Starting Out in Buy to Let

Transcription

1 Starting Out in Buy to Let Key success factors in buy to let Most people think buy to let is simply about finding a property, buying it and letting it out. But the reality is it s not that straightforward. Buy to let is about earning money from this bricks and mortar investment and ideally more than if you invested your money in other asset classes, such as stocks and shares or a pension. Buy to let success factor #1: Have a plan Before you even think about buying a property, you need a plan for how you re going to make money. There are two ways of making money from buy to let: capital appreciation and profit from rental income. And you achieve this through buying a property that then grows in value over time, and by renting out the property for more than it costs you to own and run it. That might sound easy, but it s a lot harder in practice. Buying a property that will increase in value, above inflation, certainly isn t easy when we re in a double dip economic recession and, in some areas, property recession. Although data from the past 50 years shows that property prices have always gone up over time, it doesn t mean they always will in the future. Making money from rental income is easier when you buy a property for cash because you don t have the cost of a mortgage repayment (or interest). The downside is that you don t have the opportunity to make as much money on the capital growth as you would if you leveraged your investment. Buying with cash also greatly restricts the number of properties you can afford to own, so you can t spread the risk of your investment as well.

2 Buy to let success factor #2: Get expert help! If you invest in any kind of asset you need expert advice and property is no different. Although it s possible for you to buy and rent out a property all by yourself, that doesn t mean that s the way you should approach buy to let! To be successful, you ll need expert help and advice to: 1. Learn how to assess the local property market and understand all the costs of buy to let 2. Evaluate the potential returns of different properties/target markets 3. Know which types of property and target market would be best for you to invest in, for the money you have 4. Work out the legal and tax implications of your investment, prior to investing 5. Be sure you choose the right mortgage(s) to help you achieve your returns 6. Make sure your property is let out legally 7. Know how to reference check tenants 8. Understand what type of insurance is best for you 9. Maintain your property with reliable tradesmen 10. Monitor the success of your buy to let investment When you re looking for help mortgage broker, tax specialist, legal expert or maintenance team, etc. try to find someone who s fairly local and/or easily accessible to you. You can get some good recommendations from local lettings experts that are members of the National Approved Lettings Scheme (NALS) or Association of Residential Letting Agents (ARLA). There s more information on how and where to source help throughout this guide. We ve also secured the help of Kate Faulkner, one of the UK s top property experts and authors. You can contact Kate directly with any questions, via enquiries@designsonproperty.co.uk, or meet and talk to her at the property clinics she regularly runs at UK property shows. Books and specialist magazines can also be very useful for keeping up to date.

3 Buy to let success factor #3: Buy a property that ll deliver against your objectives In investment, you typically make money when you buy. Because buy to let is a long-term investment, you have to do an awful lot of leg work to make sure the right purchase not only delivers in today s market, but also in twenty years time. Most other investments, which are managed by professionals, tend to go up and down in value according to mostly rational decision making. The tricky thing with buy to let is that property prices and rents are mainly driven by the general public. They can go up or down based on human confidence and emotion, meaning they re very tricky to predict. To ensure you make an investment that ll deliver against your objectives, you need to have a way of comparing properties, based on: the price you re likely to secure it for any necessary refurbishment the cost of bringing the property up to a legally let standard (e.g. electrics, gas and fire safety) potential capital growth likely rental income To work out whether the property will continue to deliver in the future, you need to be aware of what changes are being planned locally. For example, how many new homes are going to be built near your property? Are companies coming into the area, increasing employment? Or are companies likely to leave, which could reduce employment and impact negatively on tenants ability to pay their rent?

4 Buy to let success #4: Know your legal responsibilities As soon as you decide to buy an investment property, make a list of all of the work you ll need to do to ensure the property meets the initial legal requirements for letting. It s a good idea to check these things out before you make any offer, so you can try to negotiate money off of the price if, for example, the electrics or gas are going to need a lot of work. There are also rules when it comes to maintaining the rental property, how you treat the tenant, your access to the property and you re even affected by the Data Protection Act! A local lettings specialist, who is NALS or ARLA registered, should also be able to advise you on the changes you ll need to make. Buy to let success #5: Maximise returns; minimise costs When you re running a buy to let it s a constant battle to keep costs down and your earnings from your investment up. For example, a simple change to the VAT rates increased buy to let costs by 2.5% in just one month. Boilers breaking down cost anything from 2,000 to renew. Even a simple paint job for 500 could wipe out several months of profit. If your property is empty for one or two months because of essential maintenance or just waiting for a new tenant, that s between 8-16% of your annual income gone. As well as taking steps to minimise costs, which can quickly drain all your profits, there are ways you can maximise your income for very little outlay. Look after your tenants well so they don t want to move anywhere else, fix maintenance problems quickly and make sure the rent is fair versus the local market. Limit void periods by setting rents attractively when you need to secure another tenant. Carefully reference check tenants to make sure they can afford to pay your rent now, and on-going, and won t trash your property, devaluing the asset.

