Property - Many happy returns ... ?

Southern investors, having abandoned their local market, are now looking north to make gains through buying-to-let. But how safe is their money, asks Monica Horten.

To an investor from the South-East of England, the following property looks very tempting: two-bedroom, terrace house, Fell Street, Liverpool 7, available at auction, guide price £15,000-20,000; gross annual rental income in excess of £5,000.

The property is typical of many on offer not only in Liverpool but throughout the north of England and Wales - generally, in old industrial or mining towns, with street upon street of back-to-back terraced houses. These are the new hunting grounds for investors who are moving their money out of the stock market and into property. With southern rental yields below 5 per cent, investors are seeking 15-20 per cent (or higher) yields which, in the North, are theoretically possible. In some cases, there is an expectation that they can buy the property "blind" without viewing it and just collect the rent. At a recent property auction in Merseyside, more than 1,000 people attended, many from the South-East.

Tony Groman, a St John's Wood-based accountant, has clients making this kind of investment in North and South Wales. "The steelworks and the mines have closed down. There are terraces as far as the eye can see. These are being bought for so-called good, rental investments," he says.

In Sheffield, Paul McMahon, of property management company Norrow Estates, regularly gets approached by London-based investors seeking rental returns of 15 per cent or more. But the reality of this type of investment rarely lives up to the promise. In a city such as Liverpool, which is to be European Capital of Culture in 2008, there stands to be capital growth, which may offset any disadvantages. In areas with less going for them, however, capital growth on this type of property is low or nil, and investors will struggle to achieve the promised returns.

Mr McMahon says bluntly that for someone to sit in an office somewhere in the South and say "buy me 10 properties with a 15 per cent return" is not realistic. He gives a salient reminder that buying property is not the same as buying shares: "Somewhere there is a pile of bricks and mortar with a person living in it."

The property in Fell Street, Liverpool 7, which sold at auction last month for £37,000, is a typical example. An inner-city, back-to-back terraced house, it is in general need of refurbishment. This will not phase an experienced landlord, but the additional capital investment reduces the rental yield.

The give-away sign, when viewed by The Daily Telegraph, was the heavy coil of barbed wire on the rear yard wall, with a dirty nappy caught in it. Another tell-tale sign was the cracked window-panes in the front bay. Around the corner in the next street were houses sealed off with steel shutters to prevent unauthorised entry. All this indicates an area with problems.

Another property, in nearby Needham Street, was offered as suitable for letting, with a guide price of £20,000-25,000, and sold for £34,000. It was offered with vacant possession and with the benefit of central heating. When The Daily Telegraph viewed it, the house was in need of total refurbishment. It had graffiti on the utilitarian front door, and the kitchen was extremely basic, only a sink and cooker space with counter tops - it's unlikely that this would be acceptable to a new tenant. There was also a large hole in the outside wall of the kitchen - you could see the sky through it - and there was a mass of broken gas pipes below it. The central-heating boiler had been ripped out.

Properties like this, in a run-down inner city area, don't usually attract good tenants with deposits and guarantees. Rents average about £70-£80 per week. Most will go to DSS tenants on housing benefit or, at best, students.

According to Philip Lawton, of Merseyside auctioneers Sutton Kersh, the "paper" return of, say, 15-20 per cent reduces to 8 or 10 per cent in reality. There are two key issues. One is the cost of refurbishing and maintaining the property. Even a house let to students or DSS tenants needs to be offered at a reasonable standard. That usually includes central heating, decent kitchen and bathroom, and clean decor.

Then there are the void periods and vandalism. A common problem is that tenants leave without informing the landlord and the empty property is vandalised. Houses have been known to lose not just the boiler, but all the pipework and electrical sockets. Arson attacks also occur. The landlord suffers the double whammy of lost rent, plus repair costs.

DSS tenants do not pay a

deposit, and insurance is generally not available on this type of property. Mr Groman points out that councils can be difficult to deal with when, for instance, landlords are faced with housing-benefit tenants in rent arrears.

He adds that this type of problem doesn't affect every property, but there may be some within a portfolio: "I've got clients with 30-40 houses. About 10-15 per cent of the properties are problem cases," he said.

Many of these old, terraced properties used to be owned by local landlords. They would regularly visit the tenants, sometimes as often as once a week, and any problems could be dealt with easily. Vacant properties would be identified quickly and boarded up before anyone got into them.

