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Their jobs are to help people invest their money by buying property but here Mira Butterworth asks the mortgage industry’s big hitters how they would spend a (sadly imaginary) cheque for 100,000.

Imagine you had 100,000 to invest in bricks and mortar. How would you use the money and where would you buy property? One option would to be to look for a property that you could buy outright with the cash so that you could benefit from the rental income. Another possibility would be to divide it into several deposits and take out buy-to-let mortgages on two or three premises.

Investors may have to make these decisions on a frequent basis, but what would their advisers or mortgage providers do if they were in their shoes? Here, Mortgage Strategy asks a number of high profile industry figures for their views on how to achieve the best results with a 100,000 investment from the property market in the present economic environment.

Sally Laker, managing director of Mortgage Intelligence, says she would not step far beyond her own back yard to invest in bricks and mortar. MI’s offices are based in Bournemouth and this is where Laker would invest her 100,000 in property.

“I would prefer to keep an eye on my investment and Bournemouth is an ideal buy-to-let town, although somewhat expensive,” she says. “It has always been a property hotspot and growth potential in this part of the world is good.”

The attractions of Bournemouth as a buy-to-let venue include its weather – the town reportedly has some of the best weather in the country – a wide variety of colleges, a university, an arts institute and several hospitals in nearby towns. These are all regarded as good indicators of an attractive buy-to-let area.

Among the most popular types of rental accommodation generally are two-bedroom properties and Bournemouth is no exception in this regard. Such properties in the area are selling in the region of 150,000 and Laker says she would buy two, with a mortgage of 112,500 on each, which would equate to 75% LTV.

“Using our exclusive deal with The Mortgage Works at 4.50% fixed rate for three years with no arrangement fee, my monthly payments would be around 422 per month on each property,” she says.

The anticipated rental income would be 650 to 700 per month per property, providing Laker with a monthly income as well as capital growth.

“It would leave me with sufficient funds to cover Stamp Duty, legal fees and cash to do some refurbishment to the properties,” she adds.

Laker would also face costs from a rental agent, which she says she would hire to arrange the tenancy and handle any problems such as leaks in the properties.

She describes the property market in Bournemouth as competitive, saying properties decorated to showroom standard are snapped up quickly.

Laker is aware of the possibility of buying three properties in a lower price bracket with higher LTVs. But she would limit her investment to two properties in Bournemouth, saying it’s a case of knowing your area.

“The wrong buy in the wrong area will see limited capital growth and be difficult to rent,” she says.

“The middle market is ideal. It would be a worthwhile investment and at some point, when my son and daughter leave home, there will be a readymade investment for their first step on the property ladder.”

There is also a question of what type of property to invest in. At one end of the scale there are new builds while at the other there are renovation projects.

Peter Charles, chief economist of Mortgage Express, suggests one of the best ways of making money is to change the property to add value.

“Converting a loft or adding an extension can significantly improve the property and the sale value,” he says.

This approach obviously has its risks, particularly if unskilled home owners decide to take on the work.

But limited spare time means Charles would not take this option, instead focussing on properties that are ready to rent.

He says he would look for two-bedroom flats in an established development close to the shops and convenient for the rail station for trains to the City. These are currently selling for in the region of 160,000 and have a weekly rental value of 175, according to Charles.

“These should provide plenty of potential for a good gain in value in the next five years,” he says.

Timing is key to a profitable investment but Charles would be reluctant to hold back if he had 100,000 to invest in the present market.

“It seems lack of affordability for first-time buyers is still depressing the market,” he says. “This makes it a good time to buy, before first-time buyers start to feel a bit better off due to the fall in interest rates.”

He is also optimistic about fixed rate deals, saying he would sign up for a five-year fixed rate to shield his investment against potential interest rate rises.

“The risk of missing out on significantly lower rates seems low,” he says.