5 Understanding and minimising the risks of buy to let Any investment carries risk, so before you leap in to buy to let, you need to know exactly what the risks are and evaluate what you re happy to take on. That s in terms of both the financial investment itself and the risks associated with running your portfolio. Some of those risks can be mitigated by outsourcing, so be honest with yourself about where your expertise lies and where it might be more sensible to use the services of professionals. Key risks of buy to let: The value of the property drops This might be because of a market fall, but it could be because you paid too much for the property in the first place. It s less of an issue if you own the property (or most of it) outright and still have enough rent coming into cover your costs. But if you have a mortgage and the property s value minus the mortgage loan leaves you with 25% or less equity, it will be very difficult to remortgage and you may be forced to sell. To protect yourself from a fall in value, buy a property that you can add value to, through refurbishment or extension, and/or buy for less than the property would be worth if sold on the open market. Maintenance costs Over 50% of rented property in England alone was built before This means they need a lot of on-going maintenance, which could cost a thousand pounds a year or more. A property just 25 years old could need a new roof, timber and damp proofing, new electrics and plumbing and that might cost tens of thousands. Even if the property is relatively modern, you still need to allow for general maintenance, such as gardening, clearing guttering, boiler and appliance servicing and decorating.

6 Mortgage rises If you borrow to purchase your buy to let property, the mortgage is likely to be your biggest cost. And, unless it s a fixed rate for the lifetime of the mortgage, this cost is unlikely to remain the same. That s because the majority of mortgage rates are linked to the Bank of England base rate, which can go up or down on a monthly basis. From 1992 to 2012, the base interest rate varied from 0.5% to just over 10%. Back in 1992, mortgage rates were at 10.95%. Buy to let rates in 2012 ranged between 3.5% and 6%, depending on the level of deposit. So you need to stress test your figures to make sure your investment can handle any likely fluctuations in mortgage rates. Timescale of the investment Buy to let is considered by experts as a long term investment of 15 or more years. Committing to invest your money for this length of time is risky. Anything can happen, from sickness to break ups and even death. To cash in your investment in an emergency isn t easy and, if you can t find a buyer, may be impossible. For more information on how to protect yourself with insurance, visit Tenants not paying their rent This is one of the worst nightmares for buy to let investors. It can happen at any time, especially if your tenant unexpectedly loses their job, becomes sick or even dies. Some tenants are simply very clever at playing the system. They make a habit of entering into tenancy agreements with no intention of paying rent because they know it ll take you sometime to evict them. Bad tenants Unfortunately, there are many cases a year where tenants not only stop paying rent, but also cause malicious damage to your property. There are criminals who will offer to pay you six months rent in advance, as long as you don t visit the property. They then set up cannabis factories inside, which can cause tens of thousands of pounds worth of damage. You also need to be aware that there are tenants who claim to rent your property themselves, then sub-let rooms or even the whole property to other people at a higher price.

7 Legal problems Anything to do with property ownership is subject to an awful lot of legislation, which increases dramatically when you add renting into the mix. And it s not just the legislation that exists now that you have to keep on top of, it s also the new laws that are passed over the years you own and the let the property. To help keep on top of landlord legals, you can engage a letting agent to take over full management of your property. Use a reputable agent one who s a member of NALS and/or ARLA and they ll take on most of the responsibility for you and advise you of any legislation that affects you. You also need to be aware of the legals of owning a property, especially if you own it with another person. For example, as soon as you own a second property, or if you let your property out, you need to make your mortgage lender aware. If you ve previously lived in the property and then moved to another one, you need to seek property tax and legal advice as to which property should be declared as your main home.

8 Different ways of investing in buy to let Once you have a good understanding of your investment plan, how to be successful and how to minimise the risks, you can look at all the different ways of investing your cash in buy to let. You need to be sure how much capital you have and want to invest in property. Then there s the slightly trickier decision over whether you should invest by buying properties outright yourself, work with a partner or using mortgage finance to make your money go further. Investing with cash Buying a property with cash can be an excellent way to secure a bargain. It means you can buy a property within weeks, rather than months; you could buy land and build a buy to let property to the legal specification required; or you could buy something that needs complete renovation. However, you still need to carry out all the checks a mortgage lender would insist on, such as having an independent valuation and condition check carried out by a qualified, local surveyor, who s a member of the Royal Institution of Chartered Surveyors (RICS). You ll also need to organise building insurance at the time of exchange and make sure the legals have been thoroughly checked for anything that might affect your investment, such as flooding or drainage problems. The main downside of buying with cash is you can t leverage your money through investing in a deposit and borrowing the rest. As a result, if the property increases in value, your return on investment is lower than it could have been. The upside is that if property values fall, you don t have to worry about slipping into negative equity and being forced to sell.

