Is the property market recovery good or bad news for buy to let investors?
Kate Faulkner investigates whether the property market’s recovery is good or bad news for buy-to-let investors.
Over the past few months talk of a recovery in the property market has boosted buyers’ confidence. This, coupled with the government’s Help to Buy Scheme and Funding for Lending, has increased the number of properties sold and the national average price they achieve.
From a buy-to-let perspective, increased property prices can be good news but they can also make life pretty difficult if you want to get started in buy-to-let or expand your portfolio.
If you already own a buy-to-let, your local property market over the last year will have risen, remained stable or in some areas fallen further. Higher prices and a recovery in the property market will therefore have a positive effect on your property portfolio.Depending on which market your properties are in, the recovery will help to increase your capital growth further or, at worst, halt any further falls in the value of your assets.
So if you already own buy-to-let investments, a recovery will be welcome news. However there is a downside. If you want to invest now or expand your portfolio, the yields available could be dangerously low and might not generate enough income to cover your day to day costs.
On average, yields are around 3-4 per cent in prime central London, 5-6 per cent in most of the UK, and in some areas such as Nottingham or Sunderland you can even secure up to 10 per cent yield.
Ideally, a buy-to-let investment would yield around 7 per cent, with a level of mortgage that allows you to benefit from gearing and make sure cash flow is covered even when rates go up.
As well as yields, you also need to consider carefully whether rents can keep up with inflation. Currently most rental reports are recording rents staying the same, or in some areas falling. The main reason for stagnating rents is they tend to rise and fall in line with disposable income and, over recent years, take home pay has declined.
Some investors might not worry so much about yield levels as they buy with 100 per cent cash. With banks and annuities rates offering historically low returns, the belief is buy-to-let will return more. However, cash buyers need to remember if property price growth doesn’t keep up with inflation – and it still isn’t doing so in many parts of the UK – you could end up with declining income returns and an asset which is worth less each year.
Another issue with investing when prices are rising is you will compete with more buyers for a property. When the news is full of property prices falling, you get the best bargains, but when it’s full of property prices rising and recoveries, trying to find a good deal is harder than finding a needle in a haystack.
So for existing buy-to-let investors, property price growth is good news. However, for those trying to get a buy-to-let investment to work financially, both now and in the long term, even with cash, it’s pretty tough to do.
Article courtesy of Landlord Expert