When landlords are based hundreds of miles away, the risk is that they don't know their property is empty until it is too late. The advice to London-based investors (or anyone based outside the area) is to pay someone local to manage the properties, but finding the right person is not always easy. Property management agents have a few hundred properties on their books, and do not have the time to give a high level of care.

Pam Murch, lettings manager in Merseyside for Bradford and Bingley, said that letting agents often will not handle this type of property. The DSS backlog is one reason: an agent is paid out of the rent received; a stockpile of unpaid rents means the agent gets no income.

Mr Lawton has alternative advice for southern investors. He suggests paying more - £60,000-£100,000 - for a property in a better area, which will attract a better tenant. "You might do well to spend that kind of sum and get £400 per month rent, for less aggravation," he said.

`It was a risk I took at the time. I lost a small sum'

Even local landlords can be unlucky. Liverpool estate agent Louis Anastasiou's investment in a small, terraced house in Anfield was affected by changes in the character of the area. In 1993, he bought a two-bedroom, terrace house, with central heating and double glazing. He paid £20,000 for what he described as a "nice property". Anfield was never the best postcode, but he insists the street he bought in was not a "bad" area.

But around 1997-98, the street became "quite bad", he says. Elderly residents who had lived in the street either died or moved away, and problem families moved in. "I had a tenant who vacated without notice and a neighbour informed us the next day. When I got there, the property had been broken into. I put boards around it, but they were broken down and the central heating system including hot water cylinder, boiler and radiators all went," he said.

After that, steel shutters were put around the ground-floor windows and doors. Then someone smashed the upstairs windows. It was eventually sold for £7,500.

"It was a risk I took at the time. I lost a small sum," he concludes. Mr Anastasiou is still a landlord, but "now, I only buy properties which are suitable for working or professional tenants and that has worked out very successfully," he says.

`My experience with private tenants has been happy'

Liverpool landlord Miles Pickering owns 35 terraced properties, in carefully selected parts of the city. They include Wavertree - which, he says, has become fashionable - Crosby, Seaforth and the more down-at-heel Anfield.

He bought his first place in the late 1970s for £2,000. The properties have been subject to tenancies or vacant possession, improved and let: "If you have a new letting, it must be put into excellent condition: central heating, damp-proofing, re-wiring, kitchen and bathroom," he says. He estimates the cost for such improvements to a typical terrace property is about £10,000.

He has DSS and private tenants, on assured shorthold and regulated tenancies (where the tenant and rent are protected). He visits the tenants every six months and believes that this is the key to getting it right: "My experience with tenanted properties has been a happy one," he says. But he admits that may be due to his expertise in the business. He is a partner in the estate agency and auction firm Venmore Thomas & Jones.

However, that does not mean it has been problem-free: "I've had DSS tenants who left before their application was processed and left me with four to five months' rent arrears. You haven't got a cat in hell's chance of getting that," he says, adding that there is a current backlog of 11,000 claims for housing benefit. A new landlord could buy a property and not get any rent for months.

"With a private tenant you get someone who will make the rental payment on the due date," he says. "A DSS tenant doesn't have the same interest in the property."

Short and sharp truth

of long-distance buying

Simon Shinerock, a Surrey estate agent, recently sold a property portfolio in the south of England and wants to re-invest his money. He is considering a number of locations in the North and has just viewed properties in Liverpool.

He immediately identified the four-and-a-half-hour train journey as an issue. A long journey means it is difficult to view properties as they come on to the market. Where the market is fast-moving, as it is in Liverpool, a prompt viewing can be key to picking up the right investment.

He believes that regeneration activity and the Capital of Culture project will benefit investors, but adds: "I've got to weigh up the advantage of an area that could be going places, with the disadvantage of access." He believes the best way around it is to find someone locally who would view the properties on his behalf.

He saw properties in a number of areas, including the inner city. He rates a £20,000 terraced house as a high-risk investment: "If you buy something for £20,000, it is common sense to think you don't get something for nothing."

His research suggests that these properties may be in run-down areas and attract a DSS tenant for a rent of, say, £300 per month. But they are also prone to vandalism, and agents tend to be over-worked and not interested in collecting rent for small amounts of commission. If you wanted to do it yourself, you would need to live up there, he says.

"If you've got money, you could buy a few, and you would expect some to be good and some not," he adds. "I see this as a high-risk, speculative bet."