An attractive prospect
PUBLISHED: 08:57 08 April 2014 | UPDATED: 13:58 22 May 2015
Dick Jenkins, Chef Executive at Bath Building Society, looks at why things are up for the buy to let market
Buy to Let lending is nothing new; we have been doing it since Adam was a lad, but the market for residential property has rarely been as attractive for investors as it is today. All of the stars seem to be aligned for Buy to Let at the moment it is little wonder that the market is experiencing something of a boom.
For a start, alternative forms of investment offer dismal or unreliable yields, the investment return for cash deposits are poor with interest rates at their lowest level for over 300 years, and likely to stay very low in the coming years.
Investment in the stock market has not been the one-way bet it always seemed to be. The FTSE 100 index has still not recovered to the level it reached in 1999. These days, Financial Advisers don’t seem to bring out that graph of inexorably rising stock market values that they used to show their clients.
The property market at the moment is favouring the Buy to Let investor despite government schemes, house prices are still very high for would-be first time buyers, a problem exacerbated by the very high levels of deposit frequently required by lenders.
There is a high demand for rental properties, albeit caused by the inability of large sections of the population to purchase their own homes, has driven rents up to record levels.
Many Buy to Let investors are in a position to put a reasonable amount of equity into the purchase allowing them to access the lowest mortgage deals.
Effectively the gap between the cost of borrowing and the yield from tenant rents is at an all-time high. The icing on the cake is the recent surge in property prices with house’s rising in value by between 5 and 10% per year (and indeed much faster in certain favoured locations) depending on which of the many indicators you choose to believe.
It seems that the perfect storm for people struggling to get on to the property ladder has somehow created the perfect opportunity for landlords. Market conditions are encouraging for well- established landlords to build their portfolios, and have spawned a new generation of Buy to Let landlords to get into property investment for the first time. Many “accidental landlords” have been created in recent years by people deciding to move but keeping the old home to let out. And with uncertain returns from pension schemes the bricks and mortar of property have proved popular for people looking to create a nest egg for their retirement.
But just as with all investments, there are pitfalls for the unwary and it’s wise to look before you leap. Being a landlord is not for everybody. Tenants may not look after your property as well as you might expect and may not be able to keep up with the rent. Also they have a habit of wanting essential repairs and issues resolved at the most inconvenient times. Many of these problems can be dealt with by a good letting agent, who knows landlord tenancy law and will vet tenants and take care of many of the day to day hassles of being a landlord. But expect to pay 10% or so of the rent received for a good service and pick your letting agent carefully; ideally one with industry accreditation by ARLA (the Association of Residential Letting Agents).
Another problem is that tenants are often transient and will move when it suits them rather than when it suits you. This can mean that you have vacancies for a period and most lenders would expect you to budget for vacancies of at least a month in the average year.
Also, Buy to Let properties are seen by the tax man for what they are and gains of property values will be liable to Capital Gains Tax.
And, of course, property prices can go down as well as up. The very conditions which make Buy to Let investment so attractive at the moment are indicators of a potential bubble which may burst. It is widely expected that interest rates will rise in the next two or three years but it’s not yet clear how much of that additional cost to landlords can or will be passed on to tenants.
But against this we have to recognise that schemes which are designed to build more houses, which could seriously affect property prices, are rarely more than politician’s sound bites; there are simply not enough homes in Britain and won’t be for many years to come and this is likely to help keep property prices up. Interest rate rises which might squeeze landlords’ profits will also deter would be purchasers which will keep demand high in the private rented sector.
It is very rare to find a lender that does both Buy to Let mortgages and lets property as well, so Bath Building Society are almost unique in their ability to help Buy to Let landlords with decades of experience in a market that has come from zero to hero over that time. In a market where many others will lend up to 75% of the property value, we will generally go to 80% and we have expertise in other more specialised forms of letting, such as in holiday lets, “homes of multiple occupancy” and student letting. In fact, in one form or another over one third of our lending is Buy to Let. We welcome all enquiries from the casual would be landlord to the established professional, whether it’s to pick our brains or discuss terms.
If you would like to get in touch to discuss your requirements further:
Tel: 01225 475702