9 Mortgage finance One of the key reasons why buy to let can be so successful versus other investments is because you can leverage your money to purchase a property. For example, if you bought a property for 100,000 cash and it grew in value by 10%, your gross return on capital invested would be 10%: 10,000 growth the 100,000 you invested = 10% But if you bought the same property for 100,000, using 25,000 of your own money as the deposit and borrowing 75,000 via a mortgage, the return would be significantly better: 10,000 growth the 25,000 you invested = 40% gross return on capital invested. Even allowing for the additional costs of financing via a mortgage, the return is significantly better. And leveraging at that level also means you could buy four properties with your 100,000, rather than just one. That could mean four times the amount of rental profit, on top of the capital growth. Of course, if the property goes down in value,there s a danger you could end up in negative equity, owing the mortgage lender money and being repossessed. In that situation, you could easily lose a lot of money, so it s important you get a balance between the money you borrow and the cash you invest. Investing with a partner Some people work with a spouse, family member, friend or business partner to secure additional funds to help them build a portfolio. This can work very well, but you need to understand the best way to purchase the property, from a legal perspective. For example, even if you buy with a spouse, you should legally purchase the property under tenants in common so that you can leave the property in your Will to the person you want. If you invest under joint tenancy and something happens to you,your part of the property will go to the joint owner, regardless of what you ve put in your Will. And that could be a major problem if the joint owner isn t your spouse or children! Another issue you need to address is what happens if the other partner needs their money back, whether it s because of financial problems or just a change of heart. If you re thinking of investing with a partner, make sure you seek specialist legal advice and have a good contract between you even if you re investing with family just in case one of you needs to withdraw for any reason.

10 Different types of lets There are different types of buy to let property, attracting different types of tenants, so you need to decide which is most suitable for you. For example, you could invest in a family home, a larger property for student lets or a modern apartment for young professionals. You could choose to let only to those on benefits,rent out rooms individually or even provide a fully serviced apartment on short-term corporate lets. To work out which type of let you want to invest in, you need to consider: 1. How well the different types of let will deliver on your investment objectives 2. Which is the most risky e.g. letting individual rooms is considered higher risk than letting a home to a family How comfortable you are with the risk/reward? 3. How much work is involved in each type of let and how much of your time it ll take 4. What is the demand for furnishing from each type of tenant? Students tend to prefer furnished, whereas families often prefer unfurnished. Furnishing means additional cost for you and you need to be aware of the legal health and fire safety compliance requirements. 5. Can you outsource the letting and/or maintenance and, if so, at what cost? What will outsourcing work do to your profit margins? 7. How much the maintenance and running costs will differ e.g. renting rooms tends to be more costly than renting properties as a whole 7. The different legal obligations for you as a landlord. If a property is classed as a licensed home in multiple occupation (HMO), you will have more regulations to abide by than if you rent to couples or families. This can have an on-going financial impact. 8. Will you require any additional licensing? Some areas and property lettings such as Oxford require additional monies to be paid to the local authority. 9. Lending criteria differs depending on the type of let you are considering. For example, some lenders won t lend if you are letting to people on benefits; others might not lend on licensed HMOs. 10. How will demand for your type of let change in the future? Will it increase or is there likely to be a decrease, what if student demand lowers or there are less professionals renting?

11 Analysing your area Once you have a good idea of how you re going to invest in buy to let, you need to research different areas to find out which will deliver on your objectives. You should start by looking at yield, capital growth and the future plans for each area. House prices, unlike rents, differ dramatically from one area to another. Properties can vary from several million pounds to just a few hundred thousand pounds a few streets away. Rents don t vary anywhere near as much at the moment. So if you want to maximise the income you receive from a property versus what you invest, you need to find the areas that deliver the best yield. Yield The yield is a percentage indicator of rental income against property value. It s a simple calculation that lets you compare at a very basic level how good your investment is, in terms of rental income return: 11 months rent (allow one month s void) purchase price For example, if you can buy a property for 150,000 and get 600 a month rent, that s: 6,600 ( 600 x 11) 150,000 = 4.4% yield But if you can buy a similar property in a nearby area for 120,000 and get 575 a month rent: 6,325 ( 575 x 11) 120,000 = 5.3% yield The second property gives you a 20% better yield than the first.

