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Working Lunch Thursday, 30 January, 2003, 17:51 GMT
A good home for your money?
Prices graph
Property has provided good returns in recent years
Like so many bubbles, buy-to-let is already beginning to burst in some parts of the country.

Oversupply of properties and a collapse in incomes are leaving many would-be landlords with empty homes.

But there are parts where the market is much less well developed and it's still a viable proposition.

And with equities ever more unreliable, is buy-to-let worth a look?

Given that you've done your research and are sure you are buying in a buoyant rental area, let's look at the possible benefits.



The most obvious is that in return for a deposit of up to 25% of the property's value, you will end up with a "free" house.

If your rental income covers your mortgage repayments each month, at the end of your mortgage term, you will own the house outright having paid out only your deposit.

Any uplift in the capital value is a great bonus on top.

Leverage

Where property could have an advantage over other investments is the leverage - it makes your money work a lot harder.

Suppose you put down a 10,000 deposit on a 50,000 house.

If after a while the house is worth 75,000, you would have a 25,000 profit - that's 50%.

But in fact that 25,000 profit means the return on your original investment of 10,000 is 250%.

Because you are borrowing so much, any uplift is magnified.

However, by the same token, any fall in the price would also be magnified.

Favourably

One other advantage that property has is that your bank manager would be unlikely to lend you 40,000 to go out and buy shares.

In fact, house prices have compared favourably with shares in recent years:

  • In 1984, the average house price was 32,000. Today it is 122,000.
  • If you bought 32,000 of shares in 1984, they would be worth 108,000.

    Of course, those performances might not be repeated in the future.

    So the economics can stack up in the right circumstances, but there are downsides.

    Non-occupancy - Don't expect to have a full house all the time. You should write off two months when you get no income if you're carrying out repairs or between tenants.

    Rents can fall - Rents are quite low at the moment and could go down, so make sure you know what's happening in the area where you buy.

    Interest rates could rise - They are at historically low levels, but if they go up, your mortgage repayments rise too.

    Tax - You'll have to pay tax on any rental profit you make and Capital Gains Tax if you sell the house.

    It ties up your money - Pat Bunton of mortgage brokers London & Country says three to five years should be a minimum investment period because of the high entry and exit costs.

    When you buy there are stamp duty, lawyers' fees and valuations; when you sell there are estate agents to pay and more lawyers' fees.

    So think hard before deciding to go for it - and above all, do your homework.

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