Private property becomes an asset

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Legislation boosted the rights of landlords in the 1980s, but now that New Labour has made a commitment to the private rented sector, residential property really has the chance to establish itself as an asset class.

The yields on property are now generally higher than on shares or deposits, and over the past two years, members of the Association of Rental Letting Agents (ARLA) have arranged more than 1.7bn (€2.5bn) of loans for private investors. Nick Jopling of Allsop & Co says: 'Residential property is proving a popular form of investment for private individuals as well as some corporates.

'In many cases rental income can cover the interest repayment on any loans, plus all the letting and management fees, so at the end of the day, any increase in the value of the property is yours to keep and re-invest.'

Property is particularly attractive to those seeking to diversify risk, an important consideration for those whose jobs depend on a healthy stock market.

The dos and don'ts of investing in residential property are:

Don't think of property as a short-term investment. Jopling says: 'Property investments have traditionally tracked earnings which generally out-perform the RPI, particularly in these low inflationary times.

'So, although the property market goes through cycles - these tend to be more volatile the closer you get to the centre of London - it is the long-term trends that make property investment most attractive.'

Jopling says: 'Do use gearing to leverage your buying power. With interest rates at 5.5% and gross annual rent yields at around 10%, it makes sense to use some form of gearing in this sector, particularly as the interest payments on the gearing are allowable for tax purposes against the rental income. Gearing of 75% gives you four times the buying power.'

Do be aware of the gap between gross rent yields and net rent yields.

Maintenance costs and letting and management agency fees must be deducted from the rent income, and the odd month when a property stands empty, or a tenant fails to cough up the rent, must be taken into consideration too.

Also, if you are buying an apartment in a block, you need to allow for service charges which can add around 2,000 a year or more in London.

Do buy one or two-bedroom apartments in good locations.

Jopling says: 'The mobile workforce are your target tenants. They are generally aged 18-30, and are single or divorced people, or childless couples. They typically work in the IT sector and service industries.

'Whether they are in London, Birmingham or Leeds, these people all want to live more or less on their own, in nice areas close to town, and within easy reach of restaurants and amenities. A nearby train station, bus stop or tube, in London, are very important too.'

Don't buy blind or choose the first property you see.

Pretty common sense advice, but not everyone follows it. Do not buy a place you would not want to live in yourself.

Don't spend too much on renovations and furnishings.

Although a run-down property can be bought at a discount, it is a risky business.

It is not easy to predict accurately how long it will be before you can put a tenant in there to start paying off the mortgage. You might get your sums horribly wrong.

And as to furnishings, initially it is best to limit yourself to curtains, carpets and white goods.

Your tenants may want the property unfurnished, and if they do not, you can always pop out to the shops with a clearer idea of what is needed.

Do use a reputable managing agent and go on recommendation.

There is a lot to be said for keeping a distance from your tenants, as people often underestimate how time consuming and stressful it is to be a landlord.

But beware - agency letting is an unregulated industry - opt for a member of either ARLA or the Royal Institution of Chartered Surveyors (RICS).

Don't accept a tenant before careful reference checks.

As regards the tenant, you are looking for quality, not best price. A tenant who looks likely to stay a good while, who will look after the place and who pays his 1,000 like clockwork each month is far better than a loose cannon who says he can pay 1,500.

A guarantor - the tenant's employer, for example - is ideal, if you can get one.

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