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THE BUY-TO-LET MARKET AND THE CREDIT CRUNCH.

The credit crunch has thrown up both challenges and opportunities in the buy-to-let (BTL) market, and while there are downsides, upsides are visible too.

The single biggest challenge for most BTL landlords is where they may face negative equity due to falling capital values; however, where those properties are still self-supporting in an excess of rental income over debt costs, those looking to the long term are expected to hold their nerve and reap the benefits of riding the cycle through to the next upturn.

Although your capital appreciation may have fallen, remember to take into account that this lifts the yield percentage represented by the rent; most rental returns are far in excess of today’s unprecedentedly low deposit and bond rates.

An undeniable effect of the times is the large increase of property made available to the rental market by ‘accidental landlords’ - owners unable to sell; as in any market, when supply equals or exceeds demand, prices soften; most of our long-term landlords are taking the pragmatic view that in the current market it is best to set rental levels at a competitive figure to drive down void periods between lettings and ensure continued (if slightly reduced) cash-flow.

As supply comes to meet or exceed demand, so tenants are able to be more picky about the premises they will accept, and creative responses to the market are needed. If you have a property up for rent at £850 a month, and the tenants don’t want to take on the job of gardening, see what a garden contractor will cost; if it comes to less than one month’s rent annually, and it stops the property from being vacant for a month, then it makes sense to agree – and the gardener’s bill can be offset against tax. And it pays to be flexible –reducing the rent by the cost of the gardener will not appeal to tenants who simply don’t want the bother – they’d rather pay and get the service. It pays to listen to potential tenants when showing properties, and to ask outright for feedback if they are reticent. If three separate people tell you the curtains are awful, then however much you may like them, they’re not helping you to let the property!

Opportunities to invest are all around us at the moment, from distress sales at auction to private treaty sales at much reduced values from the market peak. Care needs to be taken, though, perhaps more than ever before, to make sure you get the right property in the right location – and perceptions of what is ‘right’ are changing.

At the moment, low priced houses in poor areas are selling at prices that make a notional 10% return quite achievable; but high yield is always high risk, and these properties will be in areas where there is a tenant profile with a greater likelihood of default and arrears than others. In ‘safer’ areas, then of course the rental yield will be lower, but equally the prospect of capital gains over the cycle will be better than those cheap houses in poorer locations. With the prospect of mortgage credit loosening up in the near future for those with large deposits, anyone who takes as much as possible from their pension pot as a lump sum for property investment will reduce the amount they have to put into annuities – which are at a historically very low level of return.

The boom market of new-build city-centre two bed flats are past; although these can be bought at auction for as much as 50% less than their market peak, you should check whether there is rental demand for these properties, and what sectors of the population the demand is coming from. With more and more distressed and accidental landlords loosening their referencing criteria, what was once a smart new city centre block may get a reputation for anti-social behaviour or worse as the tenant profile within the building changes. As in many markets, there has been a ‘flight to quality’, as tenants avoid the pioneering new developments and return to solid, traditionally high-quality areas with a reputation for safety, good transport and attractive local amenities – places like Didsbury!