12 Capital Growth However, if you re investing for capital growth and estimates show that the first property likely to grow by 10% but the second by only 7% in the next three years, then the first may be a better investment for you: Property 1: 150,000 x 10% = 15,000 growth Property 2: 120,000 x 7% = 8,400 growth Taking this analysis further, the return on the money invested (not including any costs or rental income) would be:- Property 1: 150,000 x 25% = 37,500 deposit Capital growth after three years = 15,000 Gross return on investment ( 15,000 37,500) = 40% Property 2: 120,000 x 25% = 30,000 deposit Capital growth after three years = 8,400 Gross return on investment ( 8,400 30,000) = 28% Understanding these numbers for different property types (detached, terraced, flats, etc) in different areas, will help you work out which area is most likely to deliver the returns you re hoping for. The future In addition to understanding the returns on the area as they exist now, you also need to look at what s going to be happening in the future. Many investors look for areas that are up and coming, with the expectation that they will grow in value faster than similar areas/properties nearby. This is a lot easier than it sounds because most of the information about future plans for an area is freely available from the local authority. The key things you need to know about are: what s happening economically, what s happening from a transport perspective, and how many and what kind of properties are they planning to build?

13 You also need to understand that just because an area is getting additional investment, such as a funding for a regeneration scheme, it won t necessarily result in greater capital growth or higher rents. Fundamentally, there has to be demand, and that s driven by confidence and the ability to buy or rent. So look for the key factors that help attract more people to an area and increase demand: Communication changes that improve access to major cities, such as a new motorway link, junction or tram/train Increased employment opportunities New or improving schools Better local facilities shops, restaurants, leisure, etc. than surrounding areas Demand will also be increased if there is expected population growth from the existing community, i.e. if more people are having children. While the indicators for demand increasing in an area might be strong, the changes can take 15 to 20 years to take effect. And you also need to check whether the changes which are coming have already had their effect especially house value-wise. A good example of this is Stratford, in East London, where property prices shot up when London won the Olympic bid, but have been fairly stagnant over the past couple of years, despite huge investment in transport links and leisure facilities.

14 Comparing investments Unlike falling in love with a house you re going to live in, when you re looking at investing in buy to let, you can t make a decision based on one property. You really need to have five or more to evaluate before you can make a decision about what s a good investment. And to find five properties which all stack up financially, you ll need to consider and evaluate around 150 different properties in different areas and conditions. There are three main ways you can compare one buy to let investment against another: From a financial perspective A property is only worth investing in if it meets your objectives. For example, if you were hoping for 2,000 net income, does the rent minus ALL the costs of renting and an allowance for tax deliver 2,000 now? If mortgage rates increased to 7%, what net income would it deliver? If rental income fell because of a lack of demand or greater competition, resulting in longer voids, how would that affect your income? The first financial calculations you should consider doing need to do for each property are: 1. How much deposit will you need? 2. What will it cost you to purchase the property (legals, stamp duty, survey, electric and gas checks)? 3. How much will it cost to prepare the property for rent? 4. What will the property be worth in 10, 15 or 20 years time (you can use different property price forecasts) 5. What will it cost you to sell the property in 10, 15 or 20 years time? And, before you get too excited about how much money you may make, find out how much tax you ll have to pay on the estimated increase in value of the property (capital gain) so you know what you re left with. Once you ve calculated the remaining balance after taking into account the purchase and sale costs of each property, work out the likely rental income and costs.

15 Estimate your rental income, for example 1,000 per month / 11,000 a year (assuming the average one month void). Then deduct all the on-going costs. You can calculate these either on a monthly or annual basis. Don t forget to include your one-off or periodical costs. For example, an energy performance certificate (EPC) needs renewing every ten years, so make sure you split the cost across those ten years. If the EPC costs 100, that s 10 annually or 83 pence per month. That might sound too low to bother including, but every penny counts and its tax deductible! All these little costs add up to thousands of pounds over the lifetime of your buy to let investment so it s important to make sure you include everything in your calculations. Take your costs away from your gross rental income to give you a net income figure and check the tax implications. For example, the additional rental income may push you from a 20% income tax bracket into a 40% bracket. Seek specialist tax advice to make sure you mitigate as much tax as possible. Five costs that most buy to let investors don t include in their figures: 1. Annual maintenance such as servicing the boiler, fixing problems 2. Voids - and the average property has up to a month s void per year 3. Bills when the property is empty 4. Periodical updating of the property, for example a new kitchen, bathroom and flooring 5. Costs of running a buy to let business, such as accounting and tax advice fees or driving to and from the property Once you ve compared the returns from the different properties, you ll have a good idea as to whether each will deliver on the objectives you set.

