Being a buy to let landlord: Top Tips

Landlord Expert
By Landlord Expert July 20, 2011 07:28

Taking on a buy-to-let property and being a landlord is not just a shrewd investment move in today's economy, it's providing an essential service.

According to the Association of Residential Letting Agents (Arla) the UK's private rented sector is being used more and more to take the pressure off a housing market which is impossible for first-time buyers to enter.

As a result, the rental sector is currently buoyant. Recent figures released by Endsleigh show rental prices in the UK have increased steadily over the last two years. Since 2009 rents have gone up by four per cent.

This is great news if you are a landlord, or considering becoming one. But if you are reading this as a tenant, you might want to pour yourself a strong drink before reading on – particularly if you live in London.

Endsleigh said the highest rental prices are in the capital city, where the average property is £1,372 per month – double the average price in the UK, which has reached £700 per month.

Scotland, meanwhile, is the cheapest costing the average tenant £299 per month to rent a property. Carlos Thompson, of Endsleigh, said: "The increase in cost of renting across the UK shows that despite the recession the lettings market has remained strong, which is great news for landlords and letting agents."

Meanwhile, with the average weighted rental returns, according to Arla, for both flats and houses coming in at five per cent – higher than the average interest rate earned through savings or a cash ISA – it's no wonder so many are considering buy-to-let.

But entering this marketplace can be a daunting prospect if you've never dipped your toe in before. Being armed with some helpful information to ensure you don't trip up can be invaluable.

If you think buy-to-let is the investment path for you, here are some expert tips to help you get going.

Do your research

As the statistics from Endsleigh suggest, the key to buying a property which will earn you a decent yield is to choose the right location. (see our article explaining rental yield).

But it's also just as important to buy the right property. It would be a wise financial move to buy a property in an area set for regeneration, or where a large amount of jobs are about to be created.

You may not find such great prospects in buying a large four-bedroom family house to rent in an area with no schools, or poor schools for that matter. Arla says it's important for potential landlords to remember buy-to-let is a solid, long-term investment not a quick money-making scheme.

It points out the rental market suffers ups and downs, and behaves very differently from region to region, so it's critical that you select the right property in an area you have researched in detail.

Ian Potter, operations manager at the organisation, added: "Buy to let properties can prove to be a sensible, long term investment, but consumers must do their research in order to achieve success."

Arla recommends talking to a regulated letting agent who is based in the area you are thinking of buying your property. They should be able to provide you with an insight into what makes the local property market tick.

But it's worth looking at other sources too. For example, Paragon Mortgages recently published research revealing students and young singles generated the highest yields for landlords.

While the average rental yield in the UK is currently 6.2 per cent, the investigation found this figure rose to 6.45 per cent for students and 6.22 per cent for young singles. And before you slash quiet seaside retreats off your list, the research also revealed retired people as being among the most lucrative yield providers, generating averages of 6.16 per cent.

Nigel Terrington, chief executive of Paragon Group, said: "Student yields typically outperform the wider market because they are let on a per room basis, which can generate higher rental income."

But remember, these high yields can come at a price. Mr Torrington added: "On the downside, they tend to require a higher degree of maintenance, so landlords have to factor that cost into their overall business models."

Use the Myfinances.co.uk comparison tables to find the best deal on a buy-to-let mortgage

Getting a mortgage

Unless you have a big bulk of cash to invest, it's highly likely you will need a mortgage to fund your buy-to-let venture. If this is the case, you probably already know you will need to take out a buy-to-let mortgage to obtain your property. Like residential mortgages, these come in various guises including fixed-rate, tracker and discount.

However, buy-to-let mortgages tend to have higher interest rates than mainstream residential mortgages – often by up to one per cent more – because they pose a greater risk.

You'll also find lenders will ask for higher deposits. The good news is lending grew by around seven per cent in the buy-to-let sector in 2010, according to Arla. This means the market is strong and therefore if you shop around you could find a great deal.

A mortgage lender will take into account not only your salary and credit history when assessing your application but also your potential rental income. Also, according to mortgage broker John Charcol, most lenders will expect you to have a six-month assured shorthold tenancy agreement with tenants.

And, the broker warns, you may find it tricky to arrange finance if you plan to let to students or for irregular periods such as holiday or company lets. Getting advice from a mortgage broker or from an organisation like Arla on the best mortgage to suit your needs would be a good idea, especially if you are completely new to the buy-to-let scene.

Other costs

Don't forget, when buying any property – including a buy-to-let home – you will need to put aside cash to pay for surveys, legal fees, searches and stamp duty.  If you are buying a flat or a house in private grounds, you may also need to pay a service charge.

And then there are letting agent fees to consider. An agent will take much of the load off your hands including finding tenants and fixing problems, but this comes at a cost of around 15 per cent and 20 per cent of the rent.

Tenants today require high standards, so if you've bought an older or rundown property you may need to install new kitchens and bathrooms to meet their needs.
And if you plan to let a furnished property, you will also need to find the cash to buy furniture.

There is also the matter of insurance. It's a landlord's responsibility to take out buildings insurance on their property and contents insurance on items they provide for the home, such as furniture.

There is another matter to consider too – tenants falling into arrears and, or disappearing. Rent guarantee insurance is therefore another cost you should factor in.

Carlos Thompson of Endsleigh, said: "The very nature of rented accommodation means there can be unexpected surprises, with the possibility of tenants falling into difficulty or leaving suddenly.

"But if landlords can protect themselves from lost income through rent guarantee insurance and robust tenant referencing they will be secured against the unexpected, enabling stability on their portfolio of properties."

Vet potential tenants

This leads on nicely to the next tip, which is to ensure your tenant is going to pay rent on time and stick to their side of the agreement. Arla advises landlords carry out full credit checks on all prospective tenants to assess the risks.

The organisation also suggests examining the tenant's current and previous employment status as well as their renting history and any references provided.

Look after your tenant

By this we do not mean you need to bring them breakfast in bed and do all their cleaning – more to the point, make sure you're prepared to take on the full responsibility of being a landlord.

Ian Potter, Arla operations manager, said: "Becoming a buy-to-let landlord is a decision which must not be taken lightly.

"Landlords must be aware of the legal responsibilities to their tenants and ensure they use an Arla licensed agent so their money is protected."

Among the considerations are that all gas appliances are maintained and in order and that electrical appliances supplied are safe. Any furniture provided must meet fire safety standards, which means it's worth investing in new goods of a reasonable quality rather than second hand items.

You must also, by law, sign up to deposit protection, says Arla. All deposits on assured shorthold tenancies must be protected under a scheme licensed by the government.
You can find out more about this by visiting the Communities and Local Government website at www.communities.gov.uk

Landlord Expert
By Landlord Expert July 20, 2011 07:28

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