According to the latest survey from LSL Property Sercvices, rents fell 0.4% in December to an average £717 a month. Even after the drop, rentals have increased by 3.5% over the year. That was offset by falling capital values. In total, the returns earned by landlords were a paltry 2.2%. Given the risks and work involved, they would have been better off putting their money in the bank.

But the worse the current situation the happier I am that returns will bounce back. We’re still recovering from from an almighty bubble and I’m holding my financial firepower in reserve until it feels like the pain in buy to let can’t get any worse. That would feel to me like the best time to get back into the market. The stupendous returns that investors earned in the early to mid 2000s created a huge overhang on valuations and until these correct over time, there won’t be much money made in BTL (except through the most selective opportunities).

David Newnes, director of LSL Property Services, owners of Your Move and Reeds Rains, said :

“Following their relentless march upward throughout the year, rent rises have taken a pause for breath.    Landlords are looking to avoid having properties vacant over the Christmas period, and can be less aggressive with pricing as tenant activity slows in the run up to the New Year. But across the country, the limited supply of rental accommodation means there will still be strong upward pressure on rents in the early part of 2012.”

The slightly depressing news in terms of rents and capital values does need to be balanced out by the fact that rental yields are moving towards more sustainable and attractive levels.

LSL calculates that the average rental yield was 5.3% in November. That’s starting to look attractive, especially when compared with low interest rates on accounts (but still, you have to consider that you can get an almost certainly risk-free 3-4% if you put your money on a fixed deposit for 3 or 5 years.

But if you can stomach the risk and find the right opportunity (and are prepared to see property values possibly fall further yet) then the cash flow and returns on a rental yield of 5.3% can start to make sense.  According to LSL the movement in returns over the past year has comprised £7,700 in rental income, offset by a capital loss of  £3716.

When it comes to forecasts, returns are likely to be even worse, according to LSL, which says that if property prices continue on their trend over the past three months, then investors can expect a total annual return of 0.7% over the next year. That certainly doesn’t account for the cost of capital or risks involved. So once again, my personal advice is to stay put and keep watching, only stepping into the market if a property offering exceptional value arises.

David Newnes continues:

“Total annual returns might be reined in by falling house prices in the past three months, but it is currently yields rather than capital gains that are attracting investors to the sector. It is rental
income that pays a landlord’s mortgage, and while capital gains are important over the long run, the strength of demand and rents underpin sensible investment decisions. With property prices weakening, and rental income strengthening, long‐term investors are exploiting cheap interest rates to pick‐up bargain properties that will provide a strong yield.”

So let’s start with the easier part of the question and look at when is the best time of the year to buy an investment property.

The first rule is to avoid buying at peak seasons:

The British property market follows a clear seasonal cycle. Most people who are looking to buy start looking early in the year with the market heating up from February and March through to the early part of summer. By the time school holidays arrive in late July and early August the property market goes completely quiet as buyers head off on holiday. It then revives a bit in October for a few months before going completely quiet in December.

If you are a seller, you want maximum exposure so would do well to put a property on the market in February or March. On the other hand as a buyer you want to have the least competition possible. That means looking for bargains at times that others are on holiday. The time to find real bargains can often be in December, when only the most determined sellers are still in the market. With little competition out there it is often possible to get away with cheeky offers and buy properties on really attractive rental yields.

Avoid buying during property booms

The second rule to follow is to try to avoid buying during a property boom. When house prices are rising across the board, then first-time buyers are desperate to get into the market and push valuations through the roof. For them, the question is not one of value but of getting a foot on the property ladder before prices run away from them. At the same time, there will be less demand for rental property as renters try to move into their own homes. That can depress rents and make yields even less attractive.

When property prices are falling, on the other hand, you have first-time buyers sitting on the sidelines. They don’t want to buy today if they think that prices will be lower in six months or a year. The same is true for professional investors and you don’t want to be buying too soon in the downturn. But a good time to think about buying is when prices have already fallen significantly from their peaks (I’m talking about 30% or 35%) and when lots of first-time buyers are sitting out the market. At a time like this there is less risk of being outbid or of being gazumped on an offer. At the same time, demand for rental properties often goes up in a downturn as buyers decide to rent instead of buying. This can help push up rents and yields and makes some properties look like real bargains on really attractive yields.

