Your crucial guide to buy to let

IT HAS been a very tough few months for Britain’s army of buy-to-let investors.

Falling property prices has plunged buy to let investors into a deep financial crisis Falling property prices has plunged buy-to-let investors into a deep financial crisis

The tightening of lending criteria, falling property prices and cashflow problems has plunged many of them into a deep financial crisis.

Hundreds of properties are being repossessed every month while 18,000 people are more than three months in arrears on mortgage repayments, according to statistics compiled by the Council of Mortgage Lenders.

The bad news is that no one expects this year to be any better.Nitesh Shah, an economist at Moody’s, warns: “With the economy in recession and unemployment rising tenant demand and their ability to make payments will be tested over the coming quarters.”

Geoff Penrice, a financial adviser with Bates Investment Services, says: “People have decided to let their homes after finding it harder to sell. This has led to a glut of properties and a fall in rents.”

Even the interest rate cuts have had little impact. “You might think the falls would lower the cost of buy-to-let mortgages but banks are not passing on the full reduction to borrowers,” he adds.

So here we have come up with a survival guide for current owners and have posed the question: Does it make sense to buy property now?

Buy-to-let basics

Before analysing the state of this market it’s important to understand buy to let. The definition is a form of residential investment where you buy a property — normally via a specialist buy-to-let mortgage — and then rent it out.

As well as generating an income from the rent, potential investors hope the capital value will rise over time. So in the best-case scenario the property will be earning money for its owner on two fronts.

The state of the market

There are 1.14 million active buy-to-let mortgages, according to figures from the Council of Mortgage Lenders, which are accurate up to the end

of September 2008.

This is 42 per cent (or 337,500) more than the 797,100 mortgages that were in place at the same time in 2006 and highlights the remarkable boom in popularity the buy-to-let market was enjoying prior to the credit crunch.

However, the financial problems were already clearly starting to take their toll last year. As well as 2,700 properties being repossessed by lenders during the first nine months of 2008, the number of mortgages in arrears of more than three months at the end of September had almost doubled to 18,000 in just six months.

Troubleshooting

There are plenty of difficulties being encountered by landlords at the moment including falls in property values, an inability to find tenants, difficulty covering costs and tenants defaulting on their rent.

But none of these should be enough to put you out of business as long as you move quickly to tackle the problems and find workable solutions, according to Kate Faulkner, the managing director of DesignsOnProperty.co.uk.

“Buy to let is just like running any business so you should expect to face problems,” she says. “To be successful you need to react quickly to fix them and if you don’t know how to do it yourself then seek professional, independent advice.”

Problem one - Property values are falling

This shouldn’t be a problem given that buy to let is a 10-year-plus investment.

If you bought a number of years ago then there is probably a fair amount of equity built up in the property and if you only bought recently you should be fine over the longer term as long as you can ride out the current storm.

In fact, Mandy Bradley, of website Propertyforecasts.co.uk says there are already signs of hope in the property market with estate agents enjoying a significant increase in enquiries since Christmas.

“Location is highly significant with some places increasing while others languish,” she says.

“But any market turnaround will also be slow, with rates of growth nowhere near the levels between 2003 and 2007, while anyone who paid too much in the first place will find it takes longer to recoup present losses.”

Problem two - Can’t find a suitable tenant

You need to find out why, says Kate Faulkner, the managing director of DesignsOnProperty.co.uk.

“Secure three valuations from letting agents to make sure you are not pricing yourself out of the market,” she says.

“It’s better to rent it out for £400-a-month than hold out for £500 and have it empty for months.”

It’s also worth checking out the competition as you may be surprised what’s on offer in terms of condition and price.

“Consider contacting your local authority as they are looking to work closely with landlords due to a rise in repossessions and the need for more rental accommodation,” she adds.

If you have been searching for tenants yourself then consider going via a lettings agency that can take on the hassle and stress in exchange for fees that usually equate to 10-15 per cent of your monthly rental income.

A suitable one in your area can be found by contacting the Association of Residential Letting Agents.

Problem three - Being unable to cover costs

It is essential to keep costs to a minimum at all times but this is particularly relevant during an economic downturn when every penny counts, points out Faulkner.

This means analysing your figures and working out where savings could possibly be made.

“You need to see what costs you can cut,” she says.

“This includes looking at ways to reduce mortgage payments in order to ease the pressure on cashflow, such as switching from a repayment deal to interest-only.”

It might even be worth considering finding someone willing to invest over a short period to help you out.

Problem four - Securing financing

There’s no doubt that it’s become harder to refinance buy-to-let projects but there are still some relatively attractive deals available, according to David Hollingworth of broker London & Country.

“Review your mortgage and take a look at what you will revert to if you will soon be coming of an attractive fixed-rate deal,” he says.

“For example, you may go back to a tracker, which could be just 2 per cent — or even less — above the base rate.”

However, there have been some fundamental changes in recent months. Not only have a number of lenders gone out of business but the maximum loan-to-value ratios on offer have shrunk from 90 per cent to around 75 per cent.

This means you will need to find 25 per cent of the purchase price, which is no mean feat. 

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