Wealthy investors are seeking to profit from the pain in the buy-to-let market as figures reveal arrears among landlords have jumped sharply in the past three months.

The Council of Mortgage Lenders said last week that 1.58% of buy-to-let loans — 18,000 cases — were in arrears at the end of September, up from 1.1% or 12,100 cases at the end of June.

The proportion of landlord mortgages in arrears was higher than the 1.44% of all mortgages behind with payments, at 168,000 in total. According to Ministry of Justice data, courts made 16,851 orders to repossess property from landlords in the three months to September.

“The payment profile of buy-to-let lending has worsened more rapidly than the market as a whole. Reasons include falling rents and an over-supply of rental property in some areas,” it said. Investors are seeking to profit from distressed landlords by picking up properties at rock-bottom prices. Here we look at some ways to get back into the market.

PROPERTY FUNDS

One property fund is looking to buy up an entire street of 45 properties in Eastney, Portsmouth, many of them from distressed landlords.

The British Opportunities Fund, launched at the start of the year by boutique fund manager Managing Partners Limited (MPL), backed by HBOS, has paid between £89,000 and £100,000 for each property. The same properties were selling for between £180,000 and £205,000 two years ago.

The fund, which says it has returned 6.16% growth since launch compared with a fall of 10% in the Halifax house price index, has bought 15 of the 48 properties in Fort Cumberland Street and has offers pending on a further 10 homes.

The management expects a minimum 10% rental yield on each property. It has funded “non-structural refurbishments” and installed a caretaker to collect litter and maintain the street, which it says allows it to charge higher rents.

The minimum investment is £50,000 — £2,500 if made via a self-invested personal pension.

Jeremy Leach, managing director of MPL, said: “The fund has been able to purchase these properties from landlords who have overstretched themselves at prices that are as much as 40% below market value.”

In August, Arch Financial Products, the investment manager, launched a residential property fund with Nice Capital to make the most of falling UK house prices.

The Guernsey-domiciled fund, Nice Residential III, will purchase discount properties from distressed sellers, with the aim of returning 15% annually over five years. The London-focused fund has a £50,000 minimum investment.

PARTNERSHIP SCHEMES

Another burgeoning scheme from Egerton Partners, the adviser, is hoping to offer a lifeline to struggling landlords with portfolios of £5m to £30m, by matching them with wealthy investors.

Investors will supply the deposit necessary to remortgage — on average 30% of the valuation — while landlords will receive a cut of rental income if it rises above a specific threshold. Profits from a sale go to the investor.

Chris Fleming-Brown of Egerton said: “There are landlords who can’t refinance at a decent price and the banks are saying find more equity or we’ll foreclose. That’s where we might be able to help them.”

AUCTIONS

At the November auction conducted by Allsop, the auction house, 80% of stock comprised repossessions from landlords and lenders, with 91% of lots sold raising £90m. EIG, the auction information service, is routinely recording discounts of 50% on new-build properties, and 25% on non-new build. For example, a two-storey terrace in Leytonstone, east London, bought in 2006 for £200,000 sold for £150,000 at auction on November 5.

Last month, a two-bedroom home in Surrey sold for £205,000 — 18% less than its 2004 sale price of £250,000.

ADVICE FOR LANDLORDS

New buy-to-let mortgages are still scarce — and are priced at 0.81% above the average residential fixed-rate deal, according to Defaqto, a data firm. The average deposit required on a buy-to-let has also risen from 18% to 29% in the past year.

However, landlords were given some hope last week when some of Britain’s biggest mortgage lenders quietly cut buy-to-let mortgage rates last week.

Cheltenham & Gloucester (C&G) cut rates on all fixed-rate mortgages for landlords by up to 0.60 points, taking a two-year deal to just 5.69%. BM Solutions, which was the biggest buy-to-let lender this year, also cut by up to 0.81%. Its two-year deal is also 5.69%.

The cuts are at odds with the suggestion from Richard Pym, Bradford & Bingley’s chairman, that the buy-to-let market is in effect closed, and suggest landlords who hang on will be able to remortgage at better rates.

The lowest rate on offer is a 4.69% fix from The Mortgage Works, owned by Nationwide, which is available to borrowers with a deposit of 30%. It carries a hefty fee of 3.5% — £7,000 on a £200,000 property — though the lender also offers a deal at 5.19% with a 2.5% fee.

Aaron Strutt of Chase de Vere Mortgage Management said: “Rates have come down as lenders pass on the drop in funding costs, and there are now several deals available at around 5.5%. Lenders are still cautious, but C&G’s decision to cut rates is a step in the right direction for the housing market.”