FOOL'S EYE VIEW
Buy To Let

By Alan Oscroft
May 31, 2001

Liverpool -- I'm always wary when an investment idea gains in popularity, and my recent wariness is over the rising sales of buy to let mortgages. Is buying a house to rent a good investment? It can be. But like any other investment, we mustn't ignore the risks. They are not inconsiderable, as I found out personally.

I've owned rental property for about 12 years now (initially letting to students only), with two houses rented out at one time. (I'm down to one now, because I've moved into the other one myself.) A similarly inclined friend owned another two, and my parents another one. Lots of things can go wrong when renting property, and between us we've just about seen it all.

Mortgage sellers will usually quote handsome returns when trying to lend you their money, and checking rents in the local paper might have you licking your lips in anticipation. But there are a few things that can put a dent into your expectations.

No Tenants

Do you think you will always have 100% occupancy? Don't bank on it. It only takes a month or two of emptiness to knock your annual return down significantly. In extreme cases, you might have your property empty for long periods, as I did when the local University opened a new hall of residence and severely damaged the market for private accommodation.

Bad Tenants

Tenants who don't pay the rent can be very expensive. We had one guy who didn't pay any rent for about nine months. In addition to the lost rent, getting him evicted cost money too. If it happens to you, you might have to figure on writing off a whole year's rent if you're really unlucky.

Damage

Even decent tenants shouldn't be expected to look after the house the way you would. The house I'm living in never had a bad tenant, but after 12 years I'm having to replace all the doors and a substantial amount of other woodwork (door frames and the like) due to the accumulation of minor damage.

Rectifying damage after a tenant has moved out takes time too: time when you're not getting any rent.

Covering Your Debt

A buy-to-let mortgage is a debt, and debts have to be paid. When you take out a mortgage, be sure to stay well within your means. What will you do if you don't get any rent for six months, or a year, or more (for one of the above reasons)? The answer is to be sure you can cover the repayments from your own income.

I was lucky when my tenant supply dried up, because I was very near the end of the mortgage and I only had about a year of payments to make up myself. It was a tough year though.

Capital Gains Tax

You still have the growing asset value of the house too, and that keeps on going up, doesn't it? Well, house prices can't keep growing faster than earnings for ever, and the rises we've seen in recent years won't continue indefinitely.

And when you sell, you'll have to pay Capital Gains Tax if you make a profit. Any decent profit is likely to put you in the 40% bracket if you're not already there. Unlike shares, you can't put a house into your ISA.

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