The buy-to-let (BTL) market has grown phenomenally since its inception in 1996, when the introduction of the BTL mortgage opened the door for the ordinary investor. At the start, the BTL market was made up of professional landlords who had previous experience in letting. However, with the introduction of the Housing Act of the same year, it became far easier for the general public to buy and rent property.
Many private landlords started to purchase increasing numbers of properties in close geographical proximity; essentially building a business in its own right by living off the income and managing the property themselves.
However, over the last few years a new breed of investor has emerged, primarily due to concerns over shortfalls in pension provision. More and more people have realised that by investing in a second property they can benefit from the same kind of capital appreciation that they have witnessed in the values of their own homes.
Landlord or investor
As this trend continued, many individuals who knew very little about property investing but wanted to treat this like any other financial investment, then began purchasing property having seen only a picture and valuation. They did not want to be landlords per se as they did not want to actively manage the property. They also wanted to buy the full package with a tenant in situ.
Additionally, investors started to look outside of their current geographical locations to find property that had greater growth and yield prospects. This demand from a new generation of property investors created a new market of companies whose core business is to source property for investors.
Property finders
Property sourcing companies come in many guises; the most common being the online property company.
The growth of the internet has enabled many companies to start up online investor clubs which regularly e-mail property investment opportunities to a database of clients. Other companies have chosen to operate slick marketing campaigns to attract the novice investor. When this is combined with the huge number of training courses available for people to learn about the BTL property market, the potential to become a property millionaire is now a realistic opportunity for the general public.
Genuine discounts and
over-supply
But there are pitfalls to be aware of. The vast majority of property finders, for example, predominately sell new build properties at a discount which can look extremely attractive to investors, especially when they see thousands of pounds of perceived equity. However, attention needs to be given to determine whether it is a genuine discount and whether there is an over-supply of a certain type of property.
I hear numerous stories of people who have bought property in new build developments through property finders and are satisfied with their discounts until completion comes around and all the properties arrive on the rental market at once. The result being that landlords start undercutting each other on rent in order to let their properties. Due to the over-supply, some landlords even sell their properties for less than the net price they had paid for them. The cost of paying their mortgage every month forces their hand. Their so-called equity evaporates because the market values are dragged down to less than the net purchase prices and the investors often struggle to get out at break even.
Seminars
We feel that education is key to success in the BTL market. We have therefore devised our own series of seminars to educate advisers and their clients on how to navigate the intricacies of this niche market. These seminars, which are run in conjunction with J12 Properties, which has expertise in this field, have proved extremely popular with clients gaining an excellent knowledge on the BTL market. They can then make an informed decision and establish whether BTL is right for them.
Brokers
Brokers themselves also have an important part to play in this specialist marketplace. While I would never suggest that intermediaries become property finders, I do believe there is often more that can be done by brokers to proactively help their clients enter the BTL market. By helping them avoid potential poor deals and educating them about the BTL market, brokers will be rewarded by a constant demand for further BTL mortgages. It is also important for the broker to ensure that clients do their own due diligence on any property they purchase either directly or through a finder.
With the continued rise in house prices and concerns over future pension provision, the BTL market is here to stay. With more lenders entering the market, higher loan-to-value lending and greater flexibility in pay rates, the picture clearly illustrates a trend of continued growth in the market.
Property finders play their part in the market and mortgage intermediaries should embrace this service to help supply a sourced solution in a complex market.
Alex Murray is
group director of mortgages at Thinc Destini
