Although the Help to Buy initiative has made home ownership possible for thousands more people since its launch in April 2013, it has inadvertently increased price of housing, widening the gap between those able to afford housing and those who can’t afford to buy. Data from the Office of National Statistics shows that residential property in the UK is now worth on average £250,000, which is 1.6% greater than their peak before the financial crisis.
As a result the private rental market is still booming, with around ten million people renting from a private landlord, twice the number that were renting in 2000.
Increasing rental income helping to fuel growth
Buy-to-let landlords not only benefit from increased house prices, but monthly rents continue to increase, even though the rise is slower than that seen in 2012. According to LSL Property Services, average monthly rents are now £745 in England and Wales, after a 1.5% increase in 2013; in 2012 there was a 3.2% rent rise. With house prices and rental income set to rise further, with IHS Global Insight estimating an 8% increase in property prices in 2014, buy-to-let will remain popular, offering better returns than other forms of investment. Figures from BM Solutions, a buy-to-let lender, support this, with 63% of landlords confident of rental prospects and a third of landlords surveyed planning to increase the size of their property portfolio during this year.
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More competitive buy-to-let mortgages available
With the increased popularity of the buy-to-let, mortgages are very competitive, which is welcome news for landlords wishing to add more properties to their portfolio or save money on the properties they already own. As reported by mortgage brokers Springtide Capital, buy-to-let mortgages are now 25% cheaper than they were a year ago, and with some requiring as little as 20% deposit, they are enticing to both existing landlords and those considering letting out residential property for the first time. That’s not the only good news for landlords this year though. A new ruling that all letting agents must belong to a certified redress scheme will help to protect landlords, as well as their tenants, from rogue letting agencies. However, the British Property Forum will continue to push for a rule that makes sure all agents have protection insurance to safeguard their clients’ money.
Careful planning to avoid pitfalls
The buy-to-let market is not always such an easy investment though and by no means guarantees success. People considering the buy-to-let market should always draw up a comprehensive business plan before investing to minimise the risk of problems in the future. It’s essential to research the best type of property and the areas in which you plan to invest to check there is sufficient demand for rentals. Although bigger properties bring in more rental income each month, yields for smaller properties are greater; properties with one or two bedrooms offer the best returns, typically giving a respective yield of 6.8% and 6.4%, compared to 6.2% for properties with three bedrooms and 5.6% for those with four. Having established the most appropriate property type and location, it’s time to consider how much rent you can reasonably achieve, weighing this up against the price of purchase and operating costs such as repairs and void periods. Only by considering this can you estimate the likely yield from your property. Additionally, you should choose property that is easily sold, so that you have a quick exit if you decide that being a landlord isn’t working for you.
If you are one of the landlords planning to use property to finance your retirement, it’s important to carefully consider this decision. Relying solely on property for your retirement instead of making any pension contributions is taking a big gamble. With all investments it’s safest to spread where you place your money, so having an alternative investment strategy to secure your financial future is vital.