It is worth remembering the essential rules of buy to let investing (don’t use too much leverage, make sure your yield easily covers your mortgage payments and make sure you have a margin of safety in your calculations) and be ready to hold onto properties for the long run. Properties bought in a housing market slump can often offer the best returns, but you have to be prepared to see capital values fall and stay depressed for a long time before you make your return. So long as you are investing with a clear cash flow in mind, that should not bother you. But it requires tougher nerves to buy in a downturn when everyone else thinks prices will keep falling than it does in a boom, when if feels like you can do no wrong.

An article on This is Money notes that since 2008 the number of buy to let mortgages has doubled since 2008 and that average rents are still rising (the latest figures put them at £720 a month on average according to LSL Property Services).

The article also points out that a large number of lenders are easing their requirements for buy to let mortgages:

Woolwich has become the latest lender to relax criteria for landlords, now offering loans for those with a 25 pc deposit instead of the 40 per cent previously required.

Meanwhile, Northern Rock seems particularly keen to attract new business, offering £750 cash back to anyone who takes out a new buy-to-let loan.

But it also has a pretty stark warning that a bubble is inflating. They quote several experts who warn that the market is fragile:

Andrew Gold, chief operating officer at Mutual One, the building society auditor, said: ‘It’s a case of when, rather than if, first-time buyers will return to the housing market. When they do — the question is whether they will burst the bubble.’

In this case, rents may start to fall, perhaps as interest rates are starting to rise, which would erode landlords’ yields. However, the dysfunctional mortgage market and shortage of good private rented properties means that rents are expected to stay high for now.

David Hollingworth, associate director at broker London & Country, says: ‘Landlords can get a great income at the moment, but with house prices falling in many parts of the country their capital growth is not so certain in the medium term.

The warning should cause you to sit back. Especially if you think that rents only go up. We are looking at a few long and hard years facing the economy in the UK. The latest Autumn budget from the Chancellor was not in the slightest bit optimistic about the economic outlook. Many economists are talking about a lost decade in which real incomes (that is, after taking inflation into account) are the same by 2016 as they were in 2006. If that is the case then one should not expect rents to keep increasing. Property can be a valuable hedge against inflation, but for the moment the main economic risks seem to be deflation. That means property prices may well fall quite a bit yet before they start to rise.

My advice would be the same as in recent months – to sit on the sidelines and only buy if an especially attractive opportunity comes along.

The report is the latest House Price Index from Rightmove (a property website) which shows that the asking price of houses has had its biggest fall in four years as house sellers either pull properties off the market (because demand is so weak) or are forced to drop their prices sharply to try to get a sale.

The average asking price for a property in November slumped to £232,144

This was a drop of 3.1% over the month and takes property prices over the past year to just a 1.2% gain. So after inflation, property prices have fallen over the past year.

Now part of this may be seasonal. November and December are two of the worst months to be putting a property on the market for sellers (which means they can be good for buyers) but this is still a particularly sharp fall.

According to Rightmove’s Miles Shipside:

 “Markets dislike uncertainty, and so do people who are deciding whether or not to enter the property market. Agents report that many would-be sellers are postponing their marketing until the new year, influenced by the current wall-to-wall media coverage of the Greeks and Italians attempting to get their own far-flung houses in order. It’s no great surprise that those who have braved the stormy conditions have had to accept a substantial ‘haircut’ on their asking prices”

This does, however, open up some opportunities for Buy to Let investors:

Some winter buying opportunities in areas of oversupply will be available for bargain hunters, and interestingly many agents report that buying activity is on the increase from investors. Buy-to-let investors looking to raise finance for new purchases are benefitting from increased lender competition, resulting in higher loan-to-value ratios and lower interest rates. With over half of tenants expecting rents to be higher in 12 months’ time, according to a recent Rightmove survey, investors will be feeling more confident about improving yields too. They have the benefit of greater access to finance than first-time buyers, with whom they are often competing when buying, and the ability to pay down the mortgage more quickly due to the prospect of improving rental returns.

