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As savings and equities struggle, is now the time to get back into buy-to-let?
Yes, says Malcom Harrison, Head of Harrison Communications
Nothing has changed about buy-to-let since the concept was launched in 1996. That was just as the country was beginning to recover from the last property crash. Buy-to-let was good for the housing market then, and still is today. The only difference is that then, it was not seen as a get-rich-quick investment. The buy-to-flip speculator, buying off-plan and hoping to be financed by tenants before moving on within a couple of years, was to arrive much later.
The original concept of buy-to-let was to bring investment into the private rental market, improve its housing stock and provide an alternative to all those first-time buyers who had burnt their fingers so badly by being bounced on to the property ladder during the rush to buy of the late 1980s.
Buy-to-let filled the gap left by the institutions that had abandoned their traditional role as major landlords decades before. The gap was sealed by mature private investors who could take the financial responsibility for mortgages. They were ready to invest in a new but conservative market because Britain became a low-inflation economy. This reduced the returns from the safe haven of deposit accounts, mostly run by building societies that had yet to scramble on to the securitisation bandwagon and demutualise.
In this benign climate, investment in residential property to let offered an alternative home for savings that could be understood and controlled. This ability to walk past an investment property and pat the hedge was attractive to cautious, middle-of-the-road investors as the drop in returns on deposits was followed by the collapse of Barings bank. This scared conservative investors, especially as the collapse was caused by trading in little-understood financial derivatives. Sound familiar?
According to all research, buy-to-let is seen as a long-term investment, typically 15 to 20 years, that takes account of market cycles. High rental demand is contra-cyclical to falling house prices. Over recent years, yields from buy-to-let have been low because of the astonishing rise in house prices. Hopefully this bubble of a boom will not be repeated, although with the total standstill in house-building, it would not be surprising to see yet another boom and bust in the not-so-distant future.
The Halifax house price index shows a sober average for price inflation of 7.95% over 20 years. These two decades have not only seen a major bust and boom, but yet another bust.
Last week, the Royal Institution of Chartered Surveyors reported a rise in buyer interest. This may take at least another year to translate into sales, but the early investor catches the worm.
Having found a middle-of-the-road property, put down a deposit that keeps the loan-to-value below 75% to get a good mortgage rate. Set a realistic rental valuation that is at least 20% higher than the mortgage payments. Avoid areas and blocks of flats with too many investment properties and think about the long-term future - the traders and banks of this time around can still pass by on the other side.
Investors in residential property to let have helped smooth out the housing market. Without such investors, the booms and busts could have been much worse. That's something to tell the grandchildren when it's time to retire on solid, well-earned gains.
No, says Martin Bamford, Chartered financial planner at Informed Choice
Now is not a good time to enter the buy-to-let market. There will always be exceptions, but for many investors there is rarely an ideal time to invest in residential property.
Prices fell around 15% last year, taking the price of an average property back to the levels of March 2005. Repeated cuts in the Bank of England base rate should have made the cost of borrowing more affordable and presented a wider margin between interest costs and rental income. Yet it would be a bold move to embark on a career as a landlord right now.
Investing in property is risky even at the best of times. In this economic climate it is comparable to placing a bet on a horse at Cheltenham.
With estate agents reporting slow sales, desperate vendors are turning to the rental market to cover mortgage costs. Supply in most rental markets continues to outstrip demand and this will drive down rents over the next year. We saw the average monthly rent fall by around 5% in February.
The sizeable level of deposit required to get a mortgage on a buy-to-let basis could easily be wiped out by further price falls this year and next. It could be that the combination of rate cuts and quantitative easing will free up lending in the residential property sector, restoring confidence and supporting prices; but it could equally fail to do so.
The promise of becoming a property millionaire proved a fallacy for people who forked out thousands of pounds for weekend workshops and access to "exclusive" property deals. I suspect the only people who make money from property investing, over the longer term, are those who act as unregulated property investment "advisers" and some professional investors.
Now the UK buy-to-let market has soured, we are getting more approaches from salespeople who have switched their attention to the "opportunities" in overseas markets. Throw currency risk into the mix and you might as well just burn your pile of hard-earned cash.
Even in a stable economic climate where borrowing is readily accessible and there is a high degree of confidence in the residential property asset class, buy-to-let is an ambitious way to invest.
After the costs of buying and selling, those associated with mortgage financing, and possible capital gains tax on future proceeds, investors often come away from the deal with a low return.
Viewing property investment as an alternative to a pension for retirement planning means missing out on valuable tax relief. The ability to offset mortgage interest costs against rent for income tax purposes is useful, but you get a better overall deal in a pension or Isa tax wrapper.
Investing in property will always be attractive in the long term because it is a tangible investment and one that can be highly leveraged through borrowing.
We always ask would-be property investors if they would take out a personal loan to invest in a blue-chip company in the stockmarket. Taking out a mortgage to get started in buy-to-let is no different. If anything, the stocks route is cheaper to access and easier to liquidate - but more volatile.
Buy-to-let investing, now or at any other time, is like swimming across a shark-infested lake to get your hands on a pot of gold that isn't guaranteed to be there. Think carefully before diving in.
What's your experience of buy-to-let? Have you had your fingers burnt investing in property for rental, or would you do it again if the time was right?
• Write to Cash, The Observer, Kings Place, 90 York Way, London N1 9GU, email cash@observer.co.uk or join the debate online at guardian.co.uk/money
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