Find
out what it costs to own a buy-to-let property
Ten years ago, twins Matthew and Peter Jones were both plain-clothes policemen
who dabbled in buy-to-let. Today, they are professional investors with a
portfolio of 25 homes worth £10m and enough confidence in the property
market to launch their own firm of estate agents and buying agents last
year. You will find their offices in Richmond, west London, where house
prices have more than tripled over the past decade.
“We ended up making more money through property than by doing the day job so
we became full-time professionals, setting up M&P Properties in 2003,”
says Peter Jones, 35. The twins bought their first buy-to-let property, a
two-bedroom flat in Twickenham, for £82,000 in September 1997. It is still
part of their portfolio and is now worth £295,000.
Peter and his brother agree that the property market has been slowing down.
They have seen the downbeat economic forecasts including the predictions by
Capital Economics, the analyst group, that the housing market is poised for
two years of falling prices. But they see the softening market as an
opportunity rather than a threat. “This year looks like it will be a time to
snap up a good deal,” says Peter. “There will be sellers out there who are
prepared to sell at reasonable rates. Next year we will be looking back on
2008 as a good buying opportunity. We hope to have added at least £2m to our
portfolio by 2009.”
The Joneses put three offers in just before Christmas, when the market was at
its most quiet, and are in the process of buying a three-bedroom house for
£800,000 in Richmond, a one-bedroom flat for £300,000 on Richmond Hill and a
small one-bedroom house in Twickenham for £250,000.
Matthew and Peter are not the only buy-to-let investors out shopping. Haydee
Softley, 36, who sold her entire portfolio of 10 properties in south London
between February 2006 and November 2007, is out hunting for country property
to redevelop.
For eight years Softley had been a full-time investor, focusing on ex-council
flats. But rising service charges and increasing red tape took the shine off
her returns. Softley sold her properties for between £160,000 and £230,000
and having paid the taxman a hefty sum, she used the profit to buy a
five-bedroom Victorian farmhouse in Hampshire.
She shares her home with husband Mike and their children Aidan, two, and
one-year-old Amber and now has a new base to look for a different kind of
investment. “This year I’m looking for a big place to do up in the country,”
she says. “Nobody is buying at the moment and everybody is terrified of the
market, so it’s a really great time. Every year people say: ‘You’ve missed
the boat.’ I was told that when I started out in 2000. But with interest
rates coming down and prices flattening out, it’s a great time to strike a
good deal.”
Other professional investors agree. The latest survey from the Association of
Residential Letting Agents (Arla) suggests that landlords have shrugged off
recent falls in the value of rented property with almost half planning
further purchases this year. Although the average value of a rented property
fell by 1.3% between October and December
2007, nine out of 10 landlords intend to stay in the market for the next 17
years. Council of Mortgage Lenders (CML) figures published in February
appear to confirm investors’ confidence. The CML reported that the total
number of buy-to-let mortgages passed the million mark following a 23% rise
in the number of outstanding of loans.
The sector remains resilient despite concerns that the buy-to-let market would
grind to a halt because of the credit crunch and weakening prices.
Speculation that landlords will be selling in droves come April when
capital-gains tax is lowered to a flat rate of 18%, also seems misplaced.
The novice investors of the 1990s have become today’s big players and will
not be easily shaken by predictions by Capital Economics that prices will
fall by 5% this year and 8% in 2009 and that yields will increase but
buy-to-let mortgages will dry up.
This month’s Royal Institution of Chartered Surveyors Lettings survey reports
a drop from 6.5% to 4.6% of landlords selling properties when leases
expired. It also notes that gross yields increased at their fastest pace
since the third quarter of 2005.
There are about 500,000 buy-to-let investors in Britain and Arla estimates
they own property worth well over £120 billion. Moreover, 82% of private
rented property is in the hands of professional or semi-professional
landlords who own 10 homes or more, according to figures from Hometrack, the
property data company. These landlords are doing very nicely. Rents are
rising and demand for rented property is growing. Data from the Royal
Institution of Chartered Surveyors (Rics) shows rental growth was
particularly strong in London, the southeast, the east, the Midlands and
Wales. It was more subdued in the north and Scotland.
Arla says that the demand for rental homes is set to grow by 20,000-30,000 a
year over the next decade because of the rise in the number of divorces,
immigration and increasing job mobility. Add to that the number of potential
first-time buyers priced out of the market, and there are an awful lot of
people needing rented accommodation.
Landlords, estate agents and property analysts alike believe there are still
opportunities for investing in property, provided investors do not expect to
become millionaires overnight. Focusing on tenants and rental growth rather
than capital appreciation is the key in this market.
Arla’s continuous warning that investors should steer clear of “off-plan”
properties that have not yet been built is even more resonant now.
