Why buy to let continues to deliver
New Year is about new challenges: gym memberships, diets and vows to stop smoking. The property market is full of challenges, too; prices around the country are set to remain flat or worse, with tentative improvements in the economy yet to filter down to homeowners.
This is why thousands of people have resolved to dive into the only housing sector that is truly booming: buy-to-let (BTL).
The rental industry’s figures show why BTL is set to be 2013’s favourite career change. Average UK rents have risen by 13.6 per cent since 2009, according to Rightmove, while capital values in most places have stagnated or fallen. The property website predicts another two per cent rise across the country this year.
And the proportion of UK households renting has increased in the past decade from 31 per cent to 36 per cent, according to the latest Census figures. This means that in parts of big cities (see box below), there is huge demand for rental properties. In Westminster, for example, four out of every 10 homes are privately rented, not owned.
Little wonder that Britons from all walks of life have recognised this sector as a sound investment even in troubled times.
Property queen Sarah Beeny handles a portfolio of rental properties. Former Blue Peter presenter Konnie Huq owns London buy-to-lets, and one-time Bond girl Fiona Fullerton has rental homes in the Cotswolds. Former tennis star Tim Henman has investments in south-west London and has bought into a property club that owns and rents luxury villas across Europe.
But how can you follow in their footsteps? Three of Britain’s best-known property experts (each a buy-to-let landlord in their own right) have chosen different types of homes to earn you healthy returns. Whether you are after a country cottage, a city slicker pied à terre or a villa in the sun, there are opportunities for all.
Phil Spencer’s London approach
The Location, Location, Location star and host of Channel 4’s The Common Denominator has two rules: buy somewhere you know and target the type of tenant you want. “If you understand the housing market where you live, you are likely to make a more informed decision than if you were trying to buy 150 miles away,” says Phil.
“Then decide what type of person you want to rent your property. Students, young professionals, couples or families? What do they look for? How much will they pay? How will they travel to work?”
His own buy-to-let portfolio targets young professional renters in the capital. “Several hundred thousand graduates arrive in London each year for their first jobs. They have lived with friends during university and usually wish to continue doing so,” he adds.
“This is why I have bought three-bedroom Victorian houses. I convert one room to get a fourth bedroom and let to four sharers.”
London is the UK’s hottest lettings market with more than 45 per cent of all households renting. LSL Property Services, which owns Your Move, Marsh & Parsons and other rental chains, says average London rents rose 0.9 per cent in October, to a monthly level of £1,102 for a two-bedroom home.
Agents confirm that landlords typically receive seven per cent rental yield per year. This is far more than you can earn through most banks or building societies. Savills, meanwhile, forecasts London rents will rise by 26.4 per cent in the next five years, more than anywhere else in the UK.
Amanda Lamb looks overseas
The former A Place in the Sun star and presenter of Channel 4’s You Deserve This House rents out a London flat as well as a two-bedroom apartment in southern Italy.
Her advice is to follow the sun, while keeping an eye on the budget.
“There are plenty of bargains overseas right now. You can buy cheaply in perennially popular holiday destinations,” explains Lamb.
“I suggest the Algarve in Portugal. It is easy to get to, and popular with golfers and families. The market is consistent, but the area isn’t overdeveloped. France is also an enduring and easy-to-get-to favourite with British holiday makers,” she says.
“However my hot tip is Florida. There are fantastic bargains around Orlando, Kissimmee and Miami for £160,000 to £250,000. The rental market is strong, too.”
But wherever you look overseas, choose a home near an international airport and make sure flights from the UK look viable in the long-term.
Landlords should also remember to budget for the likely number of weeks the property will be let. And include service charges when adding up costs.
Lamb warns against investing in Spain until its housing market and economy recover. “You can buy a bargain, but there will be 300 similar properties nearby all looking for tenants. This is because their owners can’t sell. Buying there could backfire,” she cautions.
The website globalpropertyguide.com, which monitors the world’s housing markets, supports Florida as a reliable buy-to-let option. They say house prices, sales volumes and building levels are just beginning to pick up across the country. These are the first improvements since 2006. Florida, Texas and parts of California plus New York state are the healthiest markets.
Tommy Walsh’s DIY style
He shot to fame as the cheery builder in Ground Force, but Tommy Walsh has starred in 11 television series. The DIY guru has also written nine books about renovating. But his first love is actually buy-to-let.
“We acquired our first BTL 25 years ago. My wife, Marie, and I have always seen it as a good investment,” says Walsh.
Unsurprisingly, he is keen on fixing-up houses. This makes them more likely to produce capital appreciation when they are eventually sold. They also produce good yields until then. Modernised properties let quicker and for higher rents than older properties, too.
But he stresses you must know your limits: “Avoid buildings with major structural defects unless you are an experienced builder with deep pockets.”
He also takes a hands-on approach to managing his portfolio, shunning lettings agents.
“We prefer to select the tenants and arrange the contracts ourselves as it is more cost effective. Obviously, building and maintenance isn’t a problem. And my wife organises the paperwork and tenants.” He has three practical pieces of advice for would-be landlords:
Be efficient when dealing with tenants. “References must be thorough, including credit checks and finding guarantors (if needed). We insist rent is paid by direct debit on the due date with cleared funds. Deposits are returned only when all contractual requirements are met,” Walsh explains.
He also advises landlords to respect their tenants and avoid costly disputes.
“We always redecorate and clean or replace carpets after a long tenancy. We video the property’s condition at the handover as well as creating a paper inventory.”
Finally, he adds, do not be greedy: “We tend to charge a little less than the going rate.” This gives him a wider choice of tenants, which often allows him to tie them into longer leases, providing more financial security for everyone involved.
Lettings agents typically charge between 11 and 17 per cent of the rental income in fees and sometimes levy one-off charges for finding tenants. They check references and manage mandatory health and safety plus gas inspections and fire precaution equipment. This is a valuable service for those who don’t have the time or relevant experience.
If you are up to the task, however, doing the work yourself can save you thousands of pounds per year, according to the Royal Institution of Chartered Surveyors (RICS).
As with any investment, of course, buy-to-let does not guarantee a return. Many overzealous would-be landlords were burnt by the recent recession. While caution is always advisable, buyers with the right attitude and a long-term view can take advantage of some brilliant deals on offer at the moment. If you can make it work in 2013, you will thrive when the market is firing on all cylinders once more.
Top 10 buy-to-let hot spots in 2013
1 London, Victoria/Pimlico
6 Milton Keynes
9 London, Canary Wharf
10 Central Manchester
How to be a buy-to-let landlord
• Do your research. Pick a sector: students, professionals, first-time buyers or retirees?
• Buy in winter when sellers are anxious and may sell cheaply
• Don’t buy in a large scheme, where 75 per cent of homes are to let
• Choose areas with diverse employment, great transport links, such as Reading and Southampton
• Find the right mortgage, or remortgage your main home if this option is cheaper. Try charcol.co.uk and mortgagebroker.co.uk
• Most buy-to-let mortgage offers require at least a 25 per cent deposit – a few want 40 per cent
• Avoid ground-floor flats, which tenants believe are security risks
• Family homes rent well if they are in key school catchment areas.
• Aim for five per cent return on your investment per year
• If you use a letting agency, ensure it is Association of Residential Letting Agents-registered (arla.co.uk)