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The buy to let phenomenon is one of those incredibly successful ideas that crops up every now and then and makes a handful of people a phenomenal amount of money. But how did this method of making enormous profits work? The theory is relatively simple, take out a mortgage in order to buy a property and then rent it out to tenants. The rent covers the mortgage repayments and as the price of the housing soars, the capital value of the property increases each year. This investment process has been so successful that in just nine years the amount of money borrowed in buy to let mortgages has gone from nothing to £108bn. One investor even saw his initial £950 investment multiply countless times over the last five years into a portfolio that is now worth almost £8m.

In the current climate, however, it’s not so easy to turn a profit. Property prices have increased 182% over the last decade, and it seems as if the market has become overvalued. This, coupled with a worsening world economy, has meant that even optimistic predictions for the next year are that prices will stay the same, with some suggesting a decrease of up to 20%. Many buy-to-let investors have found that house prices are so high that the money they recoup from rent is not enough to meet the dual cost of the mortgages and their additional duties as the landlord.

In other areas there have been a huge amount of buy-to-let properties on the market, driving down the cost of rent, and therefore further reducing the amount of profit that investors can make. Because there are so many rentable flats available, many prices have been driven down and there is less capital to be made when the time comes to sell.

One possible solution is to try and purchase the houses at a rate far below that of market value because homeowners need to sell fast, often in cases where people have defaulted on their mortgage, and the former owners are then offered the opportunity to be tenants on their home. Obviously, though, with large numbers of buy-to-let investors looking for the same opportunities, these severely reduced prices can be pushed back up by the competition.

In reaction to the credit crunch, lenders are also less willing to take risks, and many now refuse to lend on new-build properties, particularly in city centres where the property market is awash with new-build flats. Others are demanding much higher deposits of about 25% to ensure that there is some equity in the property in case of the investor defaulting.

So what is the future for the buy-to-let market? With rising mortgage rates, and a certain slowdown in the increase of housing prices, the potential for making profit has been markedly reduced. For the moment the future does not particularly bright, until the current global credit problems are resolved. Unfortunately the profitability of such a scheme requires on a steady increase in house prices, which are already at untenably high levels and out of the range of a number of first time buyers. Many people have made large profits from the buy-to-let scheme, but it looks increasingly like the bubble may have burst.

If you’re investor and you’ve just seen a great opportunity, then it’s still worth looking into the market. Take a look at Alliance and Leicester’s buy to let mortgages for some of the lowest APRs for buy to let investors on the market. It’s also worth taking a look at their mortgage calculator to see what you can afford.