Is this a good time to invest in property?

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People like to invest in property. That’s always been the case because of bricks and mortar’s tangible nature. They see this as an advantage over buying volatile shares, topping up a pension, or even cash savings which are currently giving next to no return. But is now the right time?

Most of us have an understanding of property when we own a home, and unlike a standard pension where we wait a lifetime to see any return, an instant and growing cash-flow in the form of monthly rent payments is very attractive.

Not only that, a sensibly researched and purchased buy-to-let offers the possibility of making substantial long-term “pension like” capital gains. House prices have increased on average by one-third over the last 10 years, roughly doubled over the last 20 years, and rents have seen a steady increase over those years as well, as more and more people need to rent.

Right now the coronavirus pandemic is having a negative impact on on the economy; there could be a dramatic rise in unemployment on the way, and some landlords are finding it tough as inevitably some tenants struggle to pay their rent, but even so, these are in a minority.

We could well be facing one of the worst recessions for a generation, consequently this will inevitably have it’s effects on the security of rent returns, but also on house prices as economists are now forecasting a slump in house prices.

Successful investing is a matter of finding a balance between fear and greed, and to paraphrase one of the world’s most successful investors: you should buy when others are fearful and sell when they are being greedy.

It’s situations like this that create good buying opportunities. For those with a reasonable risk appetite and prepared to take a calculated risk, based on thorough research and due diligence, the risk is acceptable, and the rewards can be substantial. Timing and patience are key; waiting for the right time to buy, having done thorough research, usually pays off.

There are currently some really good buy-to-let mortgage deals available, fixed at low interest rates (starting as low as 1.3%) as banks are keen to lend to the right investors. By using gearing (borrowed money) within reason, investors can buy far more for their money without taking too much risk.

With interest rates at these record lows they can’t feasibly go much lower, so with a fixed rate mortgage based on a bank rate currently at just 0.1%, any up-tick in inflation can only be helpful long-term. While borrowing does increase risk if prices go down, it also magnifies gains when they go up. Over the long-term property prices have never done anything other than rise.

An interest only buy-to-let mortgage of £150,000 can be serviced for around £175 per month keeping the landlord’s costs low, while an average rent in the UK is £913 pcm. It has been estimated that around 50% of people under 40 will be renting by 2025 and average net yields for a buy-to-lets are currently around 5.9%, even higher in some regions.

With rates as low as these and potential returns this high, many existing landlords are taking the opportunity to remortgage their properties, releasing capital to make further investments as good opportunities arise. The stamp duty holiday until April next is another incentive to buy.

Yes, it’s got a lot tougher to manage rental properties and make a good profit, with increasing legislation and regulations creating more work for landlords. It’s also the case that changes to the tax regime have cut profit margins, causing some landlords to sell-up, though many landlords are adapting to the changes by buying through a limited company and managing more efficiently.

So, with the boom in the demand for rental accommodation continuing, given that economic uncertainty means people delay taking on home ownership, a shortage of rental property keeps tenant demand high and rents keep on rising

Running rental property is not all “sweatiness and light” by any means; there is work to do, there is tax to pay, repairs and maintenance needed; there are tenant problems and void periods. But you don’t make higher returns on your money money without some effort.

Despite all this landlording can be very rewarding, you are providing a community service and providing you stick to the rules and provide good quality accommodation your efforts will be appreciated by your tenants and by the authorities.

Bob Hunt, chief executive of Paradigm Mortgage Services has said:

“Looking gift horses in the mouth has never been a particular trait of private sector landlords over the last half a decade, probably because those gifts have been few and far between. Which is perhaps why the opportunity to save stamp duty on purchases, up until the end of March 2021, has been seized upon as a potential catalyst for a raft of investment purchases over the next seven or so months”

“It is a challenging time for many, and it seems important to me that the government does not overlook the fact that landlords are also challenged greatly by this situation…”

“…When the repossession ban ends on 20 September we may have a different environment though, if greater certainty can be delivered, coupled with the stamp duty saving, I have no doubt landlords will be motivated even further to add to portfolios, and advisers will no doubt benefit from what is an increasingly competitive mortgage market and a greater need for advice.”

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