Can you cash in on the buy-to-let boom?

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To let

Buy-to-let is booming again. As we reported last week, the number of mortgages for this section of the market is at its highest point since the start of the financial crisis.

Booming rent, lower property prices and more mortgages on the market mean real attractions for buyers. So how can you cash in on the boom?


The sector is looking very attractive at the moment. The government's Funding for Lending scheme has ramped up availability of mortgages and pushed down rates dramatically, putting it increasingly within the reach of investors. Meanwhile, the announcement by Mark Carney, Governor of the Bank of England, that he expects interest rates to remain at all-time lows for the next three years should keep mortgage rates lower for longer.

So how can you cash in? There are five possibilities:

1. Buy-to-let

If you have the money to invest, or you have substantial equity in your own home and are prepared to remortgage, then you could buy your own buy-to-let property. For many people this offers the attractive combination of income and the possibility of growth in the value of the property too.
However, Adrian Lowcock, Senior Investment Manager at Hargreaves Lansdown, says there are some very real risks you need to take on board before you consider this route.

If you are borrowing to buy, then you aren't just taking a risk with your own money, you're risking money you have borrowed too - magnifying the risks several times over. It means you could lose more than you have invested.

In addition, property is not an easy investment. It's complicated to buy and sell, so you could end up facing a loss on the sale in the end. It's also very expensive, so there's very little opportunity to spread the risk.

Then there are the practicalities. Lowcock says: "Residential properties require a significant amount of management and maintenance as well as the unforeseen expenses. There is the issue of the tenant. Good tenants are critical to obtaining a good income. A bad tenant could do significant damage to the property, or not pay their rent. Likewise investors need to factor in a vacancy rate – the period when the property is not being rented. Anyone considering going into the Buy to Let business should ask themselves if they have the right expertise."

2. Buy your own

The good news is that you don't need to buy a second property in order to put money into residential property. Your starting point ought to be to buy your own home, and pay off the mortgage as fast as you can afford in order to keep your mortgage interest payments as low as possible.

You cannot consider this to be a rock solid investment, however, as you may get no opportunity to cash it in. Whenever you sell you will need to buy somewhere else, and even if you downsize later, you may not get the sum of money you were expecting, and you may not free up as much cash as you wanted.

3. Residential property funds

There are a handful of investment funds which put their cash into residential property. This takes away some of the issues of Buy to Let. Lowcock explains: "The fund managers will deal with management and maintenance issues and finding tenants. Investors gain access to a diverse portfolio of properties so a fund reduces property specific risks."

However, he warns that there remain some key issues: the costs of buying are high, especially when you factor in stamp duty. This means the companies will look to recoup the costs through higher management fees - which will come out of your returns.

These funds can borrow to invest, so you have the problem of magnifying your risks again. Some of the funds are structured unusually too, so you may not benefit from all the income and growth in the market. Finally, the fund manager may have just as much difficulty selling a property as you would, so selling up may not be straightforward.

4. Invest in housebuilders

The fourth option is to invest in shares of a range of companies that build homes, and profit from the boom through their fortunes. Recent share price performance has been impressive, with companies rising between 6% (Galliford Try) and 57% (Telford Homes) since the Budget - compared to the FTSE ALL-Share which rose 4% in the same period.

However, Lowcock points out that there are still risks: "Investors are not just accessing the success of the residential property market but also the abilities of the management team of the company. The investment is heavily geared to demand in residential property and shares can be volatile in price."

5 Invest in a fund that invests in housebuilders

The funds in question can invest in a wide range of different companies, and when the expert manager thinks a housebuilder is a good bet they will put their money behind them. Admittedly this option is the most removed of the five from actually buying properties, but it will still stand to benefit from a residential property market boom.

There are a number of funds that fit the bill, and it's worth talking to an expert to find one that suits your needs. However, a couple of examples to consider include Old Mutual Mid Cap, which Lowcock says recently increased its exposure to high-conviction positions, including house builders Barratt and Persimmon. The fund currently has 10.45% in house builders.

Another consideration is Franklin UK Mid Cap, Lowcock says that the manager Paul Spencer currently favours sectors including housing, financial services and industrials. The fund currently has 7.58% in house builders.

But what do you think? Are you keen to cash in on the boom? Do any of these approaches appeal? or are you just waiting for the next housing bubble to burst? let us know in the comments.