Shipside adds: “Reports suggest that buy-to-let mortgage approvals are at their highest for nearly three years. With good prospects for long-term tenant demand from those that cannot buy and consequently solid rental returns, investors will be looking forward to seeing sellers suffer a longer than usual buyer slowdown this winter. The result is a window of opportunity for buy-to-let investors to bag some bargains, spend less on finance and charge more in rent”

Given the way rents are looking quite strong at the moment it seems sensible to be looking for opportunities offering good rental yields. But my gut feel is still that property prices will keep on weakening and that even better opportunities will emerge next year.

Property has fallen for a few years

The first point that Merryn makes is that house prices have been falling steadily after they are adjusted for inflation.

Some people think that house prices haven’t crashed in the UK. They’re wrong. Prices are actually down 25-30 per cent in inflation-adjusted terms and show every sign of continuing their descent to some kind of fair value.

She thinks that the descent will keep going because of several factors. These include

• very low interest rates will come to an end
• first time buyers are completely priced out of the market now
• banks are cutting customers a lot of slack rather than taking back the keys to houses because they don’t want to be lumbered with loads of properties that could cause a real crash if they all came onto the market.

What difference might Europe make to that? Another banking crisis would restrict credit even further and push up its price. In October, the average interest rate on a two-year fixed-rate mortgage rose from 2.92 per cent to 3.04 per cent. This week, Yorkshire and Barnsley Building Societies both pushed up their rates. If things get worse in Italy, everywhere else will, too. And the higher mortgage rates go, the lower house prices will go. It isn’t making me want to get into the buy-to-let market much.

What about gold?

Merryn has been a big fan of gold for the past few years, and I have to give her credit that she has been completely right on this score. But I’m not completely convinced that gold should play a big part in most people’s savings. It is easy to forget that gold essentially went no-where for 25 years after its previous peak in 1980.

Also, gold doesn’t earn (or yield) anything at all, so it is an asset that just sits in the vault. Even Merryn concedes that:

It isn’t so cheap now. But it still has insurance value. Holding gold – the world’s only independent currency – gives you some protection against theincompetence and idiocy of Europe’s bickering politicians. So keep it.

I would add to that to say that if you don’t have any yet, buying gold now would be really risky and I wouldn’t recommend it. In any case, if you own property and have a mortgage on it (whether it is your home or a BTL property) then you already have a pretty powerful hedge against inflation. Your bigger worry in a circumstance like that is deflation, and gold won’t help protect you against that at all.

Keep some cash

On the third option, Merryn suggests that people keep some cash. Even though it is being eaten away slowly by inflation, it is useful to keep your powder dry because if things get really cheap (and I’m waiting for stocks and housing prices to fall a lot in this crisis) then you want to have cash available to snap up the real bargains.

According to a recent report from Defacto, a research firm, the number of mortgages on offer to buy to let investors stood at 483 in October 2011, compared with just 237 in 2008. This means that there is now far wider choice, and that should help with getting a better mortgage rate or better terms, such as a higher LTV (loan to value) mortgage.

The report also shows the importance of intermediaries in the market. Some 60% of mortgage deals are now available only through intermediaries at the moment. That compares with 24% two years ago. According to David Black of Defacto:

“The last few years have seen significant growth in the number of buy to let mortgage products on the market. This shows that, although the buy to let sector has contracted in terms of lending levels in recent years, the market is certainly becoming more buoyant with buy to let regarded by many as a potential growth area.

“Our analysis also indicates that intermediaries are becoming ever more important within the specialist buy to let mortgage sector, with the number of brokered products increasing rapidly since 2008. The key challenge for brokers is how to convert these opportunities for the benefit of their business. Essentially, they need to play to their core strength: giving advice – and this is particularly important in the buy to let sector where people are likely to need more guidance when selecting a suitable mortgage.”

