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Last Updated: Thursday, 11 October 2007, 17:13 GMT 18:13 UK
Britain's deflating buy-to-let bubble
By Rob Neil
The Money Programme

To Let sign
Investors are finding it harder to make ends meet
It sounds too good to be true.

Take out a mortgage to buy a property and then, while the rent covers the mortgage repayments, the capital value of the property increases year on year.

For many years, that was the way it was, but now there are signs that the years of easy money may be coming to an end.

In 1996, when buy-to-let mortgages were first launched, only 20,000 were taken out. By June 2007 this figure had grown to 940,000 and the total amount borrowed to 108bn.

It has been phenomenally successful and one of the best performing investments around.

Many buy-to-let investors have made fortunes as house prices increased and mortgage rates remained low.

One such investor is Raj Shastri who has seen his initial 950 investment grow over the last five years into a portfolio worth 8m.

Rising costs

But are the good times over for the buy-to-let investor?

Buy-to-let mortgages, halfway through the year

Mortgage rates have risen, and some are predicting a downturn in the property market.

"Most of us think that mortgages are priced off the Bank of England's base rate but they're not," says Merryn Somerset Webb, editor of Money Week.

"They're generally priced off the rate at which banks can borrow money from each other and that's gone up very fast as a result of the credit crunch.

"Mortgage rates for, in particular, sub-prime borrowers and buy-to-let borrowers have gone up very fast. And that means from here on, buy-to-let investors are going to find things more and more expensive."

Losing money

It is not surprising that some buy-to-let investors are feeling the pinch.

If the rental yield mortgage comparison becomes more and more tricky and they don't expect capital growth they may be forced to put properties on the market
Jamie Dannhauser of Lombard Street Research

The Money Programme met buy-to-let investors who are discovering that the rent on their properties is not high enough to meet the dual costs of the mortgages and their additional landlord costs, such as repairs and maintenance.

Derek Stobbs, who owns 13 properties in the Derby area, says he is losing about 6,000 a year on his portfolio.

He is relying on the profits from his other business to balance his books.

"It looks like I am going to have to subsidise them for a few years to come," he says.

Getting worse

In some areas, like Manchester, there has been a glut of buy-to-let properties coming onto the market.

How can you minimise the risks of buy-to-let?

This has kept rents low.

Some investors have found that rents have actually fallen. And because so many properties are available, they have also had little capital appreciation when they sold their buy-to let investment.

Some experts think worse is still to come.

"If the rental yield mortgage comparison becomes more and more tricky and they don't expect capital growth they may be forced to put properties on the market, which may effectively accelerate the slow-down in house price growth," observes Jamie Dannhauser of Lombard Street Research.

Sell-to-rent

One way to make buy-to-let pay in 2007 is by buying below market value, a niche where investors find homeowners who need to sell fast and are therefore willing to accept a big discount.

Buy-to-let book
There are more than 20 guides to buy-to-let for sale on Amazon

The theory is that if a property can be purchased for little, then the rent should always cover the mortgage.

"We market for what we call motivated sellers," says Glenn Armstrong, who owns 130 properties in the Milton Keynes area and runs seminars where he passes on his investment tips to other investors.

"Typical people are couples that are divorcing, that can't stand being in the house with each other. Also, people that are involved in a repossession and actually being forced out of their house by the building society because they haven't been paying their mortgage."

The former owners are then offered the chance to be tenants in what was their former home.

With repossessions up by 30% on last year and profits harder to come by in the traditional buy-to-let sector, it is likely that there will be many more investors relying on this method in the near future.

The Money Programme: Buy-to-let, Friday 12 October at 1900 on BBC 2

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