The era of the ‘quick buck’ has long gone for investors in the buy-to-let residential property market, but opportunities are still widespread for the canny buyer. Commentators suggest the ‘froth’, or the frenzied price rises fuelled by buyer interest, came off the property investment market over a year ago, but the end of this year has seen a sharp slowdown.

Without the double-digit property price growth seen during the boom years, buy-to-let has become a more difficult investment, but one that with the right advice can still produce returns.

Rental yields up

After a fairly listless 12 months in England and Wales, rental yields (or the returns on a property investment) are recovering from their downward spiral.

‘It is great to see that rental yields are rising, with returns in Scotland increasing by 0.18 per cent in the last quarter, and yields in England remaining steady,’ says Lee Grandin, managing director of buy-to-let broker Landlord Mortgages.

‘This can be attributed to a cooling housing market, which has allowed rents to increase in line with the healthy capital appreciation these buy-to-let properties have experienced over the past few years,’ explains Grandin. The future of buy-to-let is looking positive, he says, with further increases in rental profit expected this quarter.

Figures from the Royal Institution of Chartered Surveyors (RICS) appear to back up Grandin’s assertions. Enquiries for rented accommodation are up 15 per cent from the previous quarter, says RICS. It also reports that more landlords are snapping up properties, with 20 per cent of surveyors reporting a rise in surveys conducted for landlords.

Mind the gap

But the buy-to-let market could currently be described as two distinct sectors. The outlook is very different for a landlord with, say, 15 properties compared with a novice buy-to-let borrower who remortgaged to buy an investment property last year.

The five interest rate rises since August 2006 are pressuring newer landlords who bought at the top of the market, often with little deposit and expecting the kinds of returns many have enjoyed over recent years. And as the shortfall between the mortgage outflow and the monthly rental inflow opened up, many investors convinced this could never happen have watched in horror.

Simon Tyler, managing director of mortgage adviser Chase de Vere Mortgage Management, says ‘Sadly, this realisation may well come at the very point that their own personal mortgage needs to be reassessed. Perhaps their two-year fixed-rate arranged in 2005 for 4.5 per cent is coming to an end (maybe they remortgaged to raise capital to help buy the investment property), but the new fixed rates on offer from their lender could well be 25 per cent more expensive.’

He adds, ‘This scenario will leave amateur landlords with assets that are not growing, an investment mortgage that needs to be topped up every month and their own household budget increasing.’ Anecdotal evidence from estate agents suggests that some landlords have found the credit squeeze too uncomfortable, with a few putting rental properties back on the market for a quick sale. This serves as a cautionary tale for those who still think of buy-to-let as a safe investment.

Many bigger, more established landlords with plenty of equity and cash in their pockets are better sheltered from any difficulties the market can throw at them. However, for others who bought after the house price boom, times have been tougher. These landlords bought more expensive properties and, in a competitive rental market, have been accepting rental payments that are lower than the mortgage payments to get tenants in.

How bad is it?

Buy-to-let specialist brokers disagree on the extent of the problem for different parts of the investment property market. Some investors see property as an extension of their pension pot, so are happy to ‘top up’ the rent payments themselves. It is also tough to see how widespread the impact has been because landlords largely sell instead of waiting to be repossessed if they get into payment difficulties.

However, Thomas Khirrecu, a mortgage adviser with Beacon Asset Management, says he knows both high net worth individuals and landlords with just one or two properties, generally at the higher-risk end of the market, who have sold recently to cut costs: ‘I have one client who has been overpaying £100 to £120 each month since the last rate rise, although the vast majority are making ends meet, just.’

He warns, ‘Always do your sums before you buy. Make sure you can afford any extra payments to cover a shortfall. But when you talk to a mortgage adviser, look at the broader picture first in terms of what you are trying to achieve. Some buy-to-let landlords just want to buy for a child at university and sell after three or four years. Others are in the market for the long term and plan to live off the investment in retirement by letting it out. But whatever you do, make sure you get good tax advice.’

Lee Grandin of Landlord Mortgages says there shouldn’t be a payment gap for experienced landlords who know what they are doing: ‘Sensible landlords make their money when they buy their property at a 20 per cent discount to market value. If you can make 20 per cent on purchase, you’ve already made four years’ rental income.’ He adds that by buying well under market value, landlords should also be able to ride out fluctuations in rental income and the property market.

The market prospects

But buy-to-let is a contradictory market in many ways. ‘For the average person, buy-to-let is a difficult investment,’ says Grandin. ‘You’ve got traders in the market – experienced landlords with plenty of contacts and cash – who make money in any conditions.’

But for the average investor, says Ray Boulger, senior technical manager with mortgage broker Charcol, the market is on a go-slow, which can work to any investor’s advantage. The key is to research and familiarise yourself with an area and the types of properties and rents available, he says.

But critically, he warns, don’t be tempted to rush in: ‘Over the next year, you will see more and more distressed sellers or people forced to sell their property fast. So, when a bargain comes up, after your research you’ll be in a position to spot it. Put in some bids at well under the offer price and take your time for as long as the market is slow.’