DIRECTORS’ INVESTMENTS - 30.01.2008

Buy-to-let opportunity?

Time to sell?

For some time now, investing in buy-to-let property has been highly attractive to many - a way of providing for retirement. But the tide may have turned. Some less experienced landlords are having to dispose of property quickly, at reduced prices as rentals have been overtaken by interest rate rises. Conversely, established landlords have been adding to their portfolios during 2007 but remain, on average, better able to deal with the recent rate increases.

Rocky foundations. According to the Royal Institution of Chartered Surveyors, home repossessions are rocketing as affordability conditions deteriorate. Its evidence is based on the number of houses coming onto the market for sale at auction, climbing by 36% in the second quarter of 2007. They forecast that repossessions could climb to more than 45,000 this year. Lenders are becoming increasingly active at “arrears management”.

Iceberg tip?

Rising rates, much tighter lending criteria and application vetting will mean that many people who have been able to re-mortgage their way out of difficulty, albeit temporarily, could find themselves becoming an unfortunate statistic.

Opportunity?

If you’re a canny investor, with some money spare, now could be a good time to enter the market (or expand your portfolio). We don’t think taking out a buy-to-let mortgage and investing in one property that barely covers the interest, is a good idea. But, if you’re able to put down a chunk of cash and forget about it, there are clear opportunities. There are potential tax benefits too.

Still need convincing?

As house prices have risen more people are turning to rental accommodation both through choice and necessity. Half of all young men under 24 and still living at home would traditionally have been trying to buy their own home. A fifth still haven’t flown the nest at 30. This situation will not necessarily self-correct as first time buyers might become reluctant to buy if prices are falling, and the recently dispossessed may have negative equity problems hanging over them.

After years of static rents they are finally on the move. According to Paragon Mortgages, average rents rose by over 3% in July.

Price drop

Most commentators are hoping for a “slight cooling” of the rate of price increases or at worst some price drops which will be slight and not sustained. The notion of a prolonged collapse in property values is absurd, they say. Nobody knows for sure, but as a long-term bet, property still looks as safe as ever.

Tip. The fundamentals of successful property investing are the same as for anything else. Invest carefully and know what you’re doing. Don’t feel you have to follow the herd. Speak with local estate agents and letting companies to see how the market is faring in your chosen location. You shouldn’t consider it a short-term gamble but a long-term safe bet.