16 From a risk perspective Another thing to consider is how risky the property is as an investment. To do this, you may wish to consider: 1. Will the property actually grow in value? 2. What evidence are you basing this on? 3. What would happen if the value dropped by 10% or more? 4. Will the property definitely deliver the rent you re hoping for? 5. What would happen if the rent dropped by 10% or more? 6. Will the rental income and capital growth keep up with inflation? 7. Is the property in good condition? 8. What could go wrong with the property s condition? How much could this cost? 9. Is there any chance of the property being flooded? 10. Is there anything happening locally that could reduce the value of your home or rental potential? When you have an answer to each of these questions, for each property, add the information to the financial returns and see how each now stacks up.

17 From a tenant s perspective Whether you re aiming for capital growth or income, it s the rent from your property that ll make your buy to let investment viable overtime. Because of this, it s important to think about the suitability of each property from a tenant s perspective for example, if you re intending to let to a family, how well suited is each property to their needs? They ll worry about safety and are likely to want plenty of storage and a nice garden. You need to think how easy it is for them to take care of the property and keep it clean - for example, carpets might get easily stained so hard flooring may be better. Consider the different costs of the property to the tenant too. The tenant s biggest costs, after paying rent to you, will include the council tax and utility bills. The energy performance certificate (EPC) will give an indication of how much utility bills will cost and you can find out online what the council tax would be. Once you ve evaluated each of the properties based on finance, risk and how suitable they are to your target market, then you ll be able to decide which one is better for you.

18 Insuring a Buy to Let Having the right insurance will reduce some of the risk associated with letting out a property and can be extremely helpful in supporting your buy to let investment. Taking out specialist landlord insurance is the most important first step, as ordinary buildings and contents insurance won t cover you or your property s needs. Most landlord insurance covers you for the building itself and for the contents you have in the property, but it s worth comparing different policies as not all of them offer the same cover. Some of the key differences with landlord insurance include the need forcover for: 1. Accidental damage 2. Contents 3. Public and property owners liability 4. Alternative accommodation, should there be a problem for the tenants staying at the property Additional cover you can purchase includes: 1. Loss of rental income 2. Legal costs 3. Employers liability There are other types of insurance you may need to consider, especially to cover the costs of running the buy to let or the asset value should anything happen to you. Rent Guarantee Insurance To secure this type of insurance, you ll need to have proof that you thoroughly reference check your tenants, which you ll need to show the insurer. Rent guarantee insurance should include: 1. Payment if the tenant fails to pay rent from the day they move in 2. High enough payment to meet the value of rent you are charging 3. Cover for any legal costs incurred in the process of evicting a non-paying tenant

19 Preparing your property for buy to let Time is money, so try to negotiate getting as much of the required work as possible done during the purchase process. The sooner you can let the property out, the sooner you can start collecting rent. If you have to spend weeks after completion bringing the property up to a legal letting standard, you re losing valuable rent and will have to subsidise the mortgage payments yourself while the property is untenanted. However, prior to exchange it s a good idea to only carry out the checks on the property that could affect your offer. This way, if the deal falls through for any reason, you won t have wasted money unnecessarily. Aim to start any works immediately after exchange. The checks you need to carry out before exchange include: 1. Having a letting agent view the property and advise of any costs you ll need to incur to rent the property legally 2. An independent RICS survey, which is done based on the fact you intend to let the property out 3. An electrical check to see if anything needs upgrading to let legally 4. A gas check to see if any further work is required 5. Timber and damp surveys You should also have a good read of the energy performance certificate that s completely free! It s important you check the property s rating as future legislation may ban some properties with low EPC ratings from being let out. Look out for what changes you can make to reduce the tenant s utility bills and, ideally, increase the energy efficiency of the property in some areas you can get financial help for this. It s a legal requirement that you make the property s EPC available to your tenants, so it s worth asking the seller if you can have theirs to save yourself a bit of money.

