Should You Still Invest in Buy To Let?

Experts predict that the housing market will see price falls in 2008 - so will property still provide a safe investment in the long-term? We take a look

Hundreds of thousands of people have reaped the benefits of the latest house price boom - particularly those who invested in residential property. And experts claim the UK buy-to-let sector is well placed to withstand any downfall in prices - mortgage brokers Moneygate this month predicted that the market would continue to grow as potential buyers opt to keep renting while they wait to see what happens in the mortgage market.

Yet buy-to-let doesn't offer a guaranteed return and piling all your investment eggs into one house-sized basket could leave you exposed if house prices continue to fall. In the early 1990s residential properties lost one-fifth of their value - and some areas are now beginning to see fresh price decreases.

Industry professionals suggest maintaining a wide spread of investments. "Property is an option in personal finance planning, but it's not the be-all-and-end-all," says Malcolm Harrison of the Association of Residential Letting Agents (ARLA). "One of the reasons why people like buy-to-let is that it offers a real, tangible investment. There are not many nest-eggs that you can walk past and pat the hedge."

If you're considering putting your money into property, you need to think about the pros and cons:

Where buy-to-let scores
Historically, property has proved a good investment for long-term returns. Rental yields typically run at around 5% of a property's value, which can help to provide a sustained, growing income.

And, despite the credit crunch and the threat of house price falls, current conditions still favour the rental market. High levels of immigration and the increasing number of people being priced out of the housing market have helped to maintain significant demand for rental properties. More people remaining in the rental market for longer should also help push returns up.

You can also maximise your potential returns by using your mortgage to buy the property outright. For example, an investor who owns a £200,000 property outright would make a 20% gain if they sold it at £240,000. If they funded the purchase with a £160,000 mortgage, meanwhile, and sold for £240,000, the profit would be set against a real outlay of £40,000 plus mortgage interest paid out - allowing the investor to nearly double their money.

Possible pitfalls
Putting your money in bricks and mortar is a significant undertaking - many lenders will want to see proof that rent will be at least 125% of your repayments before they will offer you a buy-to-let mortgage. What's more, offloading a bad property investment is considerably more difficult and takes far longer than selling shares - and if interest rates rise, you may start to struggle to cover your costs.

The related costs of buy-to-let projects can be high compared to other investments - mortgage, solicitors' and surveyors' fees can potentially add up to thousands of pounds. Further hassle comes with the various maintenance and safety regulations to consider. "There is the potential for problems with tenants, and if you are not prepared to manage them yourself, you'll have to pay a managing agent to do it for you," says Anna Bowes of leading financial advisers AWD Chase de Vere.

Any "void" periods between tenants are expected to knock two months worth of rent off every year - but without careful research you may find your property sits empty even longer. "It's vital that you talk to letting agents about what sort of properties are lettable, and at what price, before you buy," says Malcolm Harrison.

For a typical fee of 10% (plus VAT), agents will find you tenants, check their references, hold deposits, take inventories and change utilities. For a further 5% (plus VAT), they will sort out all ongoing maintenance and repair issues.

Courtesy of Emma Tyrrell, Monday December 10, 2007