Why would you want to buy a property to rent out when property prices are
falling? To be honest, we wouldn't but you should watch the market carefully
because eventually prices will bottom out and then it may be the right time
to buy.
How will you know when prices have reached the bottom? Nobody can really
tell until after the event but there may be some indications worth looking
out for. These are:
This is the percentage
of income that a property can generate when let out. Ideally, you want the
rental yield to be higher than the mortgage interest rate otherwise the
investment is likely to cost you money.
Buy to let interest rates are currently in the region of 6.5% depending on
the fee charged by the lender. Let's assume a property is worth £100,000,
you would want this to provide an annual rent of £6,500 or 6.5%. However,
unless property prices rise you won't make any money because the rent will
be swallowed by the mortgage payments, tax and, over time, you will almost
certainly have other costs to maintain the property.
Investments other than property are likely to return less than 6.5% unless a
fairly high degree of risk is employed, so there comes a point when
investors fee that property is once again a good bet and is likely to rise.
This is when the profits come.
If interest rates
increase then the cost to borrow money is too expensive and demand for
property falls. When demand falls property prices tend to fall too.
Conversely, when interest rates start to fall demand increases.
As the price of
property falls the rental yield increases. For example, take the same annual
rent of £5,000 and divide this by a property value of £100,000. The result
is 5% (this is the yield). Now lets say the property falls to £50,000, the
yield becomes 10% a very attractive rate of return in the current
market. There comes a point when the yield is so attractive that property
prices will stop falling.
Bear in mind the effect of interest rates. If they were averaging 10% then
an attractive yield would probably need to be much higher.
In the current
climate it is not easy to borrow money. Many first time buyers simply cannot
raise the funds to buy property so they have to rent instead. As demand for
renting increases the rental yield will tend to increase also.
Less demand for property purchase as a result of funding issues is likely to
drive property prices down.
Buy to let investors are finding that they have to put a bigger deposit down
to secure funding, so demand from this sector is also on the decline. Less
activity means less competition so a keener price might be secured.
Affordability as a
result of increasing interest rates and other economic factors have led to
an increase in repossessions. This is likely to get worse before it gets
better and the properties repossessed are likely to be sold at auction at a
knock down price.