20 In addition, you ll need to check the property meets the Housing Health and Ratings System (HHRS). ( As a landlord you re responsible for the safety of the tenants in your property. The HHRS covers things such as security and safety of windows; making sure there aren t any trip hazards, for example, loose stair carpet that could cause tenants to fall; and damp and mould in the property. Overall, there are nearly 30 health and safety checks you need to make, to ensure the property s safe for your tenants to live in. If the seller has agreed that you can start works on the property between exchange and completion, ask if you can also show prospective tenants around. At the very least, you or your letting agent, if you are using one could take photos as is and start marketing, as long as the current condition isn t off-putting! As soon as you ve completed on the property, finish any jobs you couldn t get done between exchange and completion, such as upgrading or updating the kitchen and bathroom, painting and decorating or laying new flooring. It s important to prepare the property with the tenant in mind. Think about who you re trying to attract and work to that style, and consider how much wear and tear fixtures, fittings and décor are likely to get. You don t have to spend a fortune on a kitchen: as long as the carcasses are reasonable quality, the doors, hinges and worktops can be upgraded. And if you use good quality paint that can be washed, you shouldn t have to re-paint regularly.

21 Letting your property There are various different ways you can let a property out. If you ve never done it before, it s advisable to use a letting agent who s an existing member of NALS or ARLA. They typically have good training, are up to date with the legals of letting and if they go bust or someone runs off with the rent money, then the insurance required to be a member of these organisations should cover you. Remember: letting agents are NOT regulated, so anyone can set themselves up as such, both online and on the high street. Letting agents who are members of ARLA, NALS or the Property Ombudsman typically have higher costs as they operate at a highly professional level. Cheap letting services usually translate into a poor service. Use a letting agent or let yourself? When you re first starting out, it s advisable to speak to companies that are lettings specialists. All they do is lettings, so there s no danger of them getting side-tracked by selling properties. If you speak to an estate and letting agent, they will probably be keen to sell you a property they have on their books, as well as letting it out. A lettings specialist should be able to advise you more independently on what would be a good property to buy to let. There are a huge number of letting agents to choose from. To make it easier to pick the right agent for you, follow these three steps: 1. Go online to a property portal, put the postcode of the property or area you are going to buy into the lettings search and click the button that says something like, include let agreed properties 2. Find similar properties to the one you are planning to let out and see which letting agents have actually let properties similar to yours 3. Check they are members of NALS or ARLA and the SafeAgent scheme (which shows the letting agent has insurance to protect you and the tenant)

22 Then ask three suitable agents to come and visit your property. Find out from them: 1. What rent they think your property can achieve 2. What you could do to the property to increase the rent 3. About the different services they offer: tenant find, let only and full management 4. What each service costs and how they differ 5. How much it will cost to rent the property over 12 months, including a re-let 6. What legal responsibility they will take for letting the property 7. How they keep up with the legal changes affecting landlords and letting a property 8. What insurance they have to protect your rental money 9. How they reference check tenants 10. How they deal with any mistakes they make, for example, what happens if the tenant stops paying rent? A good letting agent will ask you to sign their business terms and conditions. Always check them out yourself with a lettings legal specialist before you sign. If a letting agent doesn t ask you to sign any terms and conditions, or expects you to do this without getting any checks, then they probably aren t very thorough with the enormous amount of paperwork required when letting a property! Remember that all the letting agent s fees are tax deductible, apart from the VAT (unless you let through a property through a VAT registered company).

23 Self-management Letting a property yourself is hard work and it s difficult to do if you re more than minutes away from the property. One of the biggest challengesis keeping up with the legal changes, which often come fast and furious in the lettings market. It s not just changes in national rules and regulations, which tend to be well-publicised - there are also local authority rules and regulations to keep abreast of. A major part of the legal side of letting is making sure you have an up-to-date tenancy agreement. This isn t easy, as every time there s a legislation change, it could affect the wording. For example, when the tenancy deposit scheme became law, the new wording in the agreement depended on which scheme you used. Any subsequent amendments to this legislation will result in yet more changes to what s currently written in the agreement. Another downside of self-managing is having to arrange suitable cover for when you are away do you have someone that can look after the property for you? And what happens if you re not available for the tenant to get hold of you, or there s some kind of emergency? Also, if a tenant knows you aren t limited to office hours, they may contact you at antisocial hours, even over the slightest problem. Finally, there s the issue of inventory and what s considered fair wear and tear. Some landlords are very protective of their property and find it difficult to differentiate between fair wear and tear and actual damage, which can cause problems with the return of tenants deposits. Unless you know exactly what s required in an inventory and can be completely objective, you can run into problems. This is definitely an area where it s advisable to engage an independent inventory clerk. There are some upsides of self-management, but only if you re prepared to invest the time required: 1. You deal directly with the tenant, so misunderstandings are less likely 2. When the tenant pays you rent, it automatically goes into your account some agents can take up to two weeks to forward rent to your bank account 3. If there s a problem, the tenant contacts you directly, which means you can decide together how and when the problem is fixed 4. If you form a good relationship with your tenant, they may stay longer, resulting in fewer voids 5. You can save approximately 1,000 per year; 1,500 if the property is in London