There are other signs too that the BTL mortgage market is easing. Barclays has started offering 75% BTL mortgages in recent weeks, up from a previous maximum of 60% loan to value.

Andy Gray, head of mortgages for Barclays, said: “The demand from buy to let investors has picked up in recent months as many people in the UK opt to rent for longer. We’ve also seen increased appetite from investors looking to remortgage. As one of the UK’s largest lenders we recognise the importance of supporting this market further. The five year fixed deal we are offering at 75 per cent LTV is highly competitive and will give investors the stability they need over the longer term.”

It is important to remember that just because there are easier deals out there that allow for higher LTVs, Buy to let investors should still be cautious about taking on too much leverage and debt. The reason that you want a lot of equity in a property is to give you a real buffer against a downturn in property markets. And don’t forget the 3 rules of buy to let investing to be sure you don’t risk everything..

In September, the average rent in England and Wales rose by 0.7% to £718
per month, surpassing the previous record high of £713 in August. With
annual rental inflation at 4.3%, the average rent is £29 pcm higher than
September 2010.  The average yield in September rose from 5.2% to 5.3%.

The news isn’t all good, because even though higher rents have led to improved rental yields, total returns being earned on Buy to

Let properties have fallen because of weak property prices:

The total annual returns on a rental property dropped
back in September after property prices fell annually.
The average total annual return in September was 1.8%,
the equivalent of £3,005 – £7,661 in rent, with a capital
loss of £4,666

A second issue to worry about highlighted in the report is tenant arrears. This have dropped back a bit from September, but they are still high enough to be a worry with more than£300 million in rent arrears in August.

The glut of retirees becoming amateur landlords has been created by the absence of alternative ways of boosting their income.

For example, David Wright, a retired train driver, paid £67,500 for a one-bedroom house at Ilkeston, Yorkshire. He calculated that the £4,500-plus income he would get each year by letting the property out was much better than alternative investments.

“The interest in a savings account doesn’t compare to the seven per cent yield that I’m getting as a landlord. The decision was a no-brainer from the word go,” he says.

In short, the newspaper says that rising rents are making properties much more attractive investments than either cash or shares at the moment. That’s not hard given how tough the share market is, and with a big fall likely returns on stocks will probably only get worse. But I still think that although there are good opportunities for some properties out there at the moment, I still think that the market will soften more and that most investors could sit things out a little longer before diving in.

I also agree with the advice in the article that says:

The key task for successful retirees is to select the right type of property, at a good price, in an area where rental demand is high. This could be due to the expansion of transport hubs, a growing university or a regenerated town centre. In these circumstances, the property should produce a rental profit each month, even if the overall value of the property does not increase in the near future.

It also has a real word of warning that I would agree with:

But experts warn that however strong the rental market is now, history suggests it is unwise for retirees to sink all of their money into one buy-to-let property. This is in case the sector undergoes the sort of difficulties encountered a few years ago.

“Supply can easily outstrip demand, as happened in late 2008 and early 2009, when many landlords flooded the rental market with properties they couldn’t sell,” advises Primelocation’s Nigel Lewis.

“If that happens again, rents could plummet, so buy-to-let landlords need to factor this into their financial planning.”

In short, be careful and make sure that the cash flows you expect will more than cover your costs (mortgage and maintenance) with a safety margin in case the market turns down.

A shortage of student accommodation is driving up rents

More than a year ago I wrote about how buy to let investors should consider student lets because of the higher yields on offer. This advice is now going ever more mainstream with the Financial Times and other reputable papers talking about the many advantages of investing in student accommodation. In light of this I thought I’d revisit the subject with the latest updates and market news. But first, a quick backgrounder to the subject.

Why is student accommodation an attractive investment?

The main reason is that it continues to offer higher yields than most other sorts of buy to let investments. Yields of about 6% are not at all uncommon in this market mainly because it has been ignored by the mainstream of property investors for some years now. The reason (and I’ll go into this in more detail below) is that there is high turnover among students and high rental voids, with properties often standing empty over the summer months. That adds to costs and having to find new tenants every year is a real hassle. Fortunately, because most landlords have not been bothered, yields have climbed enough to compensate investors for their trouble.

