Back in the early 1900s about 90 per cent of properties were rented from private landlords, but tough rent laws after the Second World War all but killed it off as a business opportunity until the Thatcher government realised in the 1980s that the lack of housing to rent was hitting the economy very hard. After all, people could not very well “get on their bikes” to find work if there was nowhere to park their bike when they got there!

So in 1988 the government passed the first Housing Act, making it easier and quicker for landlords to reclaim possession of their property at the end of a letting. Buy-to-let mortgage finance then followed and the rest is buy-to-let history.

Why property?

The attraction of property is clear. Unlike with many other kinds of investments, you are the one in control, not some anonymous fund manager. You can walk past your property and actually see it, so you are immediately more connected to it. Property also provides something we all need – shelter – so there should always
be demand for it.

With property, you can sell it whenever you want, which you can’t do with a pension, and you can also bequeath it to your heirs when you die. Compare this to the stock market, where there is a risk that the products or services of a company can go out of fashion or be replaced by new technology or just be badly managed.

With property, if you do your homework and check out the location and the local tenant market, you will probably know a lot more about your investment than you can ever learn about any company from any published source. And if you combine letting property with a day job, you will have the satisfaction of knowing that if your boss suddenly decides your face no longer fits, you’ll still have the income and capital from your property to fall back on.

Is it too late?

Now that everyone is talking about property, it is easy to imagine that the market is being swamped with too many developers and too many properties to rent and that it is too late to join in. However, government statistics show that there has actually been only a very small increase in the number of privately rented homes, from 8 or 9 per cent in 1988 to about 11 per cent of all residential property today. But as income multiples for property purchase become more stretched, the fear is that house price rises may level out, or even fall slightly.

But if we step back and look at the big picture, we can see that an increasing population (driven mainly by immigration) and a shortage of houses are forcing prices up. At the same time, housing supply has failed to keep up with these changes and demand for housing, especially in London and the South East, is outstripping supply. For these reasons, a big fall in house prices, like the one that happened between 1989 and 1994, is unlikely.

Also, the trend towards job flexibility, more temporary workers, more students, more migrant workers and increasing divorce rates should all lead to increasing demand for rental accommodation. If the experience of the last eight or so years is repeated, and there is no significant growth in the number of houses built, then rents should increase.

Could property crash?

This is, of course, possible, but unlikely. Even in the last property downturn, from 1989 to 1994, there were certain areas, and certain types of property, that didn’t fall in value too much. This was usually due to local factors – such as a new road, tube link, railway, airport or more employment opportunities. And rents actually went up over this period, so if you got the right property in the right place, this was still a good time to invest.

Who makes a successful landlord?

The sort of person who makes a good landlord is sceptical and enquiring and has good people and communication skills. They are usually good administrators and above all really love the property business and are prepared to take some risks.
Successful landlords question everything they hear and do their own research. So, if a developer or a consultant at a seminar tells them that his new development on a Liverpool sink estate is going to be a fantastic investment, they don’t take this at face value.

The hard fact is that you must be prepared to do some work. Listen to what people say, but do your own research before committing to anything. Keep in mind, too, that currently there is no protection under the Financial Services Act for people who invest in property themselves or via property syndicates.

It also helps to be good with people, as you will need to form good relationships with your tenants and anyone who does work for you. Be professional and courteous as well as firm, fair and clear. Prospective tenants must know exactly what they are getting with the property they will

be renting, when the contract starts and what their responsibilities to the property are.
In keeping track of everything it helps to be organised and have a good filing system to record income, costs and repairs. Things that need fixing should be fixed quickly and phone calls returned. Finally, you must like property. So, if houses bore you stiff, stick to something else.

Capital growth and income

How do you make money out of property investment? Well, it is quite obvious.
You can make it by the property going up in price (what is called capital growth) and you can make it by earning more in rent than you spend in costs, (i.e. income).
Sounds simple? The problem is that a lot of people overlook their costs, forgetting to account for running costs, periods when the place is empty and the cost of their own time.

I also see a lot of people who have over-estimated the rent they can get. In fact, the only surefire way to gauge the rent you will get is by putting a test ad in a paper.
The period of time a property is not let – the ‘void period’ in landlord’s jargon – is particularly costly. In fact, the situation is worse because with an unlet property, running costs are likely to be higher because you (not the tenant) will have to pay for council tax and utilities too.

