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Your Money > Mortgages Articles > Buy to let...
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By Alice Lilley
Investment in buy-to-let properties has soared in recent years, with the value of mortgages taken out to buy homes to rent out rising by £82bn in less than 10 years. Since 2002, for example, the average FTSE100 shareholder has seen their portfolio rise by 6.9% a year, while savers have reaped an annual return of just 3.9%. Buy-to-let investments, on the other hand, have produced an average rent and capital appreciation return of 11.25%, according to mortgage lender Birmingham Midshires. Tim Hague, director of mortgages at Birmingham Midshires, said: "Research shows that buy-to-let investors plan to stay in the market for an average of seventeen years and when you consider the potential returns from both the rental yields and capital appreciation, it's easy to see why." Interest in buy-to-let investing shows no signs of abating. A recent survey commissioned by buy-to-let lender Bradford & Bingley found that 95% of landlords plan to either increase or maintain their portfolio in 2007, while Alliance and Leicester experienced a 25% month-on-month increase in buy-to-let lending in December last year. Recent interest rate rises have, however, prompted some concerns about the health of the buy-to-let market going forward. It is therefore very important for those considering expanding their buy-to-let portfolios or becoming landlords for the first time in 2007 to ensure they are buying in the right area. Figures from buy-to-let specialist Landlord Mortgages reveal that more than 77% of landlords prefer to buy in their local area. Lee Grandin, managing director of Landlord Mortgages, said: "We would encourage our investors to consider purchasing their buy-to-let property as close to home as possible. Local knowledge and the ability to be a 'hands on' landlord can often mean the difference between buy-to-let success and failure." There is, however, a growing trend for investors to buy in other parts of the country, especially if those regions are expected to generate above-average returns. According to the Landlord Mortgages research, the North East saw the largest decrease in 'local landlords' as investors looked to the Midlands and Yorkshire for their rental properties. The number of property investors in London also dropped marginally as more and more landlords were priced out of the capital. Grandin said: "Traditionally, landlords have tried to live as close to their rental property as possible as this means that it is much easier to deal with any problems. However, this research shows that high property prices are forcing investors to find their buy-to-let properties much further afield." So which towns and regions have produced the best buy-to-let returns recently and, even more importantly, which are tipped to do well this year? The most recent figures from Birmingham Midshires show that investors in Bath and South-east Avon have reaped the greatest rewards in recent years, with the average property returning 36.4% in capital appreciation and rental yield. In the second quarter of 2006, however, the North West of England led the way with average rental yields of 5.9% and overall annual returns of 12.7%. One thing to consider when choosing where to invest is whether you are more interested in capital appreciation or rental income as a source of overall return. Many landlords need a certain level of rental income to fund their investment. However, for those more interested in capital growth, London remains the place to be. High house prices in Central London have resulted in capital appreciation of 217% over 10 years. But buy-to-let investment in Central London returns an average annual rental yield of just 4.7%, compared with 5.9% in regions such as Manchester and the North West. Search for a property for sale Prices in many areas of the capital will be out of range for many investors, but there are still pockets of Greater London that remain relatively affordable. Interestingly, some of these are close to the Olympic Games site in East London, where price rises are forecast to outstrip those in other areas of the city over the next few years. Leytonstone is the frontrunner at present, having seen the prices of its homes spiral upwards by 23% since the middle of 2004, equating to gains worth £50,714 for local homeowners. Meanwhile, even by London's high standards, Hackney and Clapton have also seen above-average increases in value, recording jumps of 21% and 18% respectively. Although the average home in Greater London is £287,176, 54% higher than the UK average, prices in the Olympic hotspots of the East End cost a fraction of this amount; opening up a clear opportunity for the savvy buy-to-let investor. Homes in the least expensive postal districts near the Olympic site - Paistow, East Ham and Leyton - range between £196,263 and £210,599, while even the most pricey - Leytonstone, Hackney and Clapton - are still at least £10,000 below the London average. Find out how much houses are selling for in your area Tim Crawford of Halifax Estate Agents said: "Despite recent rises, there are eight postal districts close to the games site where house prices are more than 25% below the London average, which highlights the area's still relatively affordable property prices." Picking the right area is not the only decision that deserves consideration, however. Once you have chosen your area, you must then decide what type of property to buy. Rental property pundit David Lawrenson believes that houses are a better bet than flats for today's buy-to-let investor. This view is supported by recent figures from mortgage firm Paragon, which show rental yields on terraced and semi-detached houses hitting 0.7 percentage points higher than for flats. However, what sort of property will prove most lucrative also depends on the area you are buying. It is therefore vital to research the type of tenants you are likely to attract before making a purchase. Useful links
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