Buy to let investment

Risks

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In the past, residential property was normally considered an unsuitable vehicle for personal investment. And not without good reason. Archaic laws meant that landlords faced strict rent controls on their property, as well as the difficulty of dealing with tenants who had security of tenure and therefore considerable power to disrupt the life and business of the landlord. It is for these reasons that placing a tenant in a residential property had an effect similar to reducing its value by up to 50 percent.

All this changed with the 1986 Housing Act and the introduction of a new type of tenancy, the assured shorthold. This went a long way to redressing the balance of power between landlord and tenant, allowing the property owner to regain possession of the property at the end of the fixed tenancy period, which had to be only a minimum of 6 months.

However, despite the changes in legislation, investing in residential property is not without its risks and some considerable drawbacks remain:

Instability
Despite what many people think, there is no guarantee that property is a stable investment. Take 1999 and 2000, for example. The first half of 1999 was an absolute boom time for buy to let investment, with some urban estate agents reporting that half the buyers they had through the door were investors. This led to over-supply of rental property in many areas, and landlords could not achieve the rents that they were looking for. This, combined with rising prices and steadily climbing interest rates forced many private investors to cash in their investments and take the profits that price rises had left them. In turn, many observers have seen rental prices rise substantially throughout 2000, partly as a reaction to many first time buyers being priced out of the market in places like London, and partly due to the slowdown in the growth of available rental properties in the same places. This is one example of an economic cycle that can cause your investment to live out a turbulent existence.

Cyclical nature of markets
Both property prices and rental yields can be cyclical. You need to have the resources and mentality to hang in for the long term. If you are the sort to jump in and out of investments at the first sign of trouble, this type of scheme is probably not for you. Property is not liquid enough to be able to guarantee your ability to divest the assets you hold in an emergency - it is a lot less liquid than equities, unit trusts, gilts or bonds.

One of the biggest dangers of the property market is that you may find yourself having to sell just as prices are in one of their periodic slumps. A property doesn't necessarily have to go all the way into negative equity in order for the costs and expenditure to eat away any profits you may make on its sale.

Remember that there is an element of seasonal demand in the rental market, which may affect the timing of any purchase that you make. There is a strong swell of demand in late summer and early autumn as families move in time for the new school year and graduates take up their first jobs after university. If you miss the rush for one reason or another, you may find it difficult to let your property as the festive season approaches.

Void periods
There are other risks that can be utterly unrelated to the bigger economic picture. Through sheer bad luck, you may not be able to find a tenant as quickly as you like. Any property will have periods of non-tenancy. You must be able to fund the mortgage payment during these rent free periods.

Resource requirements
Substantial resources are required to buy investment property, as lenders usually stipulate that fairly high deposits are required. That means that you will have to come up with maybe 20 percent as a deposit, plus the other buying costs, plus the funds required to kit the property out with the appropriate furnishings and décor to attract the right tenants. Even a property that is in immaculate condition when you buy it can require considerable investment overall.

Remember that it is much more time consuming to manage property than it is to maintain a portfolio of other investments. Once charges, taxes and running costs are taken into account, this can make the returns look unattractive to some investors.

And finally...
Always treat buy to let investment as a medium to long term project - it's usually best to have at least a 10-year outlook. Buying property is an expensive and time consuming task that will very probably repay you in the end, but the chances are that you won't become an overnight millionaire. It takes time to absorb the start-up and selling costs, even if the property rises in value quite quickly.

Finally, remember that there are good tenants and there are bad tenants. If you get a bad tenant, then your investment can really be turned on its head. Unpaid rent, damage to the property, missing and stolen items, antisocial behaviour, legal proceedings, fire damage, flooding, leaks, structural problems - all sorts of things could happen to make your investment a troubled one. Any one of these can be an unpleasant occurrence that takes time, money and an awful lot of patience to remedy. Make sure that you go into it with your eyes open.

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