Are the big players interested?

They are. Some big hedge funds and property investors have recently started making really big bets on student accommodation. Oaktree Capital Management has said it plans to invest £1 billion in this market through Knightsbridge Student Housing. Other big institutions have also been sniffing around in UK residential property with student housing getting a lot of attention. I would expect more of this over the coming year or two as big fund managers look for alternative investments that generate good yields with lower risk and volatility than stock markets.

Rental Yields are High

A comprehensive report by Knight Frank, an estate agency, in which it looked at more than 20,000 student lets across the country, found that rental yields on student accommodation in London were 6.38% in 2010 (from 6% the year before) and in the main regional markets were as high as 6.75% (from 6.5% a year earlier).

Student Rents are Rising

Student rents in most parts of the country have been rising quite steadily. In 2010 they fell back a bit in London, but rose by 4-5% elsewhere and Knight Frank forecasts another rising this year in London and elsewhere. This comes after average rental increases of 5% a year over the 5 years to 2010.

Demand is High and growing

The student population has grown at a huge pace over the past few years, mainly as a result of the government trying to encourage more people to go to university. This has led to a huge shortage of space in many university towns.

But there is a risk that demand could be squeezed. The government is allowing universities to bump up fees this year and that may cut the numbers of new students going into the system. It may also push large numbers to stay at home with mum and dad to cut costs rather than to go to a university in another town. Even so, Savills, another property agency, said it expects a shortfall of more than 22,000 beds in student housing over the next five years (it said this in a 2010 report that you can down from their site – registration required)

Their main conclusion is that:

“Purpose-built student housing completions are expected to remain lower than the annual increase in new additional students.”

What are the most attractive towns for investing in student housing?

The market for student housing is basically divided into 2 parts. One is London, where there are more than 40 universities and tens of thousands of students from within the country as well as foreign students. The other is the cluster of regional towns including Oxford and Cambridge, where the towns are much smaller in relation to the universities and flows of students dominate much of the demand.

Knight Frank lists the following towns in order of attractiveness based on the number of universities, growth in student population, supply and demand and a few other ranking factors. In the order of most attractive, the top five it lists are:

1. London
2. Kingston
3. Brighton
4. Edinburgh
5. Oxford

What is the most attractive sector?

Knight Frank thinks that the biggest area of undersupply at the moment in London is for what it calls “value accommodation” in the price bracket of £15-200 per week. In the regions away from London there is more demand for higher-end accommodation that couples, mature students or post-graduate students might want.

What do Student Flats Cost and how much is the rent?

Small studio flats (not purpose-built dormitories or single rooms in bigger houses) vary considerably depending on the area. A city centre flat in Bristol might cost £150,000 or so, whereas in Edinburgh a similar property might cost £177,000. Typical student rents in these areas might be in the range of £650 -£ 750 a month, according to an article in the Financial Times (registration required).

Average rents per week for a studio flat, according to Knight Frank, are (for 2011)

• London – £275
• Regional Towns – £136
• England and Wales – £178

What are the disadvantages of investing in student housing?

The first is mainly because of the risk of damage to property. Students often know they will only be in a place for a year and may throw some wild parties. Many students will also smoke (all kinds of things, legal and not). That said, the perception is generally far worse than the reality and most students are mature and sensible. Many will also be post-graduates in their mid 20s and are likely to show respect for a property.

The second concern is about turnover. If you have to find new tenants each year it adds to your administrative burden as well as costs since it is sensible to run proper tenant checks and credit checks on all of them. Some of this work can be done by a letting agent, but you would still need to check and satisfy yourself that it has been done property.

There are some ways of cutting costs on this. You could cut out the letting agent entirely (saving you some 7-10% of the gross rent that you would collect) and advertise yourself. A good place to start would be with accommodation officers at the universities.

