Is Buy to Let Dead?

Posted:Abigail Andrews - Tuesday, March 11th, 2008 at 9:46 pm.

Property Investors are doomed?

In recent years property has become "the" investment choice of many; becoming particularly popular with the amateur investor and "wanna be" millionaires, attracted by the potentially massive gains that have been seen due to the property boom of the last decade. The availability of cheap credit allowed those people who otherwise would not have been able to invest in property, the ability to grow their own property portfolio and become amateur landlords.

Reports in the papers and on news items in recent months would have us believe that all Buy to Let investors are doomed and that Buy to Let is dead, but in my opinion, you have not seen the last of this kind of investing no matter what the headlines say about falling property values and stricken amateur investors. Why? Here is my argument.........

You have not seen the last of this kind of investing no matter what the headlines say about falling property values.

Not all properties are equal

The reason I believe the Buy to Let market is NOT doomed is based on the fact that NOT ALL properties are equal when it comes to rental and investment potential. Property Investment is about picking the “right” property to suit your needs. In recent years, due to the property boom, the margin for error has been wide. Investors could pick a complete DUD and still easily make £50,000 within 2 years in the rising market. Yes, times are changing, but does that mean Buy to Let is dead? Well no, not all properties, landlords and investors will be affected by the current changes in the property market. I believe that the problems we will see in the Buy to Let market, will be limited to mainly new landlords, more specifically, those who have bought apartments in oversupplied areas. Many are amateur investors who poured their money into heavily marketed new properties, often in large developments in regenerated city centres.

I believe that the problems we will see in the Buy to Let market, will be limited to mainly new landlords, more specifically, those who have bought apartments in oversupplied areas.

I do agree that some landlords have stretched themselves too far. Even experienced investors in the boom of recent years have got a little carried away, taking out massive loans with little reserve in the bank for emergencies. I am particularly in agreement with those concerned about those landlords who are massively supplementing mortgage payments with their own money, simply because they have taken on a property where the rent does not cover mortgage payments. I agree that those landlords are making very risky investments, in simply hoping for house prices to rise, in order to reap the returns when the property is sold. With house prices leveling off, if not falling, this may not happen for a good few years and those landlords will have to supplement the mortgage payments for some time. For those that can, they should be able to ride any storm, but some may not be able to afford to do this as their circumstances may change. However, I believe the percentage of landlords in this situation is much smaller than reported. Most sensible investors will not buy any property that the cannot afford to hold onto under any circumstance for the long term.

THERE is the problem, oversupply of apartments for a market that is crying out for 2 bed houses!

Why on earth do we need so many apartments?

It is easy to say with hindsight that I could have told anyone that investing in some of the city centre developments was risky to say the least. I for one chose not to invest in any city centre developments after doing some research and realising that the figures simply did not add up. My question on many occasions has been, why on earth do we need so many apartments? A question prompted by the growing sky line of my city and by being bombarded with property investment emails for the next new development.

There is now evidence that prices are plummeting on these type of apartments. Furthermore, rents in this type of market are weak as so many investors are buying in the same area, saturating the market, usually two-bedroom flats, that are available to let simultaneously as the development completes. However, THERE is the problem, oversupply of apartments for a market that is crying out for 2 bed houses! The oversupply of new-build properties means falling rents on apartments but NOT on houses. Statistics show rents are rising on houses. That does not mean that Buy to Let is dead as many would like to think, it means part of the market MAY suffer, but not all of it!

Not Buying means Renting

Think about this; If property prices are too high for people to buy the result is strong rental demand, people have to live somewhere don't they?!? I mean some can live with parents or family, but be real, how long could you handle that before you wanted some privacy. There lies the crux of my argument. Furthermore, if you are buying a property to rent out for long term investment purposes, then does it really matter if the price of that property price falls in the short term? The key is long term. If prices rise as they have done, you can sell for a profit. Yes, if property prices are too high then people stop buying, and prices go down, BUT, the result is rental demand goes up. With high rental demand you have no problem paying the mortgage in order to wait for prices to start going up again. Either way surely its a win win situation?! As long as you are in your investment for the long term and do not HAVE to sell in the short term.

If property prices are too high for people to buy the result is strong rental demand, people have to live somewhere don't they?!?

The only thing that will bother any landlord is rising interest rates, however, that will bother any investor, landlord or family home buyer! Drastically rising interest rates would be the death of Buy To Let NOT falling house prices! However that looks unlikely as interest rates are one of the things that fortunately the BOE have under control. Yes, the cheap credit is drying up, but that does not mean to say Buy to Let will, it just means it will be harder for people to invest. I suppose it will weed out those investors who do their research from those investors who don't.

For two or three years now, there has been no shortage of commentators predicting doom, gloom and a lot worse for amateur landlords who have turned to bricks and mortar as an alternative to investing in a pension. Headlines in 2004, 2005, 2006 and 2007 can be found all over the internet with bold statements such as "the Buy to Let boom is over". Eventually the doomsters will be right, but so far Buy to Let has withstood anything thrown at it.

Investors Welcome a Downturn in the Market

Many landlords who have done their research and invested wisely, not greedily, will be excited, not frightened, about the apparent downturn in the property market, as it gives them great opportunities to buy property at below market value. Those that rode out the crash in the 1980’s saw huge profits. This is a relatively minor lull by comparison. Many, like me, are quite looking forward to a lowering of property values, it simply means we can buy more investment properties. If prices continue to rise we will be forced to stand back for even longer, as few properties currently work out financially as an investment. Many investors may have some properties which may see fall in value but it must be remembered that this is only short term. In 10-20 years time prices are very likely to have risen – they always do, just take a look at historical house price trends! It appears to be becoming a buyers market once again, and for the property investor that is never a bad thing.

Final Thoughts

Buy to let is not dead, but may be due a long sleep particularly in city centres, however it is likely to wake up refreshed and come back with full strength.

Perhaps people should stop criticising those who want to provide for their future by buying an investment property. Many people spend and spend without a second thought for their retirement. At least those of us who are investing in property are trying to provide for our future and our pensions. Some of us have to do it as the state pension certainly will not look after all of us when we come to retire. At least I will not be a drain on society in my old age. Many of my generation appear not to realise that the government will not be helping them in retirement and many people will find themselves reliant on the small benefits that may, or may not, be provided. I know I do not want to risk being reliant on a state pension when I retire, because its likely that there will not be one………..oh, that leads me nicely onto my next rant! :)

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