According to latest Royal Institute of Chartered Surveyors quarterly survey, rents are on the up as tenants return to the lettings market. Last August's interest rate cut also made property more attractive especially since many of us now depend on property for our pensions. Household names such as Nationwide and HBoS are grabbing a share of a new lending boom by offering more buy-to-let mortgages and higher lending limits.

Chiswick offers a good opportunity for buy-to-let properties as plenty of people are looking to rent in this area - especially families and young professionals. The holy grail of the rental market is the yield – buying at the right purchase price to achieve the highest possible rent, against the best possible tenants.

What is yield? If you’ve got a mortgage of ₤100,000 at an interest rate of 5%, you pay ₤5,000 interest. If you rent the property at ₤6,000, you’ve got a yield of 6% of the cost of your building. So when purchasing a buy-to-let property - look for a yield of 6%.

This figure fluctuates with the market as interest rates can go down as well as up. At the moment we seem to be in a pretty stable pattern of 4.5%. So property investors must make more than 4.5% for it to make sense, otherwise it’s better to keep your money in the bank. This is only mitigated by rising house prices.

Landlords sometimes take the view that any negative impact due to an interest rate change will be offset by the equity earned over time as house prices increase. But it isn’t wise just to rely in an uplift in equity to ensure a sound investment. Generally rental yields are low in Chiswick because there is an expectation that property values are firm. The perception is that the market, although generally flat previously, will continue to increase as it has done this last quarter.

Buyers need to be aware of the full cost of ownership. This includes legal fees and stamp duty (up to 4% of the purchase price) to calculate a realistic yield. It is also critical to understand the operating costs of the property – buildings insurance, any service charges etc.

Always allow for downtime - an empty property between tenants - in your calculations. Depending on the strength of the lettings market, this could be two to four weeks on average, rising to six. The agency letting fee and if managed, the property management fee, should also be included.

My advice is to look for investments that have the potential to add capital value. Look for a property that requires a small amount of work that will immediately increase the value. ‘In need of modernisation’ shouldn’t put you off.

Chris Burton chris@bellengers.co.uk 020 8987 8755. 

May 5, 2006