How to ride the buy-to-let property boom

Falling house prices and rising rental yields are once again creating big opportunities for investors. There is hot competition for homes that are available, pushing rents still higher (Michael Crabtree) Soaring rents on residential properties are opening up lucrative opportunities for buy-to-let investors. Record demand has pushed rents to their highest level for two years, according to a survey by LSL Property Services, which owns Your Move, the biggest letting agent. The growth of the buy-to-let market is being fuelled by would-be buyers who have been forced to rent for longer because they cannot get on the property ladder. However the booming lettings market is also encouraging the return of “accidental landlords”, who are unable to find a buyer for their own properties but still need to move. According to a poll of estate agents by The Sunday Times, one in ten frustrated sellers are now letting out their properties. In some areas, the ratio is one in five. There is hot competition for the homes that are becoming available, pushing rents still higher. In London, an average of six potential tenants are competing for every property, according to Marsh & Parsons, an agent. In some prime areas, there are 12 renters fighting for each property, it said. Ludlow Thompson, another London letting agent, said it was taking sealed bids for the few properties on its books amid “an unprecedented boom” in demand — up 11% on this time last year. It said the gap between supply and demand was raising rents by 20% year-on-year in some areas. Stephen Ludlow, of the agent, said: “In the past 20 years I have never seen rental properties moving as quickly as they have been recently.” It is not only London that is seeing a spike in letting demand. Tenants outnumber available property by seven to one in southeast England and five to one across Britain as a whole, said Countrywide, the national estate agency chain. It took on 20,000 tenants in August, 55% more than at the same time last year. Restrictions on mortgage lending have forced many would-be first-time buyers to remain in the rental sector. A reduction in new-build developments and a shortage of social housing have also increased demand in the rental market. Buy-to-let was given a boost last week with the return to the market of Paragon, one of the biggest players in landlord mortgages before the credit crunch. The Nationwide house price index, released on Thursday, showed that prices rose marginally by 0.1% in September, with the average property now worth £166,757. However, the annual rate of house price inflation fell from 3.9% in August to 3.1%. A comparison of the previous three months, regarded as a better indication of the market’s movement, shows that prices declined 0.9%. We provide advice for investors in the buy-to-let market, as well as those hoping to ride the buy-to-let wave. Buy-to-let investors Opportunities are available for investors in many regions. The highest rental yields last month were in Wales, at 6.4%, according to the latest survey by LSL Property Services. The East and West Midlands offered the next best returns, with 5.6% and 5.2% respectively. The survey found that rents were rising fastest in southeast England (2.8%) and then London (2%). Rents fell by 1.5% in the West Midlands and 1% in Wales. James Scott-Lee of Chancellors, the estate agent, said: “There is a shortage of supply across the country, particularly in student towns, and there is clearly demand for new investors who are earning next to nothing from deposit accounts.” One- and two-bedroom flats are also desperately needed. David Whittaker of Mortgages for Business, the broker, said: “There is huge demand in the private rental sector from first-time buyers unable to get on the ladder. This government is also unable to afford new social housing. It is effectively depending on the private rental sector to provide it in the coming years. Landlords now have more confidence in the market.” Countrywide said more two- and three-bedroom houses are also needed. The recent residential lettings survey by the Royal Institution of Chartered Surveyors found that demand for houses was rising even faster than for flats. Bruce Evans, of Countrywide, said: “Rental stock suitable for families is in particularly short supply. The proportion of families we have on our books has increased from 29% at the beginning of the year to 42% now. There is a large demand for houses with outside space.” Evans said the big cities and southeast England had the biggest shortages and so the best potential returns for investors. The buy-to-let market shrank to almost nothing in the wake of the credit crunch. In the second quarter of this year, lenders approved 24,900 buy-to-let loans worth £2.4 billion, compared with 88,000 in the same quarter in 2007, according to the Council of Mortgage Lenders (CML). However, there are clear signs of recovery. The number of buy-to-let mortgage products available has increased from just 50 in April last year to about 280 — although still far from the peak of 2007, when more than 3,600 deals were available. Paragon returned to the market last week with fixed-rate and tracker deals, including a two-year fix at 5.5% a year. There is a 2.25% fee and it is available to borrowers with a 25% deposit. The lender has no limit on the number of properties a landlord may hold and will accept applications from limited companies and for multi-unit blocks and houses in multiple occupation, such as student lets, provided that the borrower is an experienced landlord. However, it requires rental cover of 130% — higher than its competitors — and will base the calculation on an interest rate of 7%. The return of Paragon comes just a fortnight after Lloyds Banking Group revealed bad news for landlords, tightening its lending criteria and effectively shutting the door on professional investors. Lloyds, which provided 60% of the buy-to-let loans made last year through its Birmingham Midshires brand, cut the number of properties on which borrowers could secure loans from nine to three and lowered the total amount of buy-to-let lending to individuals from £3m to £2m. Last week, the Mortgage Works, owned by Nationwide building society, responded to the resurgence of Paragon by cutting some of its rates and introducing new deals. It is one of the few lenders offering landlord loans for those with a 20% deposit, including a new two-year fixed rate of 5.19% with a 3.5% fee. While there are plenty of opportunities for landlords with equity to expand their portfolios, falling prices could hamper the ability of some to remortgage, particularly when interest rates begin to rise as expected next year. Paragon has admitted that its existing borrowers have an average loan-to-value (LTV) ratio of 83%. It is currently only offering deals up to 75% LTV, which prevents the majority of its existing borrowers from taking advantage of its new deals. These landlords are paying a low standard variable rate of 2.5%, but if the Bank of England base rate starts to rise, some may find it tricky to move to the security of a fix. Landlords are required to pay capital gains tax on the sale of properties which are not their primary residence. The taxman takes 28% of any increase in value in the property, but landlords can dramatically reduce the CGT bill if they live in the property as their main home for a short period of time because special rules apply to properties that have been a primary residence in the past. Under the rules, the period of time that a second property was the main residence is exempt from CGT, plus the last 36 months of ownership.

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