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The new rules of buy-to-let

Ruth Bloomfield
Published: 23 January 2011

Interest rates are still low, but the new buy-to-let landlords are more interested in rental income than making a quick profit from capital gains

Phil Hertel and his wife, Jenny, became landlords not as a lifestyle choice, but because they were fed up with seeing their money earning next to nothing. The couple, both 53, had bought their family home in Buckinghamshire with an offset mortgage (in which interest from savings helps to cover loan payments). “We found we had a lot of cash sitting in the bank, covering our mortgage, but the base rate was so low that it wasn’t working for us,” Phil says.

So, last year, at a time when the downturn had everyone proclaiming buy-to-let dead, they spent £170,000 on a two-bed flat in Willesden Green, northwest London, putting down a 25% deposit and borrowing the rest.

With the help of Northstar Homes, a property investment adviser, they now let it out to a housing association for £1,100 per calendar month — enough to cover their interest-only mortgage with money to spare.

It has been such a success that they are investing in a second flat, a £110,000 one-bedder in Wanstead, east London. The 25% deposit will again come from savings, but they are also using income from their first rental.

“We bought the first flat because I took a personal view that property values were depressed,” Phil says. “They are going to be depressed for a little longer than I had anticipated, but my mid-term view is that prices are going to increase, and there is already an income from the properties.” Letting through a housing association, rather than directly, appealed as a hassle-free solution.

Welcome to the new world of buy-to-let. Yolande Barnes, director of residential research at Savills estate agency, says that before the recession, investors concentrated almost entirely on capital gains — in many cases, landlords were subsidising their tenants’ rent. “Now it is about rental income. You can make a yield of 7% on the right property.”

Barnes’s advice is to ignore the golden rule for owner-occupiers — to buy the best possible property in the best possible area — and instead go for a bargain in an area that will appeal to young professionals or students unlikely to be too worried about living above a shop or next to a railway.

“Tenants are far less fussy,” she says. “If you are an investor, it is sensible to buy what owner-occupiers don’t want, and you can still get the tenants.”

Moreover, rental income is forecast to keep rising, thanks to demand from thwarted first-time buyers. Savills calculates that rents will rise by 7% this year, 6.5% next and 5.5% in 2013.

James Hyman, a partner at Cluttons estate agency, has seen the profile of investors change because, despite the return of buy-to-let mortgages, they still need hefty deposits. “Before, it was anyone who could persuade a bank to lend to them. They were just piling into the market in the hope of short-term returns.”