"Buy to let" is the term coined to describe the practice of owning a property portfolio with the intention of earning both rental income and capital growth. Of course people have always been landlords, but buy to let became a popular route to riches in the USA and UK during the credit rich days prior to 2008. Unfortunately, many saw the market for aspiring property tycoons as their own passport to riches, exploiting the building boom and easy credit that was available, to the ultimate detriment of those who had invested as landlords when the economy began its downturn.
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It worked like this. An enterprising property developer would pick a residential area popular with tenants. Close to a large university was a typical target. The developer would then start buying up the properties, from auctions and bankruptcy sales. They were often in a poor state of repair and decor being student accommodation. A lick of paint and some very glossy brochures and the properties would be back on the market as prime business opportunities for the enthusiastic new landlord.
The marketing would be slick, with free educational seminars on how to become a property millionaire. Once the seminar was over, the hard sell would begin, with many persuaded to buy an investment property there and then. The logic was sound - if you buy a property using an easily available mortgage, the borrowing would be funded by the rental income. Then 10 years later, when your property had doubled or more in value, you could sell and reap the rewards. Do this with 10 properties and you could retire a millionaire!
The property purchase was made effortless - simply provide a reservation fee and two months later you would be a landlord. Incentives included guaranteed rental income and gifted deposits. Gifted deposits meant that you did not need to put any capital in as the property company would cover this for you. Of course they had already covered themselves by overvaluing the properties in the first place, based upon the projected, and usually unobtainable, rental income.
The author provided forensic accounting services to one landlord who purchased around 22 properties using a total of £5 million in borrowed funds. He had no equity to put down as a deposit and relied on the gifted deposits being offered at the time. As rents did not come in as fast as anticipated (many buyers simply assumed that their properties would be tenanted for 12 months every year without fail) he had valuations carried out. He was horrified to discover that if he wanted to sell on the open market he might be lucky to realise £3 million. He was trapped, he was unable to sell and could not afford to keep the properties. Not even employing a forensic accountant could stop him being made bankrupt.
The property companies were often helped by other professionals. By mortgage brokers who processed the loan applications without questioning the lack of deposit, by property valuers that did "drive by" valuations for whatever sum was being asked and by lawyers who were relying on the volume of work being passed by the property company and therefore could never act in the best interests of their clients, the buyers.
Of course it is not all buy to let property companies that would be a party to such a conspiracy to defraud. Some would argue that they were only taking advantage of their customers' greed (and that of the mortgage companies willing to lend so easily). It is definitely sharp business practice at the very least, practice which has been largely curtailed as a result of the banks' unwillingness to lend in the same way as previously. However, buy to let may now be considered to be a highly attractive business opportunity. Why? Well the house buying market has been severely hit and renting is more popular than ever. In addition, for those with funds the chance of buying rental property at sensible prices is very high because there will be many forced into bankruptcy by the kind of property developers highlighted above!
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