Building a buy-to-let portfolio can still work

Over a decade, house prices have jumped 98.1 per cent whilst shares

have fallen 21.4 per cent (or, if dividends are included, up 10.5 per cent).

Nationwide says the annual property growth rate is 8.7 per cent but predicts it will fall for the rest of the year. Following falls in April and May, Halifax announces a lower annual growth of 6.3 per cent.

The twin investment pillars are that rental income more than covers interest payments and maintenance costs whilst capital appreciation ensures a good final return.

Last year investors in the sector enjoyed a 13.3 per cent annual return, according to Paragon Mortgages. It also found that 12 per cent of buy-to-let landlords plan to purchase investment property.

The key to success is to research:

n district with letting demand (student, professional, new couples etc);

n type, cost and state of property;

n likely maintenance expenses;

n choice of letting agent.

Some prefer to be 'hands on' and undertake the work of either or both letting and maintenance but since such costs are tax-deductable, the true investor can use their time more profitably.

Last month's Budget will prompt some buy-to-let landlords to bring forward their purchase of furniture and repair work before VAT rises from 17.5 to 20 per cent. Since VAT is not charged on rental income, it is not possible to pass on the extra expense until there is either a new or renewed contract.

When sold, profits on buy-to-lets and second homes are subject to capital gains tax. Many investors will be caught by the rise in top

rate CGT which increases to 28 per cent.

Take care in appointing your letting agent as any organisation or person can assume this role.

There were plans under the last government to regulate the private rented sector but they did not materialise.

"Until that is changed via national regulation, unprofessional, unqualified and unethical operators will continue to exist," warns Ian Potter of the Association of Residential Letting Agents.

A current problem is the dearth of available loan finance for buy-to-lets. Try therefore to use as much personal capital as possible which should in turn reduce the interest rate charged on the balance.

At the market peak of August 2007, research by Moneyfacts showed 3,662 buy-to-let loans but today this is around 250.

Ask your current mortgage provider and consult a specialist loan broker. Paragon Mortgages, for instance, for long one of the specialist sources, is not accepting new business but helping existing clients.

Some well-known home loan lenders may have a division which specifically handles mortgages for the buy-to-let sector. For instance, Nationwide, the largest mutual, has a subsidiary known as The Mortgage Works.

"Lenders are dipping their toes back into the water, but are not committing serious levels of funding to buy-to-let and are being extremely careful about which customers they lend to," says John Heron, Managing Director of Paragon Mortgages

The Council of Mortgage Lenders reveals that the maximum loan to value has fallen from 85 per cent three years ago to 75 per cent last year with many providers imposing a 70 per cent ceiling.

Yorkshire and Clydesdale Banks have three fixed rate mortgage offers for buy-to-let, each with a 999 arrangement fee: two years at 5.99 per cent and 70 per cent loan to value, two years at 6.49 per cent with 80 per cent LTV and five years at 6.99 per cent with 80 per cent LTV.

Like all buy-to-let loans, watch the redemption penalties.

By comparison, HSBC offers tracker loans with rates as low as 2.49 per cent (70 per cent LTV and 499 arrangement fee).

Banks look at investor affordability as well as rental yield when

making a buy-to-let credit decision.

The recent trend has been to favour those with multiple properties who can absorb income fluctuations more easily.

The Bank of England's decision last week to hold base rate at just 0.5 per cent for the 16th month in a row allows stability in the buy-to-let market.

Although rising inflation may push the rate upwards, this exceptionally low level should be in force for several months.

The average buy-to-let loan in the UK is 133,919 (up 11 per cent in a year) but only 91,885 in Yorkshire (up three per cent annually), according to Lloyds TSB.

In 2007 there were 346,000 new buy-to-let loans taken out, worth

44.6bn, but last year the number reduced to just 93,500, worth 8.5bn.

Providers may also be worried over mortgages arrears. For years only 0.4-0.70 per cent were three or more months behind on payments but in 2008 this leapt to 2.31 per cent although the level fell back to two per cent last year.

Remember to factor in a period for 'voids' either when redecorating is taking place or when awaiting a new tenant.

For the former, rather than incur expensive periods with no rental income, landlords who have a good working relationship with their tenants may be able to have the premises refurbished when they are away.

Capital growth may be sluggish over the next three to four years.

However, if higher CGT prompts some investors – particularly those close to or into retirement – to sell their buy-to-let properties, this will provide opportunities for newcomers.

Tenant demand is definitely growing as so many are either unwilling or unable to purchase in the current market.

Property just the tonic

Dr Philip McMillan, 38, has 19 buy-to-let properties. A specialist in acute medicine, Philip was encouraged to first take an interest in the sector from his wife.

In four years he has built up a portfolio of two and three-bedroom terraced or semi-detached houses in Pontefract, Castleford and Nottingham. He aims for professionals as tenants.

Philip, pictured, uses several mortgage brokers but finds Savills Private Finance "very competitive and pro-active."

He said: "Savills have access to preferential loan rates which is an advantage." Tom Coupe, associate director at the firm, is his contact.

He manages some properties and employs agents for the others. Tenancies are on rolling six-monthly contracts.

Away from medicine and property, Philip is busy with his four children but also finds time for football and chess.

Contact: Savills Private Finance 01423 535802.