Potential landlords are struggling to achieve rents to comfortably outstrip mortgage payments by the traditional 125 per cent and meet the typical 15 per cent deposit requirement. In response to this, lenders, in a bid to keep the market buoyant, have eased their once strict buy-to-let criteria and begun allowing smaller deposits and lower rent-to-mortgage ratios.
But those looking to get into property should beware of easy buy-to-let deals and make sure their investment meets rigorous standards, otherwise they may find their dreams of riches turn sour.
Here is a five-point checklist for a tough buy-to-let market.
1. Do the figures stack up?
With the average British home now costing £194,500, and the average London property costing £313,000, according to Halifax, buying a rental property is expensive. Meanwhile, with the bank rate at 5.75 per cent, potential landlords face a far tougher time than three years ago, when a home cost £40,000 less and the bank rate was 4.5 per cent.
The traditional rule with buy-to-let was a minimum 15 per cent deposit and rental income must cover monthly mortgage repayments by 125 per cent. As it got harder to meet these restrictions, many lenders eased them. This has shifted buy-to-let from a business based on steady rental income to one where investors gamble on house prices rising to deliver capital growth.
But the restrictions existed for a reason – to make sure landlords could cover gaps between tenancies, income exceeded bills and give room for rate rises.
With analysts predicting a house-price slowdown and higher interest rates, potential landlords should protect themselves by sticking by the 125 per cent rule.
This is especially important as the current backlash against buy-to-let may lead to the abolishment of mortgage interest tax relief on buy-to-let.
2. Are you using your head or heart?
It is easy to get carried away by a property that is your ideal home rather than matching your target rental audience.
Don’t pay over the odds for a luxury, done-up property, you are unlikely to get the money back in rent. Meanwhile, if you can get a bargain property that needs sprucing up, remember if it needs major renovation you will have to pay the mortgage while you do the work before you can rent it out.
3. What is the market like?
What is the demand for rental properties and who is driving it? Researching an area, its rental values, property price growth and who wants to live there is vital.
A university, big business park or airport could make one town a better rental bet, even though it may seem less attractive than a more expensive neighbour. Don’t be blinkered. If you are serious about buy-to-let as a long-term investment, be prepared to work hard and explore different areas.
4. Does the property fit?
Who is your potential tenant? If there are a wealth of properties around, tenants may turn yours down for minor reasons. What is the local area like? Students and young professionals will want pubs, bars and good but cheap restaurants. Families want open space, schools, nice restaurants and good transport links.
5. Weigh up extra costs
Flats need maintaining, and tenants need washing machines, fridges and maybe furniture. Meanwhile, tenants will not put up with discomfort while you save up for repairs. Make sure you factor these costs into your budget.
Decide whether you will need a letting agent or not. If you live nearby, it is possible to manage the rental yourself, otherwise it can be very difficult. Letting agents may charge a fee of 10 per cent of the rent, but it is often worthwhile. Remember big is not always better, and small agents often provide a good personalised service.
You can offset mortgage interest and legitimate capital expenses against tax on rental income, but you will have to pay income tax on anything more than this. Buy-to-let properties also qualify for capital gains tax if sold.