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New opportunities in buy-to-let homes

This could be the right time to take another look at investing in buy-to-let property, says Liz Willis.

The government is encouraging investment in buy-to-let and proposes that the stamp duty on more than one property will be calculated on average value, not bulk value (Photograph: Istock)
The government is encouraging investment in buy-to-let and proposes that the stamp duty on more than one property will be calculated on average value, not bulk value (Photograph: Istock)

The boom in the buy-to-let property market came to a halt in 2007 when house prices began to fall. Things are now improving and with help from the government, buy-to-let is becoming more attractive again.

Many young people are disenfranchised from owning their own home because the banks require very high deposits. That means the growing demand for rental properties is outstripping the supply.

A good alternative
At the same time, with the new restrictions on pension contributions (especially for GPs) and very low savings rates, buy-to-let properties can provide a good alternative.

Typically you need a deposit of 25% or more, with a rental return of 125% or more of your monthly mortgage payments. It is common for loans to be arranged on an interest-only basis and to have more flexible underwriting requirements than residential mortgages.

The number of buy-to-let mortgage lenders has increased substantially in 2011, with a further 10 entering the sector since the beginning of 2010. The government is encouraging investment in buy-to-let properties and proposes that stamp duty on more than one property will be calculated by the average, not the bulk, value.

So if you own 10 properties worth £200,000 each, you pay 1% stamp duty (average price), instead of 5%. It is also considering making it easier for landlords to become Real Estate Investment Trusts (REITs). Currently, only stock market-listed companies can be REITs, but if buy-to-let property is included, landlords can avoid capital gains tax, which can be a huge problem in a growing market.

From April 2012, social landlords (councils) can insist on a two-year fixed-term tenancy. Social housing benefit will also be cut then, which will inevitably drive many families to rent privately.

However, to make this work, you still need to consider a gross yield of 5% per year. So if you collect £1,000 per month rent (£12,000 per year), you need to buy a property for no more than £240,000. That might be a problem in some cities, but my advice is to shop around.

Location is the key
Areas close to a mainline rail station to London or near great schools, for example, will offer some gems. Remember to buy with your head, not your heart. It is an investment and you should ultimately see it that way.

Haggle about the price. If you are not in a chain, you are a 'cash' buyer and in a great position. Also, in today's tough market, look at a number of properties before you decide.

You must also decide your role in this venture. To manage it yourself, you need time and expertise, and ideally, the property should be close to your main home. If not, factor agent's fees into your calculations.

Be realistic about timescale. A buy-to-let mortgage has tax advantages (the interest being offset against rental income), so most of my clients do not aim to repay buy-to-let mortgages. They see their eventual profit in the equity growth, but as markets can go up and down, it is advisable to take at least a 10-year view. Some people have been lucky and bought just before a property boom, but this is almost impossible to predict.

If you are going to face an inheritance tax problem later in life, you can also pass these properties on to your children as a gift, and after seven years, it will be outside your estate (to the value of the nil rate band of £325,000 per person).

You might also find that the student flat you bought for your child can eventually give them a great deposit for a house.

I would highly recommend seeking professional advice. Although savings rates are very low, the stock market still provides good investment opportunities, so you should make sure you are comfortable with having your money tied up in bricks and mortar, with no quick exit. You can sell an investment immediately, but selling property can often take six to 12 months.

Tips on buying property to let
  • Choose a good area. Although most people buy close to home, it might be better if you look a bit further afield.
  • Think about your target tenant. It is also advisable to consider taking out landlord's insurance that will cover unpaid rent.
  • Be aware of special rules and regulations. For example, student properties must have a fire escape and fireproof furniture if you plan to furnish it.
  • Consider buying 'off plan' in new developments. You can negotiate a good discount (especially if you buy more than one property) and tenants love to move into new areas.
  • Obtain references. If you are going to manage the property yourself, make sure you have a good contract with excellent references. Sitting tenants can be a big problem.
  • Try to achieve 5% growth per year, so find the cheapest property with the highest rental return.
  • You should consider holding money on deposit to ensure you have funds for repairs.
  • Do not invest for short-term gain. Property values can fluctuate and the past three years have shown they can fall substantially.
  • Liz Willis is a financial adviser and partner at the medical division, St James's Place Partnership, Wiltshire.

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