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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
8 of the best converted properties for sale nowThe best converted properties for sale – from an apartment in the former Hartley’s Jam factory on London’s Southbank, to a converted 18th-century mill in Itteringham, Norfolk
-
How taking a two-year career break could leave a £26k hole in your pensionCareer breaks are increasingly common but it is important to take steps to protect your pension, as gaps compound over time
