This is a good time to be a landlord in London. A "perfect storm" of low mortgage rates, strong rental demand and steadily rising property prices is encouraging responsible landlords to invest long term in buy-to-let, providing decent homes for renters who cannot get on the ownership ladder, while making a sound pension investment — which is more than the banks can promise. In London private renting accounts for 30 per cent of all homes and is growing.
Buy-to-let collapsed five years ago as the credit crunch took hold but has staged a remarkably rapid comeback. Last quarter, lending to landlords was at its highest level since 2008, with 40,000 mortgages worth £5.1 billion advanced, according to the Council of Mortgage Lenders.
Annual buy-to-let returns — made up of capital growth and rent — are 10.2 per cent, according to specialist estate agent Ludlow Thompson. The average London rent is £1,609 per month and rental "yields" are typically 5.1 per cent.
"Mortgage rates are at record lows and likely to stay that way for at least three years following the Bank of England's 'forward guidance' announcement, and this is allowing landlords to invest with confidence," says the firm's Stephen Ludlow.
Deciding where to invest depends on your budget, your preference for income or capital growth, your appetite for risk and your exit strategy. Higher-yielding homes include cheaper ex-council flats, where rents are a higher proportion of the property's value. A two-bedroom flat in a high-rise block in Kennington is on sale for £165,000. Call 020 7820 4100.
Flats above shops can also provide higher rental returns. "This can make a huge difference over the lifetime of a property, easily equating to an additional £50,000 in income for a 15-year period, the normal buy-to-let time frame," adds Ludlow.
Yields are higher because such flats tend to be lower priced and lenders are reluctant to advance mortgages, meaning buyers have to be cash-rich. This shuts out owner-occupiers and keeps a ceiling on values. Yet such flats are popular with renters such as students and nurses.
Family houses are also in demand. A five-bedroom Victorian house at Flaxman Road, Camberwell, SE5, costs £462,500 and would rent for £625 per week, a yield of 6.2 per cent. Call 020 7820 4100.
Buying property in south London
South-east London is good value for landlords at the moment, with cheaper properties and faster-growing rents than other areas. In general, homes with quick transport links to the West End, the City and Canary Wharf make good buy-to-lets. Areas outside travel Zone 1 on the Northern line are a good option because the line splits at Kennington and connects to the main employment centres.
Analysis by rental property group Move With Us shows that the Olympic boroughs of Newham and Tower Hamlets are among the top rental yield locations (see table).
Experts say the dynamics of the rental market point to buy-to-let being sustainable over the medium to long term. This year, the number of privately rented homes in Britain reached almost five million — up from 2.5 million in 2002. However, individual landlords face competition from new corporate landlords such as pension companies and hedge funds who are moving into the government-backed "build-torent" sector.
Developers report that investors are buying up apartments because of the hassle-free, low-maintenance nature of new-build. Though there is normally a price premium, running costs are lower and rents are higher. Some developers also offer cut-price furniture packs and sometimes rental guarantees for periods of up to two years.
Fully equipped, ready-to-move-into flats giving investors rental returns of 7.5 per cent are on offer at Bellway's Enfield Central scheme next to the train station. Prices from £196,995. Call 0845 676 0263.
Barratt is paying five per cent net at two schemes — Renaissance, in Lewisham, and Waterside Park, Royal Docks. Rental guarantees are a worthwhile incentive for off-plan home buyers as a monthly income is paid from completion and the hassle of finding and dealing with tenants is removed. Normally guarantees last for two years. Renaissance is a major 788-home scheme in Lewisham town centre, an up-and-coming travel Zone 2 address with eight-minute train links to London Bridge. Prices from £230,000. Waterside Park apartments cost from £259,000. Call 0844 5566 166.
Landlords' costs, including agents' fees and service charges, typically account for 30 per cent of gross rental income. However, investment property is tax efficient. Mortgage interest costs plus other expenditure relating to the repair and management of the property, are tax deductible, and losses can be carried over from one accounting period to the next to minimise capital gains tax.
Estate agents normally charge between eight and 12 per cent for finding a tenant and up to 18 per cent for a full management service. Check the renewal commission in the event of tenants staying on. Agents often want to charge the same fee again but will usually reduce the fee if requested.
Lenders normally limit buy-to-let mortgages to 50-75 per cent of the property's value, so landlords need to put in at least 25 per cent.