Personal Finance: Put your money in bricks and mortar

Author: Stephen Pritchard

Going one step further and buying a flat or house to rent out is simpler than ever. The law makes it straightforward, if not always swift, to remove a troublesome tenant. The market for private rented property, which saw an upturn in the 1990s housing recession, is still buoyant. And financing an investment property is easy. More than 30 banks, building societies and specialised lenders have packages geared towards the needs of investors buying somewhere to rent out.

Conditions in the stock markets, money markets and housing markets are coming together to make property a particularly attractive investment option. Stable or even falling house prices in some parts of London and the South-east, and the Bank of England’s decision to cut interest rates, make a rental investment more affordable. By the same token, holding money is less attractive.

The returns from renting out a property are good. Landlords can expect 12 to 14 per cent in suburban south-east England if they select their properties and the location with care, according to Arla, the Association of Residential Lettings Agents. In some parts of the country, such as the North-west, returns are higher still.

Over the longer term landlords should be able to factor in some growth in the value of the property itself, although this has to be set against the cost of maintenance and updating. Income from rentals is taxable, although interest, a managing agent’s fees and a 10 per cent annual allowance for wear and tear, can be deducted.

In the early 1990s lettings were boosted by “reluctant landlords”, people who decided to rent out their properties because they were in negative equity, or could not sell for the price they wanted. According to Arla and the Royal Institute of Chartered Surveyors (Rics), most of this group has now left the market to be replaced by longer-term investors.

Many of the new landlords have bought properties on one of the two organisations’ Buy To Let schemes, or on a deal offered independently by a bank or mortgage company. Arla says mortgages worth pounds 650m, representing properties worth pounds 1bn, have been completed since it started its scheme in 1996. The typical buy-to-let property costs pounds 77,000 and is funded with a mortgage of pounds 50,000, or about 65 per cent of its value.

Buy-to-let schemes work by the lender taking some or all of the rental income into account when it calculates a loan’s affordability. Terms and interest rates vary widely, and some of the best deals are almost as competitive as those for residential mortgages. The lower the risk, the cheaper the loan.

Halifax Mortgage Services, which relaunched its buy-to-let loan last month, is moving to loans that are funded entirely on rental income. Rents will have to be between 110 and 125 per cent of the mortgage repayments, says Ian Christopher, the mortgages manager. “Our average loan is pounds 65,000 to pounds 70,000 and the loan-to-value is about 60 to 65 per cent,” he says. “Most people buy because they have some spare money, and buy what they think will be a safe investment.” People looking for a safe home for inherited money are an important part of the market, he says.

The Woolwich calculates the loan by taking 3.25 times the applicant’s salary, adding 90 per cent of the annual rent, and deducting any existing mortgage commitments. In this way someone earning pounds 35,000 a year, with pounds 65,000 outstanding on his or her own mortgage and rental income of pounds 10,000 a year could borrow pounds 57,750.

This would fund a flat costing just over pounds 78,000 if they took the maximum, 75 per cent loan. Barclays, which offers a five or 10-year fixed rate second mortgage to its Premier customers, takes only 50 per cent of the rental income into account.

When it comes to buying the property itself, it pays to be dispassionate. Boring is good. A flat needs to be clean, newly decorated, preferably in white or magnolia, and have good quality, modern fittings and appliances. Buyers must not let their own tastes cloud their judgement. “Forget everything you have ever heard about property,” says Malcolm Harrison, spokesman for Arla. “Start by finding an agent and find out what the local market demands. The property must be low maintenance and decorated neutrally.” In most cities flats are a better bet than houses, not just because they are cheaper but because they let more quickly. The best flats for rentals have low service charges because these remain the landlord’s responsibility even when the apartment is empty.

The key to being a successful landlord is to find a flat that will let quickly. Try to view the flat through tenants’ eyes, suggests Jeremy Leaf, residential lettings spokesman for Rics and an agent in north-west London. Being near schools, restaurants and public transport matter to tenants who might only be in the area for a short while.

Rics has several publications on lettings, which can be ordered from Rics Books on 0171-222 7000 (internet: www.rics.org.uk).

Arla’s Buy to Let hotline is on 01923 896555 (internet: www.arla.co.uk).

Lenders offering buy to let deals include Woolwich Direct 0345 454445; Yorkshire Bank 0345 034567 and Northern Rock 0845 600 6622.

case study

MIKE BARTLETT (right), 42, and his wife, Carol, have just bought their first buy-to-let property. “We wanted some diversity in our investments, as we already have PEPs and unit trusts. It all felt a bit dangerous – but you can go and poke a stack of bricks!” The couple decided to use a specialist property search company to find them a house, a service that cost pounds 1,500 plus VAT. Mr Bartlett thinks it was money well spent. “The agency, Personal Homefinders, did everything and knocked pounds 2,000 off the price of the house.”

The Bartletts’ three-bedroomed house in Winchester is a former council property rented to students. It cost pounds 77,000 and the loan is pounds 62,000. The Bartletts’ have a mortgage fixed at 6.99 per cent for five years and pay pounds 452 a month. The income from the rental is pounds 800 a month, although the letting agent takes pounds 140 of that. So the overall return on the house is just over pounds 200 a month, plus any rise in property values.

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