Buy-to-let bounces back

With more landlords planning to invest in property, capital values rising and yields remaining healthy, buy-to-let may be back in vogue

As the UK crawls out of recession the buy-to-let sector has been quietly recovering for some time now, and landlords are feeling increasingly positive about the future.

Just last week a new survey of landlords from buy-to-let lender Paragon Mortgages showed that 12% plan to purchase more investment property in the second quarter of this year, up from 10% in quarter 1.

But at a time when the wider economy is still very fragile why are such a healthy proportion of landlords prepared to take the risk and expand their portfolios?

Tenants on tap

Firstly, tenant demand has been particularly strong for a while now and landlords are very confident they will be able to let their new properties. A significant 24% of landlords claimed demand from tenants grew in the first three months of this year, while the majority (64%) noted stable demand.

This continuing improvement is also reflected in lower levels of tenant arrears -- something that has been a major headache for landlords during the recession -- which has dropped for two quarters on the bounce. Void periods have also dropped for two successive quarters, says Paragon.

Property company LSL Property Services supports these findings, noting that rent arrears dropped to 10% of all rent in March, the lowest level since it began tracking the figures in 2008.

Over a third of landlords believe tenant demand will increase considerably in the next 12 months, so it’s little wonder they plan to take advantage by expanding their portfolios.

In other words, the worst looks well and truly over for buy-to-let, with many indicators turning positive for landlords.

But what about the nitty gritty - rental yields and capital values?

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A numbers game

It’s return on investment that landlords need to see moving in their favour to really convince them to invest further.

And things are looking bright here too. According to Paragon’s survey the average value of landlord portfolios jumped 6.1% during the first three months of the year to £1.52m. The majority (73%) expect no further change in the value of their portfolios in the next 12 months, although 19% predict a rise.

Yields are healthy at 6% although they did dip from 6.2% in the last quarter of 2009, as you would expect as values increase. Remember, yields represent a portfolio’s annual rental income as a percentage of its total value, so as property values go up it is common to see yields drop.

In fact, for the past 9 months the average rental yield has stayed pretty stable, bouncing between 6% and 6.2%, as both house price inflation and actual rental incomes have inched up.

More good news

Of course, those landlords who can afford to take a risk on property now have a whole host of long-term indicators on their side.

Related goal

Become a buy-to-let landlord

How to pick the right property, get the right mortgage, take out the right insurance, choose the right letting agent and most importantly, unravel all that red tape!

Do this goal

The private rented sector is clearly vital to the UK housing market and according to Paragon Mortgages has been picking up the slack in the last decade while the proportion of households in owner-occupation and social housing has been on decline.

Plus major socio-economic changes bode well for landlords. There are more single person households, economic migrants and students -- all of whom are more likely to rent than buy.

Add this to the fact that we are getting married and having children later in life, plus the dire shortage of sufficient housebuilding to meet demand, and the future look bright for landlords.

But there is one cloud still on the horizon, and it’s refusing to budge. The lack of available mortgage finance.

• Adopt this goal:Become a buy-to-let landlord

Not enough funding

The buy-to-let sector has seen the number of available mortgage deals decimated, well-known lenders shut up shop and criteria tightened massively across the board.

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Lenders are still extremely cautious about who they will lend to, as well as having very limited funds to lend.

Paragon found that 82% of landlords who attempted to secure mortgage finance in the last quarter found it even more difficult than the previous quarter.

But is the funding situation really that bad? Is criteria relaxing at all or do landlords still need to put up at least a 25% deposit, have rental income that covers at least 125% of the monthly mortgage payments, and pay a premium fee for the privilege of an inflated interest rate?

Well, in the main, yes. But there is at least more choice on the market with the likes of The Mortgage Works, Coventry Building Society and Northern Rock all cutting rates or adding new deals this month.

Here’s my pick of the best mortgages for landlords:

10 top fixed rates

10 top variable deals

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