Ian Potter, head of operations at Arla, says: “This kind of property
investment cannot make for a realistic buy-to-let proposition. The rental
market is too fluid to make judgments on rental values and potential demand
months or even years in advance, for property that has yet to be built. We
cannot repeat this warning often enough.”
Potter says potential investors must take advice from local professionals
about the property, the way it is furnished and the realistic market rent.
Rather than being seduced by new-builds, Richard Donnell, director of research
at Hometrack, the property data company, advises investors to seek out
places where the proportion of young people priced out of the market is high
but the availability of rented housing is low.
Donnell says: “Rather than hope for much appreciation in value, the main focus
should be getting a decent rent and a steady supply of tenants. Anybody
getting into the market now has to accept the prospect of growth at just
1%-2% above inflation.”
Top of his shopping list is Harlow in Essex, where the average price of a
two-bedroom home is £157,680. Here landlords can charge rents of £195 a
week, which give a gross yield of 6.4%. Better still, it is great for
commuters with direct trains taking them into London Liverpool Street in
just over half an hour. Other places in Essex to consider are Basildon,
Thurrock and Broxbourne, which offer yields at about 5%, with rents on
two-bedroom properties ranging from £150 a week to £183.
The most expensive properties on the Hometrack list are in Adur, West Sussex,
where a two-bedroom home costs about £200,611. But because of its location
between Worth and Brighton, landlords can reap rents of about £213 a week,
producing a yield of 5.5%. Investors should also consider Crawley, also in
West Sussex, as well as Eastleigh in Hampshire, Oadby
and Wigston in Leicestershire, Stevenage in Hertfordshire and Tamworth in
Staffordshire. However, not all potential landlords should rush off to the
estate agents. Buy-to-let is no longer a game for amateurs. The credit
crunch in the financial markets means that investors are required to put
down larger deposits and pay higher rates, placing buy-to-let beyond the
reach of all but seasoned investors who have built up lots of equity over
the years.
Donnell says: “Until 2003 buy-to-let was a no brainer. But the sums no longer
add up for new investors. With property prices where they are now you need a
deposit of between £30,000 and £60,000 to make an investment work. People
who aren’t already in the market are going to have to step back.”
Graham Gould, managing director of Residential Property Investment Management,
which advises wealthy investors about property in London, agrees.
“Buy-to-let is no longer a self-funding investment. Without a deposit of at
least £30,000, you are not going to cover your borrowing costs. People did
get rich quick from buy-to-let. They were in the right place at the right
time. But that is not going to repeat itself.”
Buy-to-let was never a risk-free investment. But the stakes are higher now and
only big players can afford to take a gamble. It looks like policemen
aspiring to become landlords will have to stick with their day job a little
longer.
- Nice Investment, which was founded by Martin Skinner and Guy Bullerwell in
2003, now owns or manages 250 properties, mainly in southeast London and
Docklands. Nice specialises in renovating houses to maximise the number of
bedrooms, and renting them out by the room under its Nice Room brand. It
claims that renting the houses as HMOs, or houses in multiple occupation,
produces gross rental yields of 7% to 8%.
Investors can buy a property through Nice, which will do all the work of
locating, developing, renting and managing it. The investor takes on the
mortgage and the cost of redevelopment, and pays Nice 2% of the purchase
price as a finder’s fee, a development fee and about 20% of the rental
income for management costs once tenants are in place.
www.hometrack.co.uk; www.arla.co.uk;
www.rpim.co.uk; www.mpestateagency.com;
www.mphomefinder.com; www.niceinvestment.co.uk
I know loads of investors who are simply selling up due to the capital gains tax changes. Some are making a loss on their buy to lets with their rents not covering mortgage costs. Others who just want to cash in on the equity in their property before prices fall too much.
Its not a rosy situation as the credit crunch kicks in as buy to let lenders go bust, stop lending or tighten their lending critera. The amount of lenders has changed radically almost over night making it harder and more expensive for new buy to let mortgages and re mortgages.
Gavin, London,
Lets talk about net worth. Building a fortune with limited equity i.e. taking on more debt using equity from the last houe price increase in the last property means very little actual wealth, just lots of debt. No mention here at all of that.
Only for those who bought before the second half of 2005 may have equity and rent covers interest payments. They may cross-subsidise tenants in newer investments but these involve losses. (More than 50% of BTL entered since 2005.)
So prices went up in the past. This is no guide to the future. Indeed, nominal 8% growth in the long run was based on high inflation and wages. That ended in 1998 and that is why the ratios are off the scale.
The market needs new money and it no longer makes sense. Many fools can't get the money anymore so the pyramid scheme is about to collapse. As for the "experts". Just because they did well in easy times they put it down to skill.
Just as most egos find, confusing skill and luck can be costly.
Trevor, UK,