Should my mum consider buy-to-let?

Q I am writing on my mother's behalf. She is a 73-year-old property owner with no mortgage and is in good health. She currently has savings invested in a fixed term bond and in Isas, which are not providing her with the return she had hoped for.

She is considering trying to buy a property to rent to generate more income. However this would limit type of property she could buy and the location, given her current budget. Ideally she would wish to purchase a property in an area that is likely to improve both in market value generally but also in popularity, ultimately maximising her profit (her budget is £65,000).

She is uncertain how to investigate the possibility of a buy- to-let mortgage, is concerned about her age and eligibility and overall about making a poor decision about pursuing an investment of this kind when there may be safer opportunities to make the most of her savings. Can you advise, in principle, about buy-to-let for a woman of her age and provide some direction about where she could seek out profitable, secure investments?

EC

A With the "average rental return in Britain today hovering around the 10% mark" according to the Association of Residential Letting Agents (Arla), it's not hard to see why your mother is attracted to the idea of a buying a property to let.

But that 10% figure doesn't take into account the expenses involved in letting property, such as insurance, agents' fees and an allowance for repairs and maintenance. According to figures from Arla, on a flat costing £60,000 - bought outright - the expenses involved in letting the property (which doesn't include the initial cost of kitting it out to a satisfactory standard) could bring the rental return down to around 7.3%. Adding to the costs of letting property by borrowing under a buy-to-let mortgage reduces the rental return yet further. A mortgage of just £20,000, for example, would add around £1,000 a year to the property's overheads and would have the effect of reducing the gross rental yield to about 5.7%.

That's still a good return compared with the rates paid on savings accounts but it assumes that the property has tenants from day one and suffers no periods of being empty. This might be unrealistic and two or three months without a tenant paying rent can make a significant dent in the overall rental return since the expenses still have to be paid even though there's no money from rent coming in. Using the example of the £60,000 flat (with no mortgage), having it empty for a total of three months brings the gross rental return down to just under 4.4%.

So if, as you say, your mother's prime motivation is to generate extra regular income - rather than a one-off hoped-for (but not guaranteed) capital gain on selling the property in a few years' time - and she doesn't want to take any risks with her money, buy-to-let may not be the most appropriate investment for her.

However, if she is comfortable with the risks involved, she can find out more in the buy-to-let section of the Arla website. Alternatively, she could get advice from a local letting agent who should be able to tell her what sort of properties are most likely to attract tenants, the standard of decoration and furnishing she'll be expected to provide, what she could charge in rent and the level of expenses she'll have to pay.