Whether the buy-to-let market will burst its bubble has been a popular topic of late, and people are being cautioned about over-exposure to this market. The sector is still performing, but investments must be viewed as a medium to long-term prospect.
Prices have risen fast in the London and the South East, and anyone buying for capital growth needs to be careful when selecting the property and the mortgage package. The outlook for such increases in value is less clear and potential landlords need to ensure the whole investment proposition works, not least from serious investigation of the expected rental income.
A further factor is the practice of buying property that will be successful as a rental property. The temptation is to buy a property or retain a previous home ‘ scenarios which are not always compatible. Time should be taken to choose the right property for the right purpose. Attention should be given to transport links, schools, local amenities as well as social infrastructure.
However, there are associated risks, and investors should be aware of the pitfalls. Advice with regards to potential rental voids as well as contingency funds for essential repairs is essential. Values cannot be guaranteed and rental incomes may fluctuate.
A fixed rate is often advisable, to provide certainty of what is often the largest regular expense. The time to fix is the period just before rates start to rise, but none of us can forecast the right time. The decision can only be taken after careful consideration of individual circumstances.
One aspect of an investment strategy is the access to capital if needed. We must be mindful that realising cash from a property sale can take time. Ensuring we have access to a rainy day fund as well as preparing realistic and prudent cash flow projections is essential. The time is just not right, from an economic viewpoint, to take unnecessary risks.
But all is not doom and gloom. Interest rates below 6%, fixed for a five-year term are available. At these rates it is possible to make a healthy return, even if the rental income falls short of ideal expectations. In the longer term rentals will rise and yields will therefore improve. The most important fact is that an income stream is in place as quickly as possible to service the interest payments, and if this means a low return in the first year or two then this should be carefully considered.
It is no wonder investors have sought out a new income stream with the potential for a rising and enduring income, coupled with the potential for long-term capital growth. Good advice will give investors every opportunity to achieve their goals.
Simon Jones is associate director of Savills Private Finance