Dear Lady Lea - Property Investor News - Sept 2003

1) I am considering investing in London and believe that ex local authority property can give better returns. What is your view on this?

In most areas of the UK it is cheaper to buy ex local authority property than private built. Usually the rents achieved are not too much below the normal private market, so your returns could be higher on a local authority property. This can depend on what local demand is like, what the estate you are looking at is like and how desirable it is to tenants. The only sure way to find out how the market is going to react to what you buy is to talk to letting agents. Find out what they have on their books, what they have demand from tenants for, and if they have waiting lists. If they have people who are waiting and will pay what you need then it could be a good investment. If they already have lots of property available you may not get the rents you hope to achieve, and would need to compete by lowering your prices. I would say that any property can give you a good return if you buy it in cheap enough, and would not just focus on local authority.

2) What level of mortgage gearing would you suggest? I have 5 properties bought 5/6 years ago with a fair amount of equity now. I want to raise further funds to put down as deposits on 3 more. What advice can you give?

Everyone needs to decide the level of gearing that they are comfortable with. We are all different, some of us have families to support, some of us have financial backing of family, others are on their own and have nothing to loose. Bearing this in mind you can see that this is not an easy question to advise.

Some investors are comfortable with 100% gearing, but are at a higher risk should sale and rental markets drop, this is not my preferred method.

You need to really calculate how much % of risk you are prepared to take. You are most likely not going to be able to get more than 85% of the purchase value or rental value in most cases as lender have already decided that their risk is mostly not more than this on buy to let.

3) What buy to let strategy should I adopt to provide an income, rather than to have capital gain as the key criteria?

If you are looking to achieve an income from property rental you need to ensure that the properties you buy leave you a profit that you are happy with at the end of each month. With capital growth strategies you may look at breaking even on rent knowing that the price would rise, or even in some cases topping up the rent until you achieved the growth you were looking for, this can be seen as putting money into a savings plan every moth to get a high return.

There are many different yield theories that people use to calculate if a property is a good investment for income, some are happy with a 10% yield, others 15%. I prefer not to use yields as they are time consuming and not necessary to my way of investing. I like to keep things simple but effective.

I work on a theory that if I can buy properties between 25k and 40k, and the rents achieve £300 or more a month then they are good to go. If they are less than that per month then I will not make enough profit to generate an income. On a purchase of 25k to 40k my mortgage will not be more than £200, I aim to make between £150 and £200 per month on this type of value property for income. This is not easy to achieve and it requires me purchasing bargains.

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