24 However, don t forget to put a value on your own time. You ll need to spend at least as much time as an agent would on your property each month usually more, because it s not your speciality. A good guide is to put aside at least one day a month to concentrate on each of your buy to let properties. You will also have to spend time and money: 1. Securing written permission from your lender to let your property 2. Preparing your own buy to let accounts 3. Sorting your own insurance 4. Advertising, taking calls and doing show-rounds 5. Thoroughly reference checking tenants 6. Keeping your letting agreement up to date 7. Administering the tenancy deposit scheme 8. Organising and checking the tenant in 9. Sorting out an inventory 10. Organising cleaning of the property 11. Checking tenants have paid their rent monthly 12. Chasing any missed rent payments 13. Keep up to date with landlord legals via magazines and/or a landlord association, such as the Residential Landlords Association or the Landlord Association 14. Keeping track of when safety certificates need updating 15. Creating and using your own team of maintenance people 16. Organising any emergency or on-going maintenance 17. Doing your own periodic property checks

25 18. Resolving any disputes with your tenants during and at the end of the tenancy 19. Being with the tenant to carry out checking out, including checking the inventory 20. Carrying out any eviction proceedings with a specialist legal company 21. Making sure you declare your rental earnings and fill in you tax forms correctly These jobs are either something you enjoy doing, or you ll end up hating it. And if self-managing becomes a real chore, then it s not worth the financial saving you ll make overtime.

26 Reference checking tenants This is a crucial part of renting out a property successfully. Done well, you can get a fantastic tenant who stays with you year after year. Done badly, within six months you could end up with your head in your hands. Worse still, you could end up with a tenant who knows how to play the system or one who trashes the place and could lose your buy to let investment. Tenant referencing is often made out to be an easy process. There are lots of different tenant referencing services, costing from a few pounds to 100, but referencing a tenant is about more than simply using a third party company to check their credit history. To reference check a tenant properly you may need to: 1. Understand the tricks rent dodgers use 2. Know how criminals will try to charm you into renting your property to them 3. Understand what happens if you don t reference check every adult renting the property 4. Make sure you know how to reference check both a UK citizen and someone from overseas 5. Know the limitations of tenant referencing services Rent dodgers who pay their deposit, appear like ideal tenants, then just stop paying, use all sorts of tricks to avoid detection. One is creating false identities. These can be surprisingly easy to do and if you don t use a variety of ways of referencing the tenant, you re unlikely to find out who they really are. You need to have sight of actual bank statements and make sure you re being given original identity information, such as the driving licence, passport or birth certificate. And it s no good just accepting an employer s reference or letter from a bank, handed to you by the tenant - you need to contact the referees directly to make sure they aren t fraudulent. Criminals, especially those who run cannabis factories love amateur landlords, who have little experience of renting a home but are desperate for cash. They ll turn up to the property very well dressed, be charming and will offer you all the money for the next six months upfront. They won t want you visiting the property, so once they re in they ll be very difficult to get hold of. As with serial rent dodgers, they re likely to be using false identities and may even offer you a little extra rent not to carry out any checks.

27 A common mistake made by self-managing landlords is only carrying out reference checks on one person within the property. This can be an issue if the person you referenced moves out, leaving you with someone (and possibly their children) who can t afford to pay you any rent. Always reference check each adult who s going to be renting the property. If you re a UK citizen you ll have a good idea of what a driving licence and passport look like. But if your tenant is from overseas, do you know whether their official documentation is correct? Make sure you check it against information online or withsomeone you already know from the country. One of the biggest referencing areas missed out by landlords and even some letting agents is reference checking any guarantor. The guarantor may have signed the paperwork without understanding what they ve really signed for the tenant might have just told them it s a character reference. Worse still, the guarantor might not actually have the money to pay you if the tenant doesn t pay their rent. Always fully reference check the guarantor, as you would the tenant, and speak to them directly to make sure they know what they re committing to. Unfortunately there are no fool proof ways of avoiding a bad tenant and even the most experienced letting agent or landlord can get caught out. Steps you can take to protect yourself from a rogue tenant: 1. Make sure you have as much information as possible to trace the person in case they disappear, owing you money 2. Keep records of car registrations and any phone numbers they ve called you from 3. Try to meet one of their previous landlords 4. Check their references are real by visiting the company premises and checking that the person who s written the reference actually works there you can t rely on just a phone number

