House price dip good news for buy-to-let

On the face of it, now is an excellent time to invest in property.

House prices fell by 3.6 per cent in September, according to new figures from Halifax, and in the third quarter of this year property values were 0.9 per cent lower than the second quarter.

Selling property is becoming more difficult, putting further pressure on prices. According to data from the National Association of Estate Agents (NAEA), the number of househunters registering with estate agents fell dramatically from 292 per branch in July to 250 in August.

On the other side of the coin, the rental market is undergoing a rebirth. Rents have soared to almost a two-year high during the third quarter of 2010, according to a new report by FindaProperty.com. This is a result of strong rental demand, says the website, following bigger obstacles to first-time buyers getting on the property ladder and homeowners putting moving plans on hold because of the uncertain economic outlook.

Even the average void period (the time that a property is unoccupied by tenants) has fallen to its lowest level for eight years – from 3.6 weeks to 3.2 weeks – according to a recent survey by the Association of Residential Lettings Agents (ARLA).

As such, the buy-to-let industry seems to be stirring from its post-credit crunch coma. At the end of last month, major buy-to-let lender Paragon re-entered the market after a three-year absence, armed with deals such as a 5.5 per cent two-year fix in exchange for a 25 per cent deposit. David Salusbury, the chairman of the National Landlords Association (NLA), called the development "excellent news for the private rented sector."

However, taking advantage of all this data and becoming a landlord for the first time is easier said than done. "Buy-to-let lending criteria are bracing and the paperwork is eye-watering," says David Whittaker, the managing director at buy-to-let broker Mortgages for Business.

Paragon has increased the minimum deposit required from 15 per cent to 25 per cent – a figure in line with the new post-crunch minimum benchmark. Arrangement fees are also as high as 2.25 per cent of the loan. For access to the best mortgage deals, such as Coventry Building Society's three-year deal at 4.49 per cent with a £250 fee, borrowers will need a 50 per cent stake.

Landlords will also need to prove that rent generated from their buy-to-let property will amount to at least 125 per cent of the monthly interest on the mortgage (either at the rate of the mortgage or, if this is very low, at an assumed rate of about 5 per cent). Before the credit crisis, in some cases rent needed to amount to just 100 per cent of mortgage interest. "These days, the Financial Services Authority would have to whip a deal like this out of the market," says Mr Whittaker.

Even if this stacks up, some buy-to-let lenders – including Paragon – specifically target "professional landlords" which means applicants will need a proven track record of buy-to-let successes. "What is clear is that buy-to-let is no longer for the novice speculator," says Melanie Bien, a director at mortgage broker Private Finance. "Lenders want to attract professional investors who know what they are doing, which is probably a good thing given the uncertainty of market conditions."

For the determined, however, there are ways. Steve Perrons, the managing director of Perrons Davis, a property management company specialising Hull, Nottingham, Doncaster and Grimsby, says his firm offers novice and experienced landlords support in finding properties, negotiating on price with estate agents, and crunching the numbers to ensure returns add up.

It will also find and vet tenants and, if required, deliver a full management service of the property and even a rental guarantee. Fees range accordingly from 14 to 25 per cent of monthly income.

"The problem people face with getting into buy-to-let for the first time is that property close to where they live is often too expensive, yet they are nervous about investing in a cheaper location 200 miles away as it is unfamiliar," says Mr Perrons. "Our 15 years' property experience in these areas enables our customers to take a hands-off and affordable approach to property investment. Most are not bothered about what the vehicle is for their investment. They just want something that is long term, hassle free and generates a return on their cash in the meantime."

Perrons Davis does not arrange mortgages, however, which can be the main sticking point for first-time landlords. But lending building blocks are slowly being reassembled, according to Mr Whittaker. "Coventry Building Society actually targets smaller landlords who have three homes or fewer," he says. "And, while Paragon's re-entry to the market may not help you specifically, it's an important sign that confidence in the market is growing."

Whether you are an experienced landlord or dipping a toe in the water for the first time, it comes down to a game of numbers. "If you buy with at least a 25 per cent deposit, ensuring a 5 per cent rental return against borrowing of 5 per cent, you won't be worse off regardless of property prices," says Mr Whittaker. "As you are planning on an investment term of between three and eight years, the market is likely to recover anyway."

Case Study

Dean Warner, 43, Business development manager

This time last year, Dean Warner knew nothing about buy-to-let. Today he owns seven properties all in Hull city centre.

"Hull is an area with high rental demand and where property is still relatively cheap so I chose there to buy seven, two- and three-bed flats priced between £47,000 and £60,000 – and they are all generating rent."

He also needed relatively small mortgages to make his sums stack up. He bought one home outright and on the rest put down deposits of 30 per cent. All of his mortgages are interest-only on two-year fixed rates of 5.2 per cent. "I wanted to ensure against interest rate rises for the first couple of years until I found my feet," he says. "My cash is working a lot harder already and I also believe that, eventually, capital growth will pick up too."