INCOME VERSUS GROWTH: Your cash is safe as houses

Buy-to-let schemes are proving profitable, says Amanda Jarvis

Poor savings rates and volatile stock market performance have sent thousands of people towards investing in property as a safe home for their money.

Gone are the days of strict rent control and poorly maintained property. There is now strong demand for quality rented properties, and cheap mortgage deals mean that property investors stand to make considerable gains with income and capital growth.

Buy to let was launched at the end of 1996 by the Association of Residential Letting Agents (Arla) and there are now 38 lenders offering mortgages in the scheme. You can also get a buy-to-let mortgage outside the Arla plan, which leaves you free to rent out the property yourself without going through an Arla agent.

About 11 per cent of people rent in the private sector, up from 7 per cent 10 years ago. "There is no longer the social pressure to buy property that there was in the 1980s," explains Malcolm Harrison, a spokesman for Arla.

"We've moved away from the rush-to-buy ethos. People move around much more than they used to; many people have short-term work contracts. Divorce and the fact that more people are choosing to live alone all contribute to an increase in people who prefer to rent."

Don't be lured by headline rental yields. Rental income will vary from location to location and property to property. "The average gross yield is 9.5 per cent, but once you've taken into account the costs of buying the property, the letting costs and maintenance that gives you a net yield of around 6.5 per cent," explains Yolande Barnes, director of research at property consultants FPD Savills.

What is really tempting for investors is the potential for capital growth. Property prices have increased by 28 per cent overall in the last 10 years, according to the Halifax House Price index. "This year we expect 4 per cent, slowing to 3 per cent in 2000," explains Celia Roland at Halifax.

Some areas of the country have boomed and prices are still rising, although you have probably missed out on the massive gains made, for example, in Islington, north London, last year. Prices there went up by 29 per cent.

Ms Roland is optimistic about property as an investment: "Property is a good bet in the long term. The market is performing as we like it with steady inflation rather than the booms and busts of the late 1980s.

"So it's a potential win-win scenario - if property prices increase then you get income along with capital growth."

You need plenty of capital to get started as a landlord. There are the usual costs of buying property: the deposit, legal fees and stamp duty. If you use a letting or managing agent you can expect to pay between pounds 125 and pounds 175 as an initial fee, plus around 15 per cent of the rent each month.

"Letting agents can expose your property to a wider market," explains Maldwyn Jones, regional director of residential lettings at Blackhorse Agencies. "If you use a letting agency you get quality of tenant, which ensures certainty of rent and security of income."

Letting agents will find tenants, take up references, and draw up tenancy agreements. They generally manage the property as well, which involves collecting rent, maintenance and repairs.

And they will often carry out quarterly inspections. Arla can provide you with a list of member managing agents.

When setting the rent you need to think carefully about the costs involved in buying and running the property and for any gaps between tenants. Ideally, the rent paid should be 150 per cent of the mortgage costs. Any increase in the property's value will be subject to capital gains tax of 40 per cent when it is sold.

Rental income is subject to tax but the Inland Revenue has generous allowances for costs and wear and tear.

Buy-to-let mortgage rates tend to be around half a per cent above the standard rate.

Most lenders will lend 75 per cent to 80 per cent of the value of the property and some will lend on several properties at one time.

Many lenders will impose restrictions. Woolwich Direct, for example, insists the gross monthly rental income has to be at least 125 per cent of the mortgage payment. Some lenders will insist that you use a managing agent.

Good deals at the moment are from Bristol & West, which is currently offering a mortgage of 639 per cent fixed for three years, and UCB Home Loans, which offers a fixed rate of 5.99 per cent for two years.

Arla provides a list of its members and a good mortgage broker should be able to give you details of other buy-to-let deals that are available.

Check what the position would be if you were to move house or remortgage your main residence while holding buy-to-let loans.

It's important to do your research and have a clear idea of who your prospective tenants are and what they want. "Don't buy a property that you want to live in," explains Mr Harrison. "You need to look at properties through a letting agent's eyes and you need the right property furnished in the right way."

A letting agent will be able to tell you what type of property is suitable for rent in the area. For example, family houses are popular in commuter- belt towns, whereas in certain areas of London, two-bedroom flats are in high-demand.

But if you are a London buyer, watch out for oversupply. Ms Barnes warns: "There's too much rental property available in parts of central London. We have direct evidence to suggest that rent has been falling in these areas and net average rent can be as low as 5 per cent."

There are risks. There may be problems with tenants, non-payment of rent or bills for damage and maintenance costs. Moreover, stock market investments can offer more generous returns.

But Mr Harrison explains that property investment is suitable for the cautious investor who prefers to have control over his or her investments.

"Modest returns are typical with all low-risk investments," he points out.

You also have to be prepared to tie your money up for at least 10 years and you may not be able to sell up quickly if you need the cash.

Falling inflation and low interest rates mean that long-term yields are likely to fall. "Returns may come down," explains Mr Harrison, "but with more good quality property coming on to the market, the number of people renting is expected to increase from 11 per cent to 15 per cent over the next 10 years."

Any further falls could leave some investors unable to service their debt.

But for most people, the long-term potential for capital growth outweighs all the current uncertainties about property prices.

"Return on capital probably won't match other investments in the short term, but we do predict capital value growth in the medium- to long-term," says Ms Barnes.

n Contacts: Arla is running a buy-to-let exhibition in London on 23 to 24 March. It also produces a free booklet, `Buy-to-let' and can give you details of its mortgage members and letting agency members. Tel: 01923 896555

The Royal Institution of Chartered Surveyors, 0171-222 7000, has a free guide entitled `Letting Your Property'.