Money
Making money
The pros and cons of buy-to-let
Property values are stagnating and rising interest rates are fuelling a demand for rental accommodation. The irresistible draw of investing in bricks and mortar seems stronger than ever today, but would-be buy-to-let investors are being urged to be cautious, writes Teena Lyons
"Lots of individuals believe they understand the property market, but buy-to-let is a business and needs to be run like any professional organisation," said Andy McQueen, managing director at Nationwide Specialist Lending. "It is really important to take advice according to your own circumstances."
The most obvious and complex pitfall in a buy-to-let investment is the tax liability. There are tax considerations on the purchase price, the rental income, on maintenance and outgoings and then capital gains when the property is sold.
According to recent Inland Revenue figures, 80,000 property investors failed to declare their full tax liability on buy-to-let and it is an area which is being given close scrutiny.
Potential landlords also have to become acquainted with the Tenancy Deposit Scheme which was introduced in April.
It is now mandatory for all landlords to pay their tenants' deposits into one of two types of scheme. Arbitrators decide what to do with the deposit if there is a dispute between the landlord and the tenant at the end of the tenancy. Yet, 55 per cent of landlords are, even now, not aware of the scheme, according to the Association of Residential Letting Agents.
Plus, another potentially off-putting initiative to consider, is the recently introduced licensing scheme for any landlord who has a property with three or more floors occupied by five or more unrelated tenants. A Multiple Occupation license from the local authority can cost up to £1,700. These new rules have not yet dented the nation's enthusiasm for buy-to-let and the market continues to increase exponentially.
More than one in ten properties are now owned on a buy-to-let basis and last year 330,300 mortgages were awarded to buy-to-let landlords. The signs are this trend will continue. According to a survey by the Royal Institution of Chartered Surveyors (RICS), economic fears have made people less willing to join the property ladder, with the knock-on effect of pushing up rental prices.
The RICS is also predicting a 50 per cent rise in repossessions next year as interest rates begin to bite, leading to a further demand for rental accommodation.
But, on a cautionary note, the very factors which are leading to a buoyant rental market, can also trip up novice investors.
Crown Mortgage Management, which chases debts for mortgage lenders, says there has been an increase in both arrears and in repossessions of properties owned by first-time landlords.
Buy-to-let investors who over-stretch themselves will undoubtedly struggle in the current climate.
However, if a potential investor is determined to make a move into buy-to-let there are some tactics they can follow to help make money – as long as they take advice first.
Buy-to-let veteran Tina Huelin, who has made millions out of a string of properties in Wales, says the most important consideration is a high yield, or rental return relative to price.
After that, the priority for an investor is chose the type of property and location with care.
"Don't just listen to what estate agents tell you, they have got a vested interest," says Tina, who has also set up a company called Handywoman to maintain properties. "The best properties are one to two bedroom, ex-council houses in need of some refurbishment and with plenty of scope for extension."
All the signs are that there is still profit to be had in property, but only for well-informed and cautious investors.
* Consumer journalist Teena Lyons' opinions are her own and for general information only. Always seek independent financial advice.