Most industry experts agree that dividing the 100,000 investment pot into several deposits on different properties would provide the best long-term deals. But this is hardly surprising when buyers would be hard pushed to find a property for this amount of money in many parts of the country. The Halifax property price index suggests the average property price is 165,000 while Paragon’s latest survey shows the average buy-to-let property is similarly priced.

“There are properties available for under and around the 100,000 mark, mainly in the north, but there is a huge amount of competition for these,” says Steve Sandiford, director of specialist products at HBOS. “Besides, there is often no point in putting all your eggs in one basket.”

He says his first port of call would be buy-to-let, using up to 30,000 out of the pot as a deposit. He’d look for a property of 165,000, meaning he’d need a mortgage with an 85% LTV.

He’d then use the remaining cash to fund more properties.

BM Solutions’ research shows that typical buy-to-let investors plan to stay in the market for 15 or more years.

And while Sandiford wouldn’t expect to make much in the way of rent with his properties, he would consider them as a solid investment for the long term. Regarding where he would invest, Sandiford refers to the old adage about there being three factors that make investments in property successful – location, location and location.

“Properties that make good buys in terms of buy-to-let and increases in capital value are those in university towns,” he says.

“Properties bought in these areas are usually stable investments, with consistent demand from professionals and students. Other hotspots include areas that are due for regeneration or investment.

“If all else fails, my house could always benefit from an Olympic-size hot tub attachment,” he concludes.

Simon Jones, director at Savills Private Finance, has already begun investing in property and hopes to expand his portfolio in the future.

“If I had 100,000 to invest, I’d use it to buy more property to add to my embryonic buy-to-let portfolio,” he says.

“I already own a couple of new builds. The yields on these are OK but this time round I’d buy something needing work in order to get the yields up and balance my portfolio.” He explains he would gear up with the 100,000 and buy more than one property.

“If I aimed for properties at around the 200,000 mark, my 100,000 could stretch to buy three,” he says.

“A 15% deposit would set me back 30,000 on each one and allow for legal costs and Stamp Duty. If the property was slightly cheaper – say 180,000 – I would have a few thousand left over to upgrade it.”

Jones would adopt a similar approach to Laker in that he would invest near his home town.

“I would stick to where I know – the Croydon area,” he says. “Investing there has worked for me in the past as there is high employment and it’s easy to commute into London. I would aim for property within walking distance of the station with easy access to shops and other local facilities.”

Jones plans to buy 10 to 15 properties in the next five years. He does not need the income from these properties at the moment and so will be investing for capital growth. The money will eventually be used to supplement his pension. With 15 properties in the portfolio, he would aim to sell five so that he could reduce the mortgages on the remainder and take some income.

Jones has tracker mortgages on his existing properties and so would be tempted to opt for fixed rate deals on any new investments.

“The larger your portfolio, the more important it is to spread your risk and there are some great fixes available,’ he says.

Judith White, national sales manager at First National, is braver than others as she confesses to a desire to adopt a higher risk strategy and buy houses with development potential.

“I’ve had experience of rebuilding and not only is it a great challenge but developing a house can also be a great way to make money,” she says.

She believes there is potential to build a portfolio of properties with 100,000 and would buy with mortgages rather than cash, allowing her more money to play with as a budding property developer.

“Buying commercial property is only a good idea if you have knowledge of running a business so I’d invest in residential property, maybe buy-to-lets so I could offset the rental income against the mortgage,” she says.

White would build her portfolio in the UK and abroad.

“The Midlands is a great location at the moment with reasonable house prices and good rental yields,” she says. “Overseas I would choose somewhere up-and-coming, such as Bulgaria or Croatia.”

A holiday home in Florida also appeals, which White would rent out and use for the occasional holiday in order to obtain the maximum benefit from it.

“I’d certainly enjoy spending the money and with the support of a good lender, some careful planning and a little luck I reckon I’d make a tidy profit,” she adds.

So, the consensus among industry figures is that dividing up the 100,000 into several deposits on two or three properties and using buy-to-let mortgages to buy the properties is a more worthwhile investment than buying a single property outright with the cash.

