Good advice for DIY landlords
Dismal returns on bank deposits and annuity rates near historic lows are encouraging more retirees to consider becoming buy-to-let landlords. But collecting rent is not as easy as waiting for interest payments, and falling house prices in most areas outside London have dented some landlords’ hopes of capital gains.
Then there is the paperwork. While a property may look safe enough for you to live in, it will have to satisfy a number of tougher tests before it is ready to be rented out. For example, landlords may be required to produce Gas Safe, Energy Performance and Portable Appliance Testing (PAT) documents to stay on the right side of health and safety regulations.
More positively for would-be landlords, the credit crisis has left banks and building societies risk-averse and reluctant to lend. As a result, many people who would otherwise have bought their own homes remain in rented accommodation, long after the ages at which their parents got a foot on the housing ladder.
While “generation rent” may complain about a mortgage famine and hope for a house price crash, the current situation is good business for landlords. As David Newnes, director of LSL Property Services, points out: “Rising rents are delivering strong yields to investors, making a powerful case for the buy-to-let market for those looking for long-term investments for their pension provision.
“Current yields – that is, rents expressed as a percentage of the price paid – are 5.3pc. Property investment is providing a viable alternative to low annuity yields and a volatile stock market.”
Location is a key consideration, but not in the same way that it is for owner-occupiers. Landlords need to consider accommodation in the same way that tenants – rather than owners – do.
Lynn Hilton, a residential lettings partner at Cluttons estate agents, explains: “Transport links are essential and it is sensible to consider newer properties, or at least ones in a good state of repair, to help keep the maintenance bills down.
“Only invest in an area with high employment and strong economic foundations, which will appeal to high-quality tenants such as young professional singles and couples. New landlords should also consider the cost of service charges and ground rent, as these are payable by them rather than the tenant.”
Most people can draw 25pc of their pension savings as a tax-free lump sum. But even allowing for this, another worry for pensioners considering investing in property is that it may mean putting too much of their wealth in a single asset. This would break what is sometimes described as the first rule of investment; to spread risk and avoid having too many eggs in one basket.
One solution is to consider cheaper properties, such as flats above shops or ex-council accommodation. Unfortunately, you tend to get what you pay for and cheap property can raise specific problems that are less likely to arise elsewhere. Kristjan Byfield, a director of Base Property Agents, explains: “Due to their lower purchase price, yields are typically higher on ex-local authority properties. The biggest risk is refurbishment works to the block or development. Buyers should therefore research works done in the past five or 10 years and try to establish if any are planned for the future.”
Flats above shops tend to cost less than comparable properties elsewhere for good reason. Mortgages are difficult to obtain because of potential conflicts of interest, between residents above and neighbours trying to run a business below. Or, as a building society manager once told me after I had found an apparent bargain: “It might be a bookshop today, but it could be a sex shop tomorrow.”
Brian Murphy, head of lending at Mortgage Advice Bureau, points out: “Most lenders’ maximum loan-to-value on a buy-to-let mortgage is 75pc. Therefore borrowers are typically looking at putting down a 25pc deposit. Lenders typically look at rental coverage on a formula – generally they require the rental income to be at least a quarter higher than the monthly mortgage interest payment.”
Mortgage lenders’ caution serves as a reminder that buy-to-let is not as easy as it looks. How can you avoid the tenant from hell who simply stops paying rent?
Landlords must scrutinise prospective tenants carefully or appoint managing agents, who will do the job for them. Letting agents generally charge 10pc of rental income to find the right tenant and another 5pc to manage the property.
Jamie Lester, head of Haus Properties, says: “If you opt to engage a managing agent, make sure that they are thoroughly vetting any potential tenants.
“A credit check isn’t enough. They need to be seeking personal references and asking if they always pay their rent on time, and if not, why not?”
Even with the extra time retirement brings, becoming a DIY landlord may be too much like hard work. Ed Mead of Douglas & Gordon says: “Always use a member of the Association of Residential Letting Agents, so your money is protected and you will sleep easier.
“You’ll also spend a lot less time on irritating phone calls from the wrong sort of tenant. And you won’t be changing light bulbs when you should be enjoying that sports car you always promised yourself.”