Among the villains of modern life, buy-to-let investors feature somewhere between people who text while they’re eating and dog-walkers who leave bags of poo dangling from trees. If you are in the business yourself you may consider the accusation of pricing the young out of the housing market to be unfair, preferring to see what you do as providing a quality service for tenants that’s unrecognisable from the days when Rachman ruled the trade. But leaving aside the rights and wrongs, are there still good returns to be made, or are buy-to-letters about to get their comeuppance?
Compared with their counterparts in the bombed-out markets of Spain and Ireland, British property investors had a good downturn. The slump did not expose an excess of housing but, by reducing construction, intensified a shortage. While prices fell up to 30 per cent, rents rose and interest rates fell. Latterly, values have recovered and are now 26 per cent above their 2009 nadir, says Nationwide. In London they are 65 per cent higher. But the outlook is less friendly, with a chorus warning that house prices may have peaked. Capital growth matters in the buy-to-let market because rental yields have for some years been poor. No one much cares about this when the value of their property is rising at 17 per cent a year, as it has been in London, but if prices are static or falling, what then?
Even yields which sound initially enticing can turn out disappointing once the costs of upkeep have been subtracted. When your Cash Isa says it offers 1.5 per cent, 1.5 per cent is what you get. If your property promises a gross yield of 4 per cent, on the other hand, you’ll be lucky to end up with half that. Even in London, rental properties spend about one week in ten empty, awaiting new tenants. Over time that will reduce your gross yield to about 3.6 per cent. If you let through agents who charge up to 15 per cent plus VAT for a full service, your yield may dip below 3 per cent. Then comes maintenance — and for most flats, service charges and ground rents. These can easily account for 1 per cent annually of the capital value of your property, reducing your net yield below 2 per cent — back in savings-account territory and significantly lower than the return on the FTSE 100.
There are places where you can achieve higher gross yields. According to HSBC the highest average yields on offer are in Southampton (8.73 per cent), Manchester (7.98 per cent) and Nottingham (7.67 per cent). But these can be even more illusory.
Yields in those cities are highest because houses are relatively cheap and there are lots of students needing rooms. Keeping a student house full can be a challenge, and maintenance costs can munch a proportionally larger slice from your rental income: it doesn’t cost a lot less to maintain a house on Tyneside than it does in Clapham, but rental income might be only a fifth. Plus there are onerous bureaucratic duties attached to owning so-called ‘houses of multiple occupancy’, which have to be licensed with the local authority.
The lowest gross rental yields, by the way, are to be found in Kensington and Chelsea (2.88 per cent), Thanet (3.33 per cent) and Hastings (3.38 per cent).
Property is a good hold if you think you might have to help your children onto the housing ladder. It is also the easiest way to supercharge your returns through gearing, if you feel bullish. Take out an 80 per cent loan and the profits on your capital are multiplied five times. Unfortunately, this also applies to the losses. You have to take into account that while interest rates might be low now, it won’t take much of a rise to reach a point where your rental income is dwarfed by your mortgage repayments.
There are two more disadvantages with buy-to-let. Unless you have millions to invest you must put all your eggs into one or two baskets. Moreover, in contrast to an Isa — into which you can now place £15,000 a year — you will have to pay income tax on your rental income and capital gains tax on any capital growth when you come to sell. Unlike shares and savings in the bank, you can touch, scratch and sniff a property — something that gives some comfort during a slump. But don’t think it’s a guarantee of lucrative, worry-free investment.