It’s a strategy that has proved popular in recent years, with figures from the Council of Mortgage Lenders showing buy-to-let lending rising from 5.4bn in 1999 to 52.2bn in 2004 . Many investors have benefited from buy-to-let and it’s a trend that looks set to continue for many years to come.l

Alternative to the standard sale process
Julian King is director of National Homebuyers
Selling a house is often stressful but the pressure is even greater than usual at the moment as the stagnant property market lingers. There is little indication that this will change in the foreseeable future.

Nationwide revealed this summer that annual house price growth slowed to 4.1% compared with 19% this time last year. This is the slowest rate of growth since July 1996. Nationwide added activity levels seemed to have stagnated and reported estate agents talking of stalemates between buyers and sellers on price.

In this climate sales can take months to complete, leaving sellers in limbo, and if you have a buy-to-let to sell it may mean that there is additional financial pressure to sell a house quickly. It may be that other business opportunities have to be put on hold until capital is released. If the house is no longer being rented out, a lengthy sale process can be a pricey business in terms of both additional mortgage payments and maintenance costs.

Rather than just waiting for a house to sell there are organisations, such as National Homebuyers, that will buy the property, arranging a deal that is quick and hassle-free. An offer can be made on a property in as little as seven days of instruction and completion can be arranged almost immediately. Of course, that offer will be less than market value but a lost business opportunity or outgoings on a house not being rented out may well be more costly in the long run.

For those who need to sell quickly, this provides a real alternative to the standard house purchase process.

Within an increasingly complex property market, this option seems one that is set to become an attractive option for those selling buy-to-let properties, particularly those who need to sell quickly.

B2L is more than just an investment
Malcolm Harrison is spokesman for Association of Residential Letting Agents
Getting into buy-to-let is more than making an investment, it is going into business. It requires professional advice, a plan, market knowledge and is not a question of personal taste. Property has to appeal to the widest possible selection of prospective tenants.

For some investors the income is to live on now while for others – nearly half – it is to service the costs of an investment that will produce a gain 15 or 20 years down the line.

Either way, it all has to start in an area with lots of people and with a letting agent. The agent knows the local tenant demand, the kind of property that is popular, the standard of fixtures and fittings demanded and the decoration and furnishings that will get it let quickly. The agent also knows what improvements add to rental value.

Together with the letting agent, investors need to look at likely properties, decide what mortgage is needed and determine a rental value. The rent has to cover the mortgage payments, insurance, maintenance, service contracts for appliances, ground rent, service charges and agent’s fees. Investors should assume that, for at least one month a year, the property will be empty while outgoings will continue. There is also the profit element to consider. All this should total between 120% and 150% of the mortgage payments.

Once bought, an investment property has to be let and it is worth using an agent who is a member of the Association of Residential Letting Agents. Apart from safeguarding rents and deposits, an amazing amount of details need attention. And it is attention to detail that makes any business successful. Once a tenant is found, references must be checked, a tenancy agreement drawn up, utilities changed, rents and deposits taken and held in properly controlled client accounts – and remember tenancy deposit schemes become mandatory next year. Rents have to be collected, all faults and repairs sorted out quickly and efficiently. At the end of a tenancy, everything has to be done in reverse and another tenant found quickly.

Prices of investment properties are rising along with rental yields
John Heron is managing director of Paragon Mortgages
September’s Buy-to-Let Index from Paragon Mortgages shows property prices paid by investor landlords easing slightly on last month’s level. But they are still almost 8,400, or 5.5%, higher than four months ago.

This period of relatively strong increases in landlord property prices is in marked contrast with the months between November 2004 and April 2005, when property values were static or declined slightly.

In August, landlords paid on average 160,984 for a typical investment property, compared with 152,622 in April this year and 141,765 in August 2004 – up 13.7% over the year.

The market took a breather in the winter and early spring (2004 into 2005), which translated into flat property prices paid by landlords.More recently, there’s been growing evidence landlords are willing to engage in transactions and that is having the effect of pushing prices of investment properties gently upward.

