Time for buy to let to come out of the freezer...

Wednesday, April 28, 2010 by Ed Mead

It’s easy to run scared from buy to let. It had as much bad publicity as any other sector in 2008/9 and at D&G we’ve been managing all sorts of rented properties for over 50 years.

There may be only a handful of mortgage products out there but perhaps no fewer by proportion than there were for ordinary purchases. As usual with any investment sector there’s always a degree of overshoot on the downside, as there is often with upside too, and it’s probably true that prices an in recovery mode at the moment, even if it’s a bit too soon to say it’s going to last.

If you look at the number of private equity outfits trying to raise money to invest it’s impressive with players like Savills, Grosvenor and Aegon looking to get involved. If you add the research done by the Investment Property that tells us that returns from investment grade market let residential property was on average 11% in 2009 you can see why. Yields from the more easily managed commercial sector (tend to be self managing 5-15 years leases to one tenant) are at around 4% for the same period. Unless yields change for this class the chance for upside remains less than in residential property

D&G manage a fund that invests in prime central London property and they’d kill for that sort of yield and I can imagine that if you advertised that sort of return in a newspaper you’d be knocked over in the rush so what are they talking about.

It’s very difficult to handle a portfolio of multiple properties all with different tenants who may not stay for more than a few months. But I have a close business friend who has for many years been building up a portfolio of well placed, not overly smart, houses that he is now cashing in on. His tenants are the new disenfranchised buyers who have given up looking, or new workers in City type jobs who want a good location but don’t want grand space. I’d have been in that latter category in my youth. What this entrepreneur does is to turn standard three bed terraced houses into a smart house with five or six sharers, all of whom pay monthly, and often in cash, and he himself drives around on Fridays and Saturdays collecting the rent himself. He is making a fortune and suspect his returns are well over 15%.

So all these issues come down to how hard you’re willing to work to get the return. Many of the London landlords we’ve managed have understood that so long as you have a very long term view with property, and right now a long term view is best, you’ll be alright. But they’ve also understood that they aren’t going to make a living from it, in fact at best their rental will pay for the periodic maintenance required to keep their property in good order.

Prejudice and poor press mean that you need to research thoroughly before actually investing, but it doesn’t any longer seem sensible to assume that we are on our way to becoming a nation of home owners, and so a large vibrant private rental sector is vital, and in the long term, viable.