Is now the time to get back into buy-to-let?

15th  March 2009

No, says Martin Bamford, Chartered Financial Planner at Informed Choice.

Now is not a good time to enter the buy-to-let market. There will always be exceptions, but for many investors there is rarely an ideal time to invest in residential property.

Prices fell around 15% last year, taking the price of an average property back to the levels of March 2005. Repeated cuts in the Bank of England base rate should have made the cost of borrowing more affordable and presented a wider margin between interest costs and rental income. Yet it would be a bold move to embark on a career as a landlord right now.

Investing in property is risky even at the best of times. In this economic climate it is comparable to placing a bet on a horse at Cheltenham.

With estate agents reporting slow sales, desperate vendors are turning to the rental market to cover mortgage costs. Supply in most rental markets continues to outstrip demand and this will drive down rents over the next year. We saw the average monthly rent fall by around 5% in February.

The sizeable level of deposit required to get a mortgage on a buy-to-let basis could easily be wiped out by further price falls this year and next. It could be that the combination of rate cuts and quantitative easing will free up lending in the residential property sector, restoring confidence and supporting prices; but it could equally fail to do so.

The promise of becoming a property millionaire proved a fallacy for people who forked out thousands of pounds for weekend workshops and access to "exclusive" property deals. I suspect the only people who make money from property investing, over the longer term, are those who act as unregulated property investment "advisers" and some professional investors.

Now the UK buy-to-let market has soured, we are getting more approaches from salespeople who have switched their attention to the "opportunities" in overseas markets. Throw currency risk into the mix and you might as well just burn your pile of hard-earned cash.

Even in a stable economic climate where borrowing is readily accessible and there is a high degree of confidence in the residential property asset class, buy-to-let is an ambitious way to invest.

After the costs of buying and selling, those associated with mortgage financing, and possible capital gains tax on future proceeds, investors often come away from the deal with a low return.

Viewing property investment as an alternative to a pension for retirement planning means missing out on valuable tax relief. The ability to offset mortgage interest costs against rent for income tax purposes is useful, but you get a better overall deal in a pension or Isa tax wrapper.

Investing in property will always be attractive in the long term because it is a tangible investment and one that can be highly leveraged through borrowing.

We always ask would-be property investors if they would take out a personal loan to invest in a blue-chip company in the stockmarket. Taking out a mortgage to get started in buy-to-let is no different. If anything, the stocks route is cheaper to access and easier to liquidate - but more volatile.

Buy-to-let investing, now or at any other time, is like swimming across a shark-infested lake to get your hands on a pot of gold that isn't guaranteed to be there. Think carefully before diving in.

This article was first published in The Observer, Sunday 15th March 2009

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is now the time to get back into buy-to-let?