This month sees a modest easing of prices and rents, attributable to a spike in July caused by some unusually high value transactions completing in the month.But August is in line with the long-term trend.

The trend in rents has been staunchly upward in the past 12 months.Since August last year, rents are up by almost 1,000 or 10.5% – more than three times the rate of inflation.

This sustained buying activity and the higher prices that go with it reflect renewed confidence in the private rented sector on the part of landlords.Landlords watch the market carefully to gauge changing demand for types of rented accommodation.If the neighbourhood hospital is expanding or there is an influx of students at the local college or university, or an area is growing in popularity with workers at a new office block, landlords will regard this as a buy signal.It’s a matter of being close to the ground, knowing the market and understanding its dynamics.

Landlords are responding to demand and to the upward trend of rents.In particular, established investors who take a long-term, professional approach to buy-to-let, continue to buy selectively and carefully, as and when they can secure a good deal on the right property in the right place.

Many people rent out of choice rather than need.They choose to rent for a variety of reasons including avoiding the need to commit to living in the same area for a long period of time and also because they can rent a better quality property in a nicer area than they could afford to buy. Maybe they simply enjoy the opportunity to share with friends.

Uncertainty in the housing market undoubtedly encourages additional rental activity and the lettings business is pretty buoyant – and is likely to become more so as the autumn progresses.

This month sees a significant change in the regional pecking order in terms of average yield.Wales, at 7.37%, has usurped Yorkshire in the top spot in terms of highest yield.Yorkshire has been at or near the top of the list for most of 2005 but slipped into fourth place this month at under 7%.The West Midlands remains in second position with a yield of 7.31%. Nationally, the average total annual return stands at 20.3%, compared with 22.3% in July.

The summer is traditionally a somewhat quiet time in the housing market but with renewed confidence, good tenant demand and the country’s long-term structural shortage of decent accommodation, it’s no surprise investors continue to buy.

Chose your area with care when buying to let
Nicola Severn is marketing manager of Mortgage Trust
Provided an investor is able to achieve their lender’s rental income and LTV requirements – approximately 125% of the mortgage payment and 85% of the property value respectively – 100,000 would allow for a loan of up to 566,000, a total budget of 666,000. This could be invested in a single property but in the majority of cases return on investment is likely to be maximised by buying a number of rental properties and building a portfolio.

This provides the potential to avoid Stamp Duty on any properties below 120,000 and spread the risk if rental demand in a particular area or from a particular tenant type goes into decline.

Wise location choices will not only help to shield buy-to-let investors from potential void periods but can also affect rental yields and capital returns. For example, according to the September 2005 edition of the Paragon Buy-to-Let Index, the North has outperformed other parts of the country with total returns – taking into account rental income and capital appreciation – of 40% compared with a national average of 20%.

Regeneration, improved transport links and business investment are among the factors that bode well for an increase in rental demand in certain areas. By choosing the right location landlords are well placed to take advantage of this demand and in terms of capital appreciation there are still areas that are more likely to deliver than others in the long term.

For example, Coventry was recently named top UK city for potential business growth in the next 10 years. More than 5bn is being invested in the area and projects such as expanding the city centre by 148 acres make it a city to watch.

Thought to be the government’s preferred location for a new million pound casino complex, Blackpool is another area of interest. The development will offer extensive facilities and if Blackpool is chosen it seems likely to be a huge employment generator for the area. At the moment you can expect to pay around 95,000 for a terraced property in Blackpool and rents are around 420 per month.

Finally, the 2012 Olympics are likely to have a major effect on east London where the games are being held. It is only a three-week event but a great deal of development will occur. Of course, there could be a temporary dip in property prices while the construction takes place and this could be a good time to invest as prices are expected to climb considerably as the project nears completion.

Any capital investment in a regeneration area boosts its potential, but any buy-to-let purchase requires at least a 10-year view.

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