Is Now A Good Time To
Invest In UK Buy To Let Property?
Is Now A Good Time To Invest In UK Buy To Let Property? (Aug2011)
With more and more people looking for alternative ways of securing their financial future, many are turning to buy to let property investment in the UK. But is now a good time to buy?
If you're currently a landlord, you'll know that the health of the buy-to-let industry is anything but sickly. Landlords are benefiting from the somewhat stagnant mortgage market, as people who can't afford to buy need to live somewhere.
The Residential Rental Market is Booming
Research into the private rented sector by ARLA (Association of Residential Letting Agents) says an under supply of good quality property is threatening the UK rental market.
The continued shortage of housing, coupled with the increasing population, increasing rate of divorce and less mortality means this is likely to continue. As an increasing number of migrants arrive in Britain looking for employment and better opportunities, they need housing and and they mostly seek rented accommodation.
According to ARLA, the imbalance of supply and demand is continuing. During Q2 2011, three quarters (74%) of members reported there were more prospective tenants than properties available - a figure that jumps to 82% in central London.
By comparison, just two years ago the number of members reporting an undersupply of UK rental property was 10% and 8% in central London.
Ian Potter, operations manager of ARLA, said: "As many parties are reporting, there is a clear shortage of homes to buy in the UK. Faced with this, many people are turning to rental homes as a more flexible option than buying; yet as our research highlights that the dearth of properties is just as real in the private rented sector (PRS), and is showing no signs of improvement."
More articles about UK buy to let rental market.
Will Investment Property Increase In Value?
Historically UK property prices have doubled in value every 10-15 years.
Just 20 years ago, in 1988, the average house price was just £50,000. The Nationwide building society said that the average house price in July 2011 was £168,731.
That's an increase of £138k – or 276%! If you'd had that kind of information in 1988, how many properties would you have invested in then? Most likely as many as possible!
Remember, this increase is despite the housing market crash in the 1990's and the more recent fall since 2008. This should indicate that despite ups and downs, housing prices tend to recover over time.
The first step to making money from the property market, is to get in the property market.
The key is to understand that investing in anything – whether it be property, commodities, equities, art – all comes with an element of risk. The value of most investments will rise and fall and the goal is to make money over the long term.
If you're risk-averse and can't handle seeing fluctuations in the value of your assets, you're probably more suited to putting your money in the bank or in a some kind of cash ISA or fixed-rate bond, where your capital is guaranteed. You'll get low returns, but very low or no risk.
If you're looking to make a short-term killing, you're probably best to steer clear of property at the moment. There are bargains to be had, but if you intend to sell on quickly, you're likely to encounter problems.
Buy To Let property investment is for you ... if you understand that gains come over the long term. Buy investment property below value and rent it out so that someone else is paying your running costs … and sit tight until prices rise.
It doesn't matter if your property loses 10% of its value in the short-term. You'd only feel it if you tried to sell or re-mortgage soon after purchase ... and within 5-10 years, it will regain that lost value plus much more.
This is a well known fact based on a long history of the housing market – and history does repeat itself when it comes to housing prices.
The current fall in prices is not due to a lack of demand for property. It's due to a shortage of finance. First time buyers still want to buy, homeowners still want to trade up. But gone are the days of 100% mortgages. Now lenders are demanding large deposits and have restricted their criteria with regards to who and who cannot borrow from them.
That's great for the rental market, but a shortage of buyers who can borrow is not good for property sales. This causes house prices to fall as keen sellers reduce the price to sell quickly.
It follows that once the lenders' appetite for lending increases again, house prices will start to rise and more buyers are able to enter the market.
What About Investment Property Financing?
There are far fewer mortgages available to buy-to-let investors than at the height of the property boom in 2007. According to financial analyst Moneyfacts.co.uk, in July 2007 there were 3,648 buy-to-let deals. Now landlords now can choose from less than 300 products. The average buy-to-let loan interest rate is still relatively low with many currently under 3.5%.
But most of these loans come with hefty fees on top. The average fee for a £150,000 buy-to-let mortgage is just over £2,500 on a mortgage with an interest rate of 4.5% - down from an average of 5.11% a year ago.
However, most of these mortgages require a 25% deposit. Lenders may also demand a minimum income guarantee and proof the rent will be at least 125% of the mortgage interest.
If you're considering buy-to-let, consider all the costs. Buy to let is a business and you should run it as such. When calculating if a property is good deal for you – make sure you calculate all your running costs such as:
- Mortgage interest – and increased payments if you're not on a fixed rate
- Letting agent fees including new tenant set up and tenant renewal fees, as well as monthly charges
- Advertising and tenant referencing if you don't use a letting agent
- Gas and electric safety checks
- Service charge, ground rent (not just apartments, but even some houses incur service charge and ground rent)
- Maintenance, repairs
- Buildings insurance for landlords
- Void periods – even if the property is empty and no rent coming in you'll be liable to pay the mortgage
- Legal costs in case of problem tenants
So Should I Buy An Investment Property?
The important thing now is to make sure that you can answer 'YES' to the following three questions:
- Are you buying below market value investment property ... with a genuine discount?
- Are you generating a positive cash flow?
- Are you planning to hold on to the property and you don't need to sell quickly?
If you can answer 'yes' to the three questions above, you won't have to worry about what happens in the property market in the short term, as you have purchased for the long term. By sticking to these three golden rules, you will make the following happen:
- Your discount will cushion you from any further property falls - if that were to happen, you avoid negative equity
- Your positive cash flow means your property is generating a rental profit - so you're making money from your property from day one
- By not selling in the short term, you give your property investment a chance to grow ... and that's when the real money is made.
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