Your costs

The main costs you need to think about are:

  • Letting agency fees – These are typically a 10 per cent (plus VAT) once-off fee for finding a tenant and doing a reference check. If the agent does management too, add another 3 to 5 per cent (plus VAT).
  • Ground rent and service charges – If your property is leasehold you’ll have to pay these charges.
  • Insurance premiums – Buildings insurance should be budgeted at about 3 per cent of rent. Where the property is furnished, contents insurance is also a must – allow between 1 and 3 per cent of the rent, depending on the level of furnishing.
  • Replacement fixtures and fittings – Build in an allowance of 10 per cent of the rent for replacing furnishings.
  • General maintenance – In buy-to-let, more things need maintaining more often than they do in a private home. Also, gas appliances must be checked annually by a Corgi-registered gas engineer.
  • Legal expenses – If you are unlucky and get a ‘tenant from hell’, it will take about three to four months to get rid of them, so it’s wise to budget for about half a month’s rent per year for this, just in case.
  • Personal costs – Allow for the cost of your own time and incidental expenses.


These days, in most areas of the country, it is pretty hard to find properties where the net yield (the rent after you have taken off your costs divided by the total cost to acquire a property) is more than 5.5 per cent. And as buy-to-let mortgage rates are about 6 to 6.5 per cent, you will be losing money. So, most landlords hope to get a good level of capital gain to compensate, and to do this they buy in areas that are likely to go up in value over time.

Finding attractive areas

For the price of the property to go up, the area (and type of accommodation) must become more attractive to both homeowners and tenants. Try to find areas where future improvements are really coming – not just promised. In other words, that area of derelict land close by really will be built on and bring 10,000 jobs, and the green light really has been given for the diggers to move in and start work on the new tram link.

To get this information, try to get up-to-date with what is going on in the local area. Good sources of information are the local council planning departments, local newspapers, libraries and estate agents.

Websites like www.upmystreet. co.uk are very good for information on house prices, council performance, transport etc., and the government site www.communities gov.uk has good data on house prices by local authority and you can see if the area is going to be a recipient of government- backed regeneration schemes that can help transform run-down areas.

However, beware of the risk of over-supply. Your newly built two- bedroom flat with a river view might be in high demand in a newly attractive city centre when there are only 200 other two-bed apartments, but not if there are 20,000 two-bed flats all competing with yours for a finite number of tenants.

Once you have spotted a good area, you have to buy the kind of property that meets tenant demand in that location. There is no point buying a big family house, if there is little demand for big family houses to rent!     

Further information: David Lawrenson's top tips

1.     Don’t believe all the negative talk. There are still lots of opportunities for people             who are coming into buy-to-let for the first time.
2.     Buy the right property in the right location and at a decent discount to true market         value.
3.     Before buying a property to let, always check the level of tenant demand first. You         can do this at no risk by running a test advert. If no tenants call, you'll need to think         again.
4.     Don’t buy (or furnish) to your own taste. Think about what is practical and what                 tenants want. They may want no furnishings at all – again, find out using a test ad.
5.     Do all you can to minimise vacant periods when the property isn’t let (including             dropping the rent if necessary).
6.     Be rigorous about referencing tenants to avoid getting a bad one – and make sure         your agent does too. Ask to see tenants’ and agents’ references too.
7.     Fix things promptly.
8.     Don’t overstretch yourself financially. Keep a healthy cushion in case of difficult             times. You can now borrow up to 90 per cent of a property’s value using a                         buy-to-let mortgage, though lenders usually insist that rental income be at least 25         per cent more than the interest you will be paying, which may limit what you can             borrow at around 80 or 85 per cent of the property cost.
9.     Treat tenants as you would expect to be treated yourself – your tenants are your              customers!
10.   Pay tradesmen on time.
11.   Before you start off in property investment, read up on it as much as you can.
12.   If you buy abroad for investment, the same rules apply. Find out as much about              the area you are buying into as you can.
13.   Don’t forget tax. You will have to pay tax on any rental income you make, but you          can deduct most of your running costs, including the interest you pay on your                  buy-to-let loans and mortgages.
14.   You may be liable for capital gains tax when you come to sell, though you can                  deduct acquisition and selling costs. Taper relief will also reduce your liability over          time, and don’t forget to use your capital gains tax allowance.

David Lawrenson is the author of the bestselling book Successful Property Letting – How to Make Money in Buy-to-let and runs a consulting and coaching service for property investors at www.lettingfocus.com 
This article is from the December 2006 issue of What Investment.