Already in London, the buy-to-let bubble is beginning to burst. American expat Liza Llewellyn and her husband, Stephen, had to lower the rent on their two-bedroom Kensington flat from [Pound sterling]895 to [Pound sterling]800 per week before they found a tenant. In the end, the property stayed on the market for four months. “There are simply too many landlords chasing too few tenants,” says Jeremy Leaf, a spokesman for the Royal Institution of Chartered Surveyors.
Why the rental glut? In the mid-1990s, mortgage lenders in Britain began offering much easier terms for buy-to-let mortgages, which led some people to overextend themselves. By 2001, market fears encouraged even more people to invest in property, but it also meant that the most lucrative rental markets were drying up. (Since the dot-com crash, a large chunk of high-flying expat bankers, who make up 75 percent of renters in prime central London, have either been sent home, downsized or had their housing allowances slashed.) Hong Kong, where rents fell 11 percent last year and continue to drift down, has experienced a similar crunch.
Other major cities may provide somewhat safer opportunities. In Tokyo, housing prices are falling, but rents remain stable. A growing number of singles and elderly people are expected to boost the demand for small studio apartments. In Europe, Paris and Frankfurt (which have less inflated housing markets) still offer some good opportunities for buy-to-let investors. And as so many Britons have discovered, there’s gold in the Tuscan hills–if you are prepared to put up with Italian bureaucracy, and shell out for renovation. In areas like the Lunigiana Hills, investors can buy a home for as little as 78,000 euros, and rent it out for as much as 2,000 euros a week to a constant stream of Northern European tourists capitalizing on cheap air fares. The catch: must-have renovations (like installing a swimming pool or modernizing the kitchen) can run into the hundreds of thousands of euros. And getting a building permit in Italy can be costly and complicated.
The advice most estate agents give to potential buy-to-let landlords is: think long term, and don’t overextend yourself on a mortgage. A five- to 10-year time horizon and a comfortable debt load (70 percent or less of the purchase price) will give you the flexibility to move with the market. Also, ask lots of questions before buying. “People do a lot of research when purchasing equities, but everyone thinks they understand property,” says Richard Donnell, director of U.K. research for FPD Savills. Donnell advises potential investors to talk to multiple agents or surveyors in the target neighborhood in order to come up with a realistic rental price. Then, give yourself room to lower it if need be. Make sure there aren’t already 50 similar properties on agents’ books. And remember that even bricks and mortar aren’t risk-free.