28 Tracking your buy to let investment Getting your buy to let property up and running is just the start don t make the mistake of thinking you can then simply sit back and wait for the investment to work. Unlike regulated financial investments, nobody s going to send you an annual report on how well the property s performed versus other buy to let investments, or other assets, so you have to track the success of your property investment yourself. You need to monitor: 1. What rental returns your property is giving 2. Whether you re maximising your rent, versus other landlords 3. Whether the money you ve invested could be delivering better in another asset 4. What, if any, capital growth you ve secured 5. If the property is going up or down in value versus the market 1. Rental Returns The amount of money you receive from your rent is critical as it s one of the reasons you will have invested in buy to let in the first place. If your main reason for investment was to secure capital growth, then your main concern will be that the rent covers all your costs. But if you invested for income, then you need to make sure this income delivers a return that s at least as good as, if not better than if you had invested your money in another asset, such as a financial investment. You should be keeping a monthly note of all the costs of your buy to let investment. These aren t just the obvious costs, such as the mortgage, they re also things like the amount of time you spend on your buy to let. What do you earn an hour? If you earn 30 an hour and spend up to 5 hours a month on your buy to let investment, then add in 5 x 30 = 150. This is effectively the cost of your management time. Unless you re running your buy to let within a company, you can t deduct this from tax, but it s still important to know what your investment management fee is. Ideally, your rental income should be covering all of these costs on a monthly basis, with profit on top.

29 If you ve bought a property for cash, then working out your gross and net return and comparing this to other investments should be fairly straightforward. For example: You invested 30,000 via a deposit and costs You re receiving 6,000 a year gross rent Your gross return is 20% ( 6,000 30,000) Your costs associated with renting the property are 2,000 a year 6,000 rent - 2,000 costs = 4,000 Your net return is 13.3% ( 4,000 30,000) If you ve bought a property with a mortgage, this is likely to be your biggest cost. You need to seek financial advice as to whether it s better for you to take an interest only or repayment mortgage. If you just want capital growth from the property, interest only might be worth considering; if you want to secure an income in the future, then a repayment mortgage may be more suitable. 2. Maximising rental income When you originally invested in buy to let, you hopefully set objectives via a Property Investment Brief. And when tracking how well your buy to let is delivering, you should check whether you re earning the amount of money you expected from renting the property. If you re not earning the income you expected, then look at what s happening in the marketplace and review your costs to see if you can reduce them. Have a look on property portals and in your local paper to find out what similar properties to yours are renting for. If you find a property that s being let for more than yours, find out why. Is it in better condition? How much would it cost for you to bring it up to this standard and how would that affect your investment returns? Or has the going market rate simply picked up and you were unaware? You should be reviewing rent every six months or so, so you can detect a change in market conditions up or down. You should also be looking at how other properties are being rented. For example, there s a real growth in renting individual rooms. This will usually increase your income, but it can also substantially increase your costs, so you need to spend some time calculating whether it would be more or less profitable for you. Ask at local landlord networking events how everyone else is maximising their rent and what costs other landlords are paying out monthly.

30 3. Could your money be working better elsewhere? Once you ve made sure you re maximising rents at a local level, check what your investment monies could be earning in other financial schemes. An independent financial advisor is especially helpful here. Although you ll probably need to pay them for some of the analysis, finding out whether you re earning as much as you could from your money should be a priority. Make sure you include the effect of inflation on your rental and asset analysis. For example, your rents might not have increased at all over the last 12 months, yet inflation could be 3% or more. If this continued over 25 years, the value of what you could buy with your rental income would halve. This is especially relevant if you re investing for future/retirement income. 4. Capital growth Buy to let is a long term investment and until you have secured substantial capital growth it s a risky investment as the credit crunch has revealed. Some investors who bought properties as far back as 2002 are finding their properties are worth no more ten years on, in When you factor in inflation, this actually means their asset has dropped in value, as the costs of goods and services have gone up. If a property doesn t grow in value at least as much as annual inflation, it ll lose its investor money. So it s worth checking whether your property is growing or falling in value on a 6-12 month basis. And you should also make sure your property s performing well compared to other properties in the local area. As an investor, you should be outperforming the local market of house buyers and sellers. 5. The value of your property versus the local market To work out whether your property is keeping up with or outperforming local house prices, find out whether similar properties to yours are selling for more or less than yours has been valued at. Check the condition of properties via property portals to see whether they re in a better state than yours and whether the room sizes are similar. You can use sites such as (use their search the index facility) togive you an idea of what s happening to property prices on a monthly basis at town, county or regional level. If you re investing for capital growth, your property should be worth more than others sold and growing at a faster rate than the level shown by the Land Registry.