Putting your money where the house is

With interest rates down in the doldrums, buy-to-let investments are once again an attractive option for savvy savers looking to boost their retirement income

For the investor approaching or enjoying retirement, deposit accounts with their paltry rates of return offer little interest (literally), while stock market volatility can make shares an equally unattractive bet for the cautious. Yet one investment has a long-term performance record outstripping most others: residential property, especially in the buy-to-let sector.

Despite the downturn since 2007, capital values are much higher than ten years ago. The Halifax says that in early 2001 an average UK home cost £83,976; by early this year, the average had risen in value to £162,379, a return for an investor of over 95 per cent.

Older investors seeking a regular income as well as a one-off profit when they sell are now well placed to take advantage of one of the strongest rental markets in recent years.

Government figures show that in England alone the number of private renters rose from 2.15m in 2004 to 3.35m last year; the continuing shortage of mortgages for first-time buyers is forcing this figure up further month by month. Data from LSL Property Services, owner of Your Move, Reeds Rains and several other high street estate agencies, found that rents have been on the increase over the past five months, with some parts of the UK seeing a 7 per cent increase.

The result is that buy-to-let is once again a profitable investment choice and perfect for a typical over-50-year-old who has equity from a home or pension pot to invest.

No one can promise bricks and mortar will produce guaranteed profits, but the buy-to-let sector’s track record is robust

There are two direct forms of buy-to-let. One is buying a home for long-term letting – a flat to rent to professionals moving into an area, or a house to be rented by sharing students, for example. The second is a holiday let – a cottage in a tourist location, typically rented to holidaymakers each week and perhaps used by the owner’s family, too.

Retiree David Wright, 61, recently bought his first buy-to-let, a one-bedroom coach house at a Barratt Homes development in Ilkeston, Derbyshire, for £67,500. “The interest I’d get in a savings account doesn’t compare to the 7 per cent yield I’m getting as a landlord. Barratt handed the keys over at 12.15pm, the letting agent had booked two viewings for that afternoon and by close of play that day, I had secured a tenant,” he says.

“I honestly believe that you can’t beat investing in bricks and mortar. As long as you’ve got the finances, do it. I’m considering investing in more properties.”

Wright’s case is not unusual, and many older investors have already built up a portfolio; they treat buy-to-let as a full-time business, rather than simply a way of augmenting a pension.

Clare and Richard Harvey, who are in their 50s, have several homes which they let out across the West Midlands, but are still buying – they have just snapped up a two-bedroom, two-bathroom apartment at St Paul’s City Lofts in central Sheffield.

The first tenant will be their son Jonathan, 21, who is starting his final year studies at Sheffield Hallam University. The couple plan to keep the home for five to ten years to let out to future generations of students. “The central location gives me confidence that this property will continue to generate a positive income through our retirement,” explains Clare, a former teacher.

A key consideration for any buy-to-let investor is, of course, getting the right, and most cost-effective, mortgage. “As long as rent from the property covers the mortgage, plus a margin for maintenance and running costs, the lender will assume the borrower won’t draw on retirement income to pay the mortgage,” says Melanie Bien, director of broker Private Finance. “Criteria differ between lenders. BM Solutions will allow a maximum age of 75 by the time the mortgage matures, while for Paragon it is 80 and for the Mortgage Works it is 90. You may need to opt for a shorter mortgage term than the usual 25 years, depending on your age when you take out the mortgage.”

Mortgages for holiday lets, rather than longer-term buy-to-lets, are less common so an independent mortgage broker may be the best place to start. Bien also warns that on all investment property mortgages lenders may want hefty deposits – perhaps as much as 40 per cent of the purchase price.

If a buy-to-let apartment or holiday cottage is not for you, and an indirect investment appeals, there are several residential funds. These are financial products: you buy into a fund, which in turn purchases property and generates income through renting it out.

Two recently announced measures – a reduction in stamp duty payable for apartments and houses purchased by a fund, and a promise of lower capital gains tax on profits from one type of fund called a real estate investment trust – make this route even more attractive. An independent financial adviser will give impartial information on how to invest.

No one can promise bricks and mortar will produce guaranteed profits, but the sector’s track record is robust. What is more, flats and houses are more affordable to investors than for many years, and demographics point to a long-term growth in the rental market.

It all looks a lot more tempting than many rival forms of investment – or, for that matter, many pensions.

Property hotspots

  1. Kent – Ebbsfleet is just 17 minutes to London St Pancras and new fast services will soon go to hitherto hard-to-reach Folkestone and Ramsgate, where an investor could buy a family house for £200,000.
  2. Lake District –one of the UK’s busiest tourist destinations as visitors do year-round walking tours, expanding the holiday letting season to 40 weeks. A pretty stone cottage, able to sleep five, will set you back £240,000.
  3. Exeter – Devon’s business capital is on the M5, expanding its university and soon to get a new John Lewis store. A prime-location, one-bedroom apartment costs about £130,000, while a two-bed is approximately £175,000.
  4. Central Birmingham – if the HS2 high-speed train link really does make Britain’s second city less than an hour from London, this will be a good long-term punt. For £300,000 you’ll get a well-located family house.

Golden rules

  • Research locations – avoid city centres which are over-supplied with flats and anywhere with big public sector workforces; try areas short of student accommodation, enjoying year-round tourism or expanding private firms.
  • Organise funding – interest-only mortgages are most cost-efficient but a broker can advise on latest products.
  • Don’t be cheap – most long-term lets are unfurnished, holiday lets require furniture, but all require good-quality fixtures and fittings.
  • Consider using a lettings agent – tax laws, health and safety regulations and tenancy rules change frequently, while renters can be demanding. Use an agent from trade body the Association of Residential Letting Agents.