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Monday, July 05, 2010

FT reports BTL surge

According to reports in the Financial Times landlords are piling back into buy-to-let!

The logic for this is that after the emergency budget the relief factor of Capital Gains Tax not reaching the stratospheric levels of 40-50%. Landlords are so relieved that they are rushing out and piling back into buy-to-let investment.

I'm not so sure about that guys. I don't think that most landlords give too much thought to exit taxes at the beginning of their investments. Lets face it in the average holding time or a buy-to-let investment of approximately 20 years much can change. I think fundamentally landlords investment decisions are more likely to be based on:

1. Rental yields ( the relationship between rents and capital values)
2. Availability of buy-to-let finance and it's costs (interest rates)
3. Expectations of future house prices

3 criteria governing buy-to-let investment

On the basis of these 3 criteria the investment climate is starting to look more promising.

Rental yields are certainly looking more attractive as rental levels prove to be resilient whilst capital values are still under pressure. I've been carrying out a few investment appraisals myself and I'm getting potential gross rental yields approaching 8%. A level which to me represents a basis for good long-term investment value. At these levels there is a good potential for an investment to be producing a strong positive cashflow.

Buy-to-let finance is still depleted. The FT reported that there were only 266 types of buy-to-let mortgage available last week compared to 3,662 back at the peak in September 2007. However, there are lenders out there willing to lend and with a 5 year fix available at less than 6% this level is still below the 10 year average paid by landlords on a fixed rate mortgage. In this respect finance is still cheap.

House prices have recovered since the nadir of early 2009. However, prices could well be entering into a period of uncertainty as the result of the 'cuts' feed through into buyers and sellers attitudes. I expect prices to weaken for the rest of the year, but not drop significantly. This means that landlords have an opportunity to get a 'deal' but fundamentally housing should prove to be a resilient capital investment.

What do you guys think? Good time to buy? Or should landlords hold off and wait for further price falls?

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