On first glance, it looks like the tide is turning for buy-to-let investors. "The demise of the buy-to-let landlord is overdone," says Richard Fletcher in The Daily Telegraph. Fletcher based this opinion on a press release from Paragon a specialist buy-to-let mortgage broker whose profits are plummeting which reported "a marked improvement in rents and yields over the past six months".
A survey by the Royal Institution of Chartered Surveyors backs up the story. "The net balance of surveyors reporting an increase in gross yields is at the highest level since the survey began," says Jane Baker on Fool.co.uk (records began in 1999).
Add to this news from the property website Hometrack, reported in The Times, that the cost of renting has risen 6.15% in the past year, and to the casual observer it would appear things are really looking up. Unfortunately, it's not so.
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As James Ferguson points out in the Model Investor, it's going to take a lot more than a small rise in rents to bail out the average buy-to-let investor. Take a hypothetical buy-to-let landlord who was renting out his flat (valued at £120,000) for £120 a week before Christmas. According to Hometrack, he is now getting 4% more rent, amounting to £124.80 a week, making his annual gross rent £6,489.60, up from £6,240, says Ferguson.
That's nice, but at the same time what if the interest on his just-matured £100,000 two-year fixed-rate mortgage has shot up to £7,200 (7.2%) from £4,500 (4.5%)? He's just gone from a £1,740 annual profit to a £710.40 annual loss. That's "hardly cause for celebration and certainly not an incentive to invest".
Still, that hasn't stopped some people trying to say it is. According to Judith Heywood in The Times, anyone thinking of buying a property to rent out should consider Oxford or Cambridge. She warns that the closer your rental yield gets to being 100% of the cost of buying, the more risky the property, as people will choose to buy instead of rent. But in Oxford and Cambridge, "respectively the cost of renting is 72% and 69% that of buying". That means landlords should buy. This advice basically boils down to buying only in places where you're certain to lose money every month. Madness.
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