The first rule of successful investing is to diversify. Never put all eggs in one basket. Markets rise and fall, whether shares or commodities like gold. They often move in different directions and at differing speeds.
A balanced portfolio will offer such divergencies and reflect the saver’s attitude to risk.
As a nation, bricks and mortar fascinate savers with increasing numbers purchasing property to rent out. Rightmove, the website which monitors asking prices, says property has jumped to its highest level for almost three years, with prices up 79.5 per cent over a decade. Rightmove says the average price last month rose to £238,874.
Although Hamptons say stock levels are at a three-year high, estate agents report rising rental levels. Savills predicts that over four million families – one in five households – will have to move into the private rented sector by 2016.
Already an average 5.2 people search for every available room to rent across the UK with the figure rising to 5.9 in York, according to SpareRoom.co.uk.
Skipton Building Society’s estate agency subsidiary says tenant demand “has soared in the North and central England over the past year while the South and London have remained broadly flat.” Many have been forced to rent owing to the withdrawal of high loan-to-value (LTV) deals.
UK average monthly rent rose 4.4 per cent, according to LSL Property Services. Agents William H. Brown say, “In line with our national figures, there has been a significant uptake in demand for rental property in the Leeds area. Homes are being let within just two days of being on the market.”
Investors are encouraged by these signs with one North Yorkshire saver receiving 12 per cent on his investment which is double the UK average.
“As demand for rental properties continues to outstrip supply, the market has seen an upturn in the yields being achieved,” says Steve Reid, Retail Director of Clydesdale and Yorkshire Banks.
Before entering the buy-to-let (or BTL) market, consider such key factors as:
Type of tenant (such as student or professional);
Length of tenancy and whether property will be furnished/unfurnished;
Type and age of property;
If an agent is to be used to collect rent and provide maintenance;
Mortgage type and amount of capital borrowed.
Research an area, including such factors as local schools and employment prospects.
Ask estate agents about rental demand and length of likely voids (times when a property cannot be let, either awaiting a tenant or because refurbishment is underway).
Join one of the major BTL landlord associations to share information, such as the legal way to hold deposits. Secure an energy efficiency check and take any action recommended.
Legal obligations to tenants such as electrical checks, gas certificates and compliance with fire safety regulation will add to the cost and complexity.
Remember to allow for landlord insurance to cover losses through the property being uninhabitable, such as a fire or flood (offered by NFU Mutual). Direct Line guarantees to beat any quote on a comparable basis.
There is a good choice of loans for the BTL landlord. Moneyfacts report the highest number since October 2008. Currently there are 463 available.
Ray Boulger of mortgage advisors John Charcol says around 90 per cent of BTL loans are arranged through brokers. He reveals that 75-80 per cent of loans last year were made by just two lenders – Birmingham Midshires (Lloyds Banking Group) and The Mortgage Works (Nationwide).
The BTL sector is the only part of the mortgage market where lending is increasing and Boulger predicts a rise around 15 per cent this year whilst the overall market will be flat. One lender (Kensington) now offers loans up to 85 per cent LTV.
Low interest rates for BTL loans have attracted investors. For a fixed rate, Skipton’s two year at 4.29 per cent with 60 per cent LTV and £1,495 fee is appealing. Godiva (part of Coventry) offers a three-year fix at 4.99 per cent with 65 per cent LTV and £250 fee.
Clydesdale (which owns Yorkshire Bank) has a five year fixed 5.49 per cent with 70 per cent LTV and £1,999 fee.
“For reassurance, potential investors should consider fixing their mortgage rate to provide certainty of outgoings,” tips Bob Wood, mortgage specialist at Yorkshire-based Ellis Bates.
For a variable rate loan, Charcol has sourced Godiva with bank rate plus 2.79 per cent, making 3.29 per cent to June 2013 or 3.99 per cent for the term (both 65 per cent LTV and £1,249 fee). Many loans come with free valuations and legal fees.
If taking either a variable rate option or a short-term fixed, calculate if the rent and other outgoings will more than cover an increase in the interest.
One tip when comparing loans is to opt for one which allows capital repayments to reduce the mortgage without penalty. Leeds Building Society allows 10 per cent to be repaid annually with its two year 4.29 per cent loan which is available up to 70 per cent LTV.
On a cautionary note, Phil Burgess, Senior Manager at AWD Chase de Vere financial advisors in Leeds, says, “BTL properties are only suitable for those with large diversified investment portfolios, who can afford to tie money up with the possibility of no return, can afford to stay invested in the long term and can accept the risk of capital losses.”
Shaun and Elaine Roscoe, who own a sandblasting and chemical cleaning business in Bradford, have just completed a two-year fixed BTL at 4.99 per cent on a 80 per cent loan to value.
They started with a terrace house and their second one is a two bedroom semi-detached ex-local authority.
Their new loan is a two-year fixed at 3.5 per cent and fees of £365 (survey) and £1,680 (including valuation). Both loans were arranged through The Mortgage Works.
Like many BTL landlords, they have no pension, preferring the rental property sector.
BTL mortgages jumped from £8.5bn in 2009 to over £9.5bn last year