Is now the time to join the buy-to-let bandwagon?

Soaring rents in UK hotspots such as London, the Thames Valley and parts of the west country, are fuelling the buy to let mortgage market.

But, while first rate returns and capital growth can be achieved, those wanting a piece of the action the need to do their homework. If not, the novice landlord can be left with an unwanted and unprofitable property that could create huge financial problems.

Owning a second home that is let out to good tenants can be a fantastic investment.

According to Bradford & Bingley letting agencies, average returns on rented properties are 8%. It says nationally average yields range from 6% for a detached four-bedroom house to 8% for a two-bedroom flat.

It is predicted that demand for rented property will grow because of the high divorce rate, job mobility and the fact that many people can't afford to buy a home.

But buying to let is far from risk free. At the same time, many people who have opted for the supposedly safer route of investments and pensions and been disappointed by the returns, may be looking for an alternative.

The disastrous situation at Equitable Life, which has closed to new business and could leave hundreds of investors out of pocket, has cast a shadow over the whole pensions industry and a rented property can return a higher and regular income.

Yet, while renting may continue to bring in an income, landlords also have to be prepared for pitfalls. These could be that rent is withheld or that tenants cause damage.

A property could also be left vacant if there is too much rented property on the market meaning the landlord could potentially have to pay for two mortgages. A property slump could also affect the property's value and make it hard to resell.

Then there are costs. Heavy repair bills are a possibility and a property is also likely to need decorating and furnishing. Insurance is also required.

Then there is the cost of a letting and managing agency. A reputable agency can help with finding quality tenants, dealing with any problems and ensuring there are no voids. Any landlord who also has a full time job or does not live locally may find using an agency essential. Any agency used should always be registered with ARLA (the association of residential letting agents).

Agents tend to charge around 10 to 12% of the gross annual rent for finding tenants and 6% for managing the property.

All these costs add up and landlords could lose up to 30% of their projected income through these.

Buy to let mortgages also cost more than those aimed at buyers who simply want to own and live in their home.

But, there are now far better deals on the market. Bristol & West has recently improved its terms and is offering rates at below 9% - something unheard of several years ago.

Lenders have different criteria when it comes to weighing up the potential of a buy to let property. Among the factors likely to be taken into consideration are the borrower's income and what the property is likely to bring in compared to the mortgage outgoings. Bristol & West requires the expected rent to be 125% of the rate being paid.

If you are considering investing in property, you need to provide the lender with a sizeable deposit - most will require at least 25% as a down payment, although a few will accept 15%.

There is also far more choice of lenders with over 50 buy to let mortgage providers on the market. For inexperienced landlords it is worth taking advice from either an independent financial adviser or a mortgage introducer who follows the Mortgage Code.

Pink Home Loans, for example, allows borrowers to take payment holidays and reduce the term. Reserves built up in the account can be used to finance school fees or the purchase of car, for example, at the mortgage rate instead of higher personal loan rates. It requires the rental yield to be at least 130% of the interest rate at the non-discounted or capped rate.

The Woolwich offers a range of buy to let mortgages. Its Open Plan mortgage allows those with equity in an existing home to be released and a second property bought with this. A spokeswoman said this could prove a popular option with parents looking to buy flats for children going to university.

Once the deposit is secured, the next challenge for the aspiring landlord is to select the right area. The aim is to choose somewhere that will not only mean there will be a plentiful supply of tenants but where the value of the property will also rise. London rents are highest, but so are property prices, which means looking outside the capital can yield a better bargain.

Areas with large student populations are popular with landlords, since less can be spent on furniture and rooms can be let out on an individual basis. Student rents vary, but are typically around ?50 a week.

Landlords also need to be aware of tax implications. These apply should you wish to sell a property that is not your main residence. But, if you plan to keep the property as an income-generating investment for retirement, this may never affect you. Interest on a buy-to-let mortgage can be offset against tax, but the capital repayments cannot.
Repairs can also be offset against the tax, but new furniture and fittings cannot.