Buy To Let Investors Return In Numbers

He’d found the flats, which he expects would fetch a monthly rental of 480 pounds each, through Property Secrets, a Crewe-based company specialising in newly built property, both here and abroad. “The plan,” he explains, “is to put the flats up for sale and onto the rental market at the same time. If one sells first for 120,000 pounds, then I’ll take the other off and let it, so overall the investment will make 480 pounds a month — not bad for this market.”

Thomas is one of many property investors on the lookout for bargains: with the interest rates on savings close to zero and shares perceived by many as too risky, bricks and mortar seems like a no-brainer for those with cash.

Where should you start? First and foremost, you must buy right: as the old adage goes, you make money when you buy a property, not when you sell it. Make sure you have either cash or mortgage finance in place — if it really is a bargain, it won’t hang around for long.

Property Secrets is one of a growing number of companies that aim to help investors acquire BMV — below market value — property (see panel, below right). In some cases, as with Thomas’s flats, these will come on the market after a developer has gone under. Other companies specialise in homes repossessed from owner-occupiers or investors, or that people are in a hurry to sell.

A more proactive approach can help you to track down owners keen to sell. Kiran Gandham is the acquisitions manager at Elysium Skies, which sources houses at knockdown prices. “Investors find these sellers,” he says, “by placing adverts in papers and viewing hearing lists at county courts to approach vendors who are facing repossession.”

Opinion differs as to the best kind of property to buy. Former local-authority flats typically offer the highest rental yields — 8% or more at present — but may not produce such good capital gains and could be difficult to secure mortgages on. The reverse is true of larger houses. “Long-term, big family houses are a good prospect for capital growth, as they are in short supply,” says Yolande Barnes, director of research at Savills estate agency. “But they tend to have lower income streams attached to them, as there is a limit to what people will spend on rent.”

Many of the more successful buy-to-let investors favour smallish two- or three-bedroom houses because they provide the best of both worlds. If these are beyond your budget, then a two-bedroom flat can provide more flexibility than a one-bedder.

Choosing the right area can be almost as important as choosing the right property. Planned improvements in transport links and other infrastructure can be beneficial. In the capital, the extension of the East London line, the first part of which will start operating next year, should help areas that lie along its route; and parts of Kent should benefit when the high-speed rail link to St Pancras opens in December.

“For rental investments, the best locations are the city peripheries,” says Gary McCausland, a property developer. “In London, this is west Kensington, Clapham, Camden, Stockwell — all solid investments.” He also suggests targeting areas to which young celebrities are moving: “It was Chelsea, then Notting Hill, then Primrose Hill; now it’s Clapham, Balham and Camden,” he says.

By the same token, however tempting prices may be after sharp falls, avoid areas with an oversupply of property — in parts of Manchester, Leeds, Nottingham and Cardiff, for example, too many flats were built during the boom years.

Before buying, establish how easy it would be to let out the kind of home you are considering — and what it might fetch. Phil Spencer, presenter of Channel 4’s Location, Location, Location, says: “Ask a rental agent what kind of property they wish they had more of. That way, you’ll know what’s in demand.”

David Lawrenson, a buy-to-let expert who runs the website lettingfocus.com, even suggests placing a spoof advertisement in a local paper. “It’s important to stress-test before taking the plunge,” he says. He is certainly putting his money where his mouth is: two weeks ago, he exchanged on a two-bedroom buy-to-let house in Brockley, southeast London — his first property purchase in five years.

He identifies three potential risks for would-be investors. First, prices may fall further before they start to pick up again — which makes it all the more important to bargain hard when you buy. Second, with the base rate at 0.5%, the next move in interest rates will be up rather than down — although investors can protect themselves to some extent by taking out a mortgage that is fixed for three or more years.

Third, as unemployment looks sure to grow, there is a danger that tenants will lose their jobs — and so default on the rent. Although you can never guard completely against this, you can minimise the risk by running careful background checks on tenants and choosing those in jobs more likely to be secure — especially the public sector.