Managing the risk of student lets

Students are generally not likely to have enough income or a decent credit record to stand as tenants on their own. It is thus often essential that you get their parents to sign as guarantors. This means that the parents guarantee that the rent is paid in full. If you do this you should also do a full tenant check and credit score on the parents. Ideally you want to find parents who own their own home. This means you have a fixed address in case things turn ugly and you have to send the bailiffs with an order for payment.

Actively try to let to older students or post graduates as they are more likely to be more responsible.

What else to look out for

When you get landlords insurance double check the terms and conditions very carefully as some policies exclude students. You may also struggle to get rent guarantee insurance for a student let, especially if you haven’t got the parents to be signing on as guarantors. In that case you might want to ask for a slightly larger deposit.

You may also struggle to find a mortgage lender willing to finance a buy to let investment in student accommodation as not all agree to this.

A good agent can mean the difference between finding great tenants or deadbeats

When you’re involved in buy to let investing, every penny that you spend or save can mean the difference between making a profit or a loss. So a common question that many landlords ask is “do I need a letting agent?” given that they typically charge 8% or so of the annual rental (usually one month’s rent) for finding you a tenant.

The cost is a considerable one, especially since many letting agents charge a similar (or slightly reduced) fee when the tenants renew. A half a day’s work by an agent can result in a landlord paying out for years and years.

Before deciding whether to employ a letting agent or not you should be aware of the pros and cons of letting agents.

What does a letting agent do?

The main role of a letting agent is to find you suitable tenants for your property. Typically letting agents will have a high street presence in the area, usually near to a tube station or bus stop since tenants often start their search for a new home by visiting the first letting agent they see.

A letting agency will also often have their own web site and will advertise a property on national websites such as rightmove.co.uk or pirmelocation.com.  This broadens the range of potential tenants that you can compared with placing adverts of your own or by posting on websites such as gumtree.com or craiglist.co.uk.

The agent will also do a preliminary screening of tenants for you and will exclude those who clearly cannot afford the property or seem unsuitable. Their experience can also be really helpful as they may pick up potential problems that wouldn’t occur to a new landlord.

The next job that the agent should do is take references and do a credit check on the tenants.  This is usually done through an agency such as Homelet, which will independently check for County Court Judgements (CCJs) against the tenants at their previous address as well as look for any other black marks on their credit record. They should also call the listed employer to check that the tenant is indeed employed where they say they are and at their stated income.

Once this is done the agent should also be able to offer you rental guarantee insurance (and other sorts of landlord’s insurance such as legal cost insurance). Just remember that these insurance policies are not all equal and that some of the cheapest (usually the ones that are thrown in for “free” by letting agents) will only provided quite limited cover. Do your homework on this.

Leases and deposits

Most letting agents also take care of the basic paperwork for you. They will have a standard assured shorthold tenancy agreement that they will ask you and the tenant to sign and they will often arrange to collect the deposit and put it into one of the deposit protection schemes such as mydeposits.co.uk or the Tenancy Deposit Scheme which can be found at www.thedisputeservice.co.uk.

Inventory

The agent should also ensure that they have a proper inventory taken at the start of the tenancy. This is essential as it will form a key part of the evidence you need if you later have a dispute with tenants in the event that they have damaged the property or furnishings.

How to choose a letting agent

If you decide to use a letting agent you should be sure you put time and research into choosing the right one.  The first thing you should do is to check with they are registered with ARLA (the association of residential letting agents). This is because ARLA has a code of conduct and a dispute resolution service that you can complain to if you feel your agent has done something wrong or treated you unfairly.

You should also take time to check the reputation of the agent in the area. An agent with a bad reputation among tenants won’t be able to attract the best of them. The last thing you should be sure of is to meet with them and satisfy yourself that they aren’t just going to try to sign up the first tenant who comes along. Some agents are just chasing their commission and may be under huge pressure to meet targets so will not turn down unsuitable tenants. What you want is an agent who will see your relationship as a long-term partnership.

Can I do it myself

The steps I’ve outlined above are all well within the ability of the average person. There is no reason for you not to place your own listings online and to screen tenants yourself. The selection you will get will probably be more limited and you may not be able to command as high a rent, but this may well outweigh the costs of paying some 8% or so to an agent.