The Bank of England’s latest snapshot of the mortgage market shows us that novice buy-to-let investors are stampeding in on the back of reports that the rental side is booming as rents are rising. However, nervous first-time landlords don’t want to make mistakes with their precious pension money. So where should they buy to let? Should they aim to be in central London or settle for a pleasant suburb close to where they live (and know the market)? Should they head for a regeneration zone, or buy in the country?
The first thing you have to decide is whether you want capital growth or rental yield, as experienced letting agents say you can’t have both. Capital growth increases faster in more expensive central London areas, but your investment money doesn’t go very far - there won’t be as much rental yield from a one-bedroom property in the city as a two-bedroom place that costs less in the suburbs. If you opt for the suburbs, then be prepared to wait for your capital growth.
Investigations into the best options for landlords, carried out by Lucian Cook, head of research at Savills, suggest that the Atticis’ experience, (below), is typical of a buyer going for long-term growth - in effect a pension. Some 200 miles further north in Manchester city centre, you would not make much on property growth as you can buy a two-bedroom flat for £185,000. Prices there are forecast to rise by just three per cent by 2016, well below the rate of inflation, but if you are looking for yield then Manchester buyers can enjoy a 5.5 per cent yield on a two-bedroom flat.
When Henney Kenney-Herbert, 50, and her husband Christopher, 56, recently inherited some money, they wanted an easy-to-let, secure London investment that they didn’t have to worry about, as they live in Gloucestershire with their three children aged between 17 and 21. They bought a one-bedroom flat in south Kensington for £910,000, and their strategy was to go for the smartest postcode they could afford.
"We are very green to this so we hope we have not taken any risks. We hope the property will go up in value but we wanted yield, and with the shortage of rental property we hope it will be full all the time," they confess, adding that they get £600 a week at the moment.
Top tips from estate agents
Cook’s research reveals that flats tend to generate a better yield than houses, probably because several sharers can afford to pay more than a single family. But houses tend to appreciate in value more rapidly and may well be easier to sell, simply because there are fewer being built.
Tim Hyatt, head of residential lettings at Knight Frank and president of the Association of Residential Letting Agents (ARLA), believes investors need a minimum five per cent yield just to break even on their buy-to let-investment once maintenance, service charges, management fees and tax are taken into account.
"You can make a bit of cash but it is not going to be anything spectacular until you have owned for quite a few years," he said. He advises buying in a central London location close to transport links and places of employment, preferably big commercial offices. And "drive a hard bargain when you buy, which you can do more easily if you are a cash buyer". Then you just have to be patient. "You won’t make a quick buck but the private rented sector is only going to get bigger, and that means yields are going to creep up."
Ian Potter, operations manager at ARLA, says buyers shouldn’t necessarily stick to an area close to home. But he sounds a note of caution about that traditional buy-to-let magnet, the university town. "We don’t know how higher tuition fees will affect demand for student flats. More and more private developers are doing deals with universities and building huge amounts of accommodation for students."
Potter is also wary about regeneration zones like Stratford, where prices are forecast to rise by 24 per cent by 2016. He fears Stratford has the potential to "crash" as thousands of new flats come on stream after next year’s Olympics. "Will the demand be there long-term? We just don’t know," he said.
He says if you go somewhere such as Sittingbourne in Kent, which has good schools, good train links to London and £140 million-worth of regeneration on the cards, you can have both bets covered. You can buy a two-bedroom flat in the town for a bargain £116,000 and prices are forecast to rise 21 per cent by 2016. And the gross yield for a two-bedroom flat is 6.3 per cent.
Local knowledge: make a comfortable investment close to home
In March, after months of searching and deliberation, Stefano Attici and his wife, Lina, became the proud owners of a two-bedroom garden flat in Wimbledon.
The newly-weds chose the £403,000 property because it is close to the station and good schools, and is spacious and airy. And as they like it they are rather hoping that their tenants will like it, too.
Stefano is an investment banker who moved from Italy to London in 2007. His wife already had a flat in Wimbledon which they could live in, so they decided to invest their funds in property. The couple searched all over London before buying close to home. "Prices had gone down, I could afford it and I felt comfortable with the investment" said Stefano.
They used estate agents Hamptons International to find a young family to rent their flat at £1,700 a month, which sounds like a lot but only just covers their repayment mortgage. Profit will go on general maintenance but they are planning on long-term price rises.
Thinking ahead: find out how your investment will stack up
Manchester city centre
Forecast price growth by 2016: three per cent.
Average price and average monthly rent for a two-bedroom flat: £185,000/£840.
Average price and average monthly rent for a four-bedroom house: (not available).
Gross yield (flat): 5.5 per cent.
Gross yield (house): not available.
Bristol city centre
Forecast price growth by 2016: 18 per cent.
Average price and average monthly rent for a two-bedroom flat: £211,000/£860.
Average price and average monthly rent for a four-bedroom house: £375,000/£1,330.
Gross yield (flat): 4.9 per cent.
Gross yield (house): 4.3 per cent.
Forecast price growth by 2016: 26 per cent.
Average price and average monthly rent for a two-bedroom flat: £240,000/£960.
Average price and average monthly rent for a four-bedroom house: £589,000/£1,850.
Gross yield (flat): 4.8 per cent.
Gross yield (house): 3.8 per cent.
Forecast price growth by 2016: 21 per cent.
Average price and average monthly rent for a two-bedroom flat: £116,000/£610.
Average price and average monthly rent for a four-bedroom house: £288,000/£1,060.
Gross yield (flat): 6.3 per cent.
Gross yield (house): 4.4 per cent.
Forecast price growth by 2016: 24 per cent.
Average price and average monthly rent for a two-bedroom flat: £235,000/£1,170.
Average price and average monthly rent for a four-bedroom house: £357,000/£1,410.
Gross yield (flat): six per cent.
Gross yield (house): 4.7 per cent.
Prime central London
Forecast price growth by 2016: 33 per cent.
Average price and average monthly rent for a two-bedroom flat: £1.31 million/£3,660.
Average price and average monthly rent for a four-bedroom house: £3.6 million/£8,430.
Gross yield (flat): 3.3 per cent.
Gross yield (house): 2.8 per cent.
Finchley, north London
Forecast price growth by 2016:
30 per cent.
Average price and average monthly rent for a two-bedroom flat: £323,000/£1,220.
Average price and average monthly rent for a four-bedroom house: £749,000/£2,520.
Gross yield (flat): 4.5 per cent.
Gross yield (house): four per cent.
Measure demand: how quickly will your flat find a tenant?
* London: properties are being let within 12 days of going on to the market - four days quicker than at this time last year.
* South West: properties let within an average 13 days, with more than six tenants vying for each home.
* South East: more than five tenants per available home, which let within an average 13 days.
* North West: four renters compete per rental property.
* North: more than two tenants compete for each property.
* East Midlands: there are 2.6 tenants competing for each property.
* East Midlands: the average property is let within 15 days.
* West Midlands: more than seven tenants for each available property, which let within an average 12 days.