the signs point to a steep decline in values over the next few years. The next good opportunity is probably 4 years away, when we see cheap repossessions after a few years of negative equity. And yes - I do feel like a vulture waiting for something to die, but I don't feel like throwing my money away all the same. I feel sorry for those who will get hurt, but I won't volunteer to be among them.
Alex, Swansea, UK
A house is a home and a finite resource which everyone should have a right to. It's abhorrent that this government should allow people to speculate on houses and reap outrageous rewards at the expense of other people's misery.
Troy Pitt, London
As a renter I am obviously gutted to have missed the huge increases in property over recent years but I have noticed a marked change in the rental market recently. Four or five years ago you almost had to beg to get a flat where as now there are so many to choose from its mind boggling, and I just signed a lease on a flat paying approximately what I was 6 years ago. Which says to me as soon as base rates go up there will be a lot of buy-to-let landlords in trouble and having to sell their flats, kick starting a property crash.
Some of the previous comments suggest that buy to let is unethical. Is it unethical to make money? Perhaps they should move to a communist country where property is considered theft.
Grant, Bournemouth Dorset
I have to giggle at some of the comments about property being a 'tangible' asset. An internet stock certificate is a 'tangible' asset (look, I can wave it about). Unless you plan to live in it the value of a house is only what you can persuade the next mug to pay for it.
B Essada, London, UK
First-time buyers who are currently holding off will wait for the market to bottom out before carefully coming in. They will face much more restrained mortgage lending policy from banks, who will also have had their fingers burnt in repossessions and subsequent auction sales - these banks are also to blame for inflating the housing bubble through their ridiculously aggressive lending and encouragement of the buy-to-let fad.
Julian Ratcliffe, London, UK
As a potential first-time buyer myself, it is a daunting process trying to decide whether to buy now or wait for a potential slump in prices, which may never materialise. I think the best strategy for anyone in my position is to base a decision on a "worst case" scenario. By preparing in this way potential risk can be reduced and anything on top is a bonus.
Sam Blakey, Southport, UK
The only people with anything to fear are those who have overstretched themselves. There are a lot of people who have put down small deposits, and have mortgage payments that are barely covered by the rental income received.
Investing is all about maximising opportunities. Experienced buy-to-let investors will not be worried by a fall in prices. They will use this to buy more properties at prices that will ultimately turn out to be ridiculously cheap.
Those who have made millions from any type of investment have bought when everyone else is selling. They then hold onto the asset for as long as necessary to get a silly profit.
Sam Magill, Newtownards, County Down
I looked at a buy-to-let recently - my local estate agent suggested two particular properties both of which had established (and trouble-free) tenants. Looking at the figures was a surprising though - £325,000 for the property against a rent of £1200pcm. The mortgage on £325,000 would be somewhere around £1800 per calender month so even with a 33% deposit the rent would only just cover the mortgage. Throw in the likelihood of further interest rate rises, any repair costs and the chance that the tenant may leave and it ceased to seem so attractive.
John B, UK
The country is divided into the haves and the have-nots. How can it be fair that some people are sitting pretty due entirely to fortunate timing, while others are paying huge rents and will have nothing to show for it? If professional couples can't afford a normal house something is wrong, we need to build homes rather than to speculate on markets.
Calum Grant, Cambridge, UK
In the mid-80s a terraced house in Reading cost £30,000 and could be purchased on multiple of three times income with a £10K salary. Today the same house costs £180,000, six times as much. Salaries haven't increased six-fold over the same period. Low interest rates and a rush by buy-to-let investors has created a bubble.
John Rice, Reading, Berkshire
I believe that the first-time buyers are being priced totally out of the market by the buy-to-let market, and who can blame them for waiting until the housing market levels itself out. We need to encourage buyers to climb the property ladder rather than buy numerous smaller properties.
Nathan Clamp, Hayling Island, Hants
I'd love to see a property crash - I think it's unethical to rent properties and over value worthless house prices for first-time buyers. A crash would be worth it - if only to eliminate all those boring programmes about home ownership on TV.
Mark Taylor, Bristol
I own a £185,000 new-build apartment on Tyneside which is drawing no interest from potential tenants. There is an oversupply of property and undersupply of tenants in this area as a result of investors from other parts of the UK buying new build apartments in bulk. These investors have bought in fashionable areas, which in my opinion, will not be fashionable or affordable in a few years.
Colin Tyneside, Newcastle