With inflation rising fast and interest rates pathetically low, where can you go to make sure you get a real return on your money? Listen to the property crazies and the answer is apparently perfectly obvious: buy to let.
After a dicey few years, things are looking up. Rents are rising and there are hordes of new buy-to-let mortgages coming on to the market. Couldn’t get a mortgage on a two-bed flat in Birmingham last year? You might now.
In March 2010, there were 299 different products that let you borrow against a rental property. Now there are 463. So you should buy a house and let it out. That way, you’ll not only make money from the rental income, but over time you’ll make a killing on the capital gains too.
Sounds good, doesn’t it? Well guess what? It’s nonsense. It is true that average rents in the UK have been rising – up 0.4% in March for example – and that this, combined with falling house prices, have made property yields look rather better than they did.
The average yield in the UK is now running – depending on who you listen to – at about 5%. And if you make the right investments, we keep being told, you’ll get something in the region of 7%.
But 7% isn’t the net yield. It’s the gross yield. And if you are a small investor with, say, one or two properties, you not only won’t ever get it, but you also won’t have the faintest idea what kind of yield you will get.
Why? First up, the maintenance lottery. I got a miserable email from a journalist friend trying to sell a flat this week. His gross yield sounds just fine. But the net yield just isn’t. The boiler gave up the ghost a few weeks ago. The replacement cost was to be £3,000. Then there turned out to be seagulls in the attic (attacking gas men who came near their nests). Another £400 was added to the bill. His net yield will be negative this year.
Then think about voids and about bad tenants: according to LSL Property Services, 9.4% of all UK rent is in arrears. Yes you did read that right. One in ten landlords isn’t getting the rent they thought they would. Not only that, but tenants who don’t pay also don’t take much care of the places in which they live. So every time you manage to get them out, in order to get new tenants in, you’ll have to redecorate. Hello negative net yield.
This alone probably explains why repossessions in the buy-to-let sector tend to run at about twice the rate of those in the owner-occupier sector. Now, you won’t always be the unlucky one in ten of course. You could be in the lucky nine. But it’s still a whopping risk to have hanging over you. Particularly when your boiler could go any minute.
And it is even more of a risk when house prices are falling. It used to be that negative net yields were by-the-by. I remember getting press releases throughout the bubble pointing out that “total returns” on buy to let were 10% plus. But when you looked at the small print you found that net yields were negative, and the total return numbers were turbo-charged by capital gains. Fine for those buying and flipping. Not so good for those trying to make an income.
Either way, that doesn’t happen any more. For those who can get their 5%-odd rental yield, the Council of Mortgage Lenders has total returns at 2.6% a year “as rent rises counteract the annual fall in rental property prices”.
So, if you want to make money out of buy-to-let now you have to assume that house prices will rise from here. There was a headline in The Times yesterday that suggested this might be possible. “Average house price at three-year high”, it said.
But as it turned out, it didn’t refer to the prices at which houses actually exchange hands. Just to the prices their owners would like them to exchange hands at. These are different things.
Which is why, according to Zoopla, more than a third of the owners with houses on the market at the moment have had to step back from their heroic instant millionaire fantasies and reduce their prices at least once. The average reduction? £18,970.
Buy-to-let investors used to refer to their properties as their pensions. My friend doesn’t refer to his as his pension any more. No. After a couple of years of trying to dump it and its hideously negative yields, he calls it an “accursed millstone.”
He isn’t alone in his sentiments. So here’s my advice. If you are thinking of getting into the buy-to-let market, don’t. Use the deposit cash to buy NS&I inflation-index-linked certificates instead.
Buy-to-let is likely to give you a zero or negative return. The NS&I deal doesn’t offer a certain return (it depends on RPI) but it is 100% certain to – at worst – be positive and to beat inflation. It really shouldn’t be a tricky choice.