Saving slums is less taxing

Aspiring investors in property could benefit from the Chancellor's £1 billion Budget rescue package for run-down areas.

You can take advantage of six tax cuts designed to breathe new life into inner city slums and other disadvantaged places by buying in one of these so-called designated areas.

Experts say they are a particularly good choice for budding private landlords with an eye on the buy-to-let market.

This gives you the potential to generate an income in the short term and capital in the long term as long as the property market, whose growth is now slowing down, holds up.

Along with the introduction of relief for companies cleaning up land comes the abolition of stamp duty on all property transactions in rundown areas, and reduction in VAT from 17.5 per cent to 5 per cent for conversions to residential use.

'This is good news for the development sector,' says David Moulton of London property consultants Knight Frank. He believes it will encourage residential investment into blighted areas.

'If you buy when the market is in a trough and then that market is stimulated, you are in a good position to make money out of your investment,' Moulton believes.

'First-time buyers who have been priced out of the market may want to take advantage of the Chancel lor's plans. Those looking to make a buy-to-let purchase may also wish to do so.'

He says canny homebuyers should find out from their local authority which areas will be targeted by the Government.

The identities of the designated areas are still under wraps, but the scheme could eventually cover 10 per cent of the inner cities.

But not everyone is so positive. David Hollingworth of mortgage broker London & Country warns: 'The stigma of the dubious accolade of a designated urban regeneration area is likely to deter the potential purchaser rather than encourage.' Property values may even fall in the short term, Hollingworth says, adding: 'Let's hope negative equity does not rear its ugly head.' But even Bath-based London & Country admits that you can snap up a bargain in the meantime.

The whole London rental market, especially the top end, is experiencing robust growth, according to figures from estate agent Savills. It predicts that rents will grow by an average of more than 10 per cent this year, outpacing an estimated 7 per cent increase in house prices.

Many savers have turned to investment property as continuing low interest rates provide unattractive returns on more usual savings plans. The Equitable Life saga has added to the trend by cutting savers' confidence in the pensions industry.

The Council of Mortgage Lenders says buy-to-let lending grew by 10 per cent in the last six months of 2000. These loans typically cost 1 per cent above base rate, giving a payable rate of 6.75 per cent, and they are falling as competition intensifies. Sixty-five lenders offer them.

Five-year fixed-rate deals are particularly attractive, says researcher Moneyfacts.

Bank of Ireland and Bristol & West both offer five-year fixed rates at 6.5 per cent, says Hollingworth.

NewWorld, the Australian lender, has just launched a flexible buy-to-let mortgage discounted to 4.95 per cent for six months, after which it is 6.74 per cent. You need a 20 per cent deposit.

Is buy to let the right bet?

Experts agree on the key question to answer when deciding whether buying to let is for you: Could you pay both the loan on an investment home and the mortgage on your own house if you had no rent coming in?

Think long term if you want to make money out of buy to let. 'Getting a deal costs money and so does getting out,' says David Hollingworth of broker London and Country. 'While property has done well, it has not done as well as equities.'

To see how much the property will yield in a year work out your annual rent, subtract the mortgage interest and calculate this total as a percentage of your deposit.

For example, ?7,200 rent, minus ?6,000 comes to ?1,200. On a deposit of ?15,000, the yield - or return - will be 8 per cent. The average yield on rental property is currently 8.3 per cent.

Rental income should outstrip mortgage interest payments by between 25 and 50 per cent in most cases. If there is a gap - or 'void period', in the jargon - between tenants you will have to stump up the loan repayments. You can offset the mortgage interest, plus some maintenance costs, against income tax.

Have a big deposit at the ready. If you have only a small one you will effectively be gambling on property prices, and there is no guarantee they will go up.

Looking after a rented property is a responsibility in terms of time and money. You can pay a management agent to do it for you, but the fees can absorb 15 per cent of the rent. Agents do have advantages: they ensure contracts are handled properly, for example.

Remember, it is more difficult to find a mortgage for properties above a shop, says Mark Harris of independent financial adviser Savills Private Finance. Halifax and Woolwich won't lend on these flats, but Royal Bank of Scotland is more flexible. Some lenders will also turn their noses up at student or multiple tenancies.

Be careful where you buy. Some analysts consider the supply of rental properties in central London and central Manchester to be near saturation point. University towns are a safe bet. Look also at places where companies have announced relocations. Talk to local letting agents about rental demand in your chosen area. Obtain a list of agents from the Association of Residential Letting Agents (Arla) on 01923 896555.

Tyne and motion

Sue and John Harrison from Newcastle have caught the buy-to-let bug. They currently have three properties for rent in the city - one on the quayside and two in Jesmond - all of which they have just remortgaged with a Leeds & Holbeck five-year fixed deal at 6.64 per cent through London & Country.

They see the properties as a good long-term investment to be passed on to their four children.

In the short term the Harrisons feel rental income is guaranteed by the fact that the properties are of good quality and in popular areas where the city's young executives (both Nissan and management consultancy Accenture have branches in Newcastle) want to rent.

Any advice for someone thinking of becoming a private landlord? 'Do your research,' says Sue who, besides being a landlady, works part-time at her husband's web engineering firm, Maxsi. 'Some flats look attractive but if they are not in a popular area they will be hard to rent out. Ask a letting agent.'