It's ten years since the introduction of buy-to-let mortgages to the UK market, and investors' appetite for them shows no sign of waning. Buyers are still captivated by property porn' from the likes of Channel 4's Kirstie Allsopp and Phil Spencer, tempted by promises of high yields, cheap credit and relaxed lending rules. But take a closer look at the figures released by the perennially positive mortgage lenders on returns on investment and you'll soon be hopping TV stations.
Investing in buy-to-let property: what are the real rates of return?
The Association of Residential Letting Agents (ARLA) claims an annual return of 23.5% over five years on a buy-to-let investment (see the table above), a sector that now makes up 14% of the mortgage market, according to mortgage lender Paragon. But that assumes a wildly optimistic capital appreciation rate of 8.8% a year. If your hopes of rising prices don't materialise, you'll be holding a dead-end investment. ARLA also says that, on a 75% mortgage of £217,597, the net income after voids and interest is £486 a year. That means that after putting up £78,335 as a 25% deposit, you will have received less than if you had put the money into a savings account.
It gets worse. The voids' ARLA speaks of include only acquisition costs and rent lost over 27 days a year. They don't include buildings insurance (£400-£500 a year), fees paid to letting agents (typically 10%), cost of furniture and appliances, new home information packs (£600-£1,000), new licensing legislation that will cost landlords between £100 and £1,100 a year, or any of the costs that come from problems such as rowdy tenants and broken washing machines.
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Investing in buy-to-let property: are rents actually rising?
Lenders will counter these charges, stating that not only are house prices rising, so too are rents. "Landlords are benefiting from the continuing rise in property prices and rents mostly staying the same or increasing," says Andrew Moss, buy-to-let product manager with Bradford & Bingley building society. But according to figures compiled by Investment Property Databank, which monitors property prices, the net yield on rental property (exluding mortgage repayments) is around 3.6% across the country, and is as low as 2.8% in London. That tells us that rents have not risen in line with property prices in recent years, meaning that new buy-to-let investors with little equity in their properties are funding gaps on mortgage repayments as they literally bet the house on capital appreciation.
So while buy-to-let investors shouldn't be too worried if capital growth continues, "if the property market falters, many may start asking themselves why they are forking out cash each month to fund an asset that is falling in price", says Robert Budden in the Financial Times. There is, of course, the added problem of interest rates. A 1% rise would add £83 a month to every £100,000 borrowed, which will make smaller investors in particular "anxious", says Andrew Mortlake of London-based Cobalt Capital on Citywire.co.uk. Owning only one or two investment properties, these small investors make up more than half of the market. "Personally, I think we could see another 0.25% rise in interest rates by the end of the year and it could be enough to stifle demand from investors."
Investing in buy-to-let property: where will house prices head next?
And that could make for interesting developments, as buy-tolet investors have arguably been the prime feeders of the house-price beast since 1996. Take the purchases made at recent property developments in London, reported in The Mail on Sunday recently. At Falcon Wharf development in Docklands, 70% of purchasers were investors; at Angelis in Islington, 69% were; and at Lanherne Gate in Wimbledon, investors made up 46% of buyers. What will happen to prices when they begin to lose interest and money?
The celebrity property pundits continue to plug rising rents and prices; it will come as little surprise to learn that Channel 4's Location, Location, Location's presenters, Kirstie Allsopp and Phil Spencer, are both property agents. Take a recent programme, where Oxford was described as the "ultimate buy-to-let in the ultimate place to invest". In fact, according to one local agent cited in The Guardian, "returns that were 11% a few years ago are now closer to 4%". As the Guardian's Miles Brignall points out, "given the recent huge rises in property prices, few investors are going to make much (if any) profit from rental income".
Jody studied at the University of Limerick and she has been a senior writer for MoneyWeek for more than 15 years. Jody is experienced in interviewing, for example in her time she has dug into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.
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