Despite mammoth efforts to get more people onto the property ladder, inflated house prices are keeping many first-time buyers in the rental trap. This is good news for property investors who bank on tenants living in their properties.
Where you can make money
You can make money in two ways. Firstly, you can earn money on the rental income paid by tenants. You can also make a profit when you sell on an investment property but tax has to paid on both incomes. The slow down in house-price growth means, in the short term, gains won't be as spectacular as they were in the past.
Can you cut it as a landlord?
You will make more money if you manage a buy-to-let property yourself. However, this can be a full-time job and there are complex laws and regulations to abide by. To be a successful landlord you will need the following:
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good management skills
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a head for figures and finance
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plenty of time to oversee the management and to keep up with legislation
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patience to deal with difficult tenants
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a fantastic sense of organisation
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maintenance skills or a reliable stream of tradespeople
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a base near to your buy-to-let property if you intend to carry out any maintenance yourself.
When to call in a management agent
You can hire a managing agent to manage the property for you. However, expect to pay up to 15% of the annual rent for a full management service. Make sure an agent is registered with the Association of Residential Letting Agents (ARLA) or the National Approved Letting Scheme (NALS). Membership of these organisations means the agent should be of a certain standard and that you have a body to complain to about poor service.
Buy-to-let mortgages
There are more buy-to-let mortgages available than ever and rates are competitive. Most lenders require at least 20% of the purchase price as a deposit, although some will accept 15%.
Buy-to-let lenders work out how much you can borrow according to the likely rental income, not your income. Most require at least 130% of the monthly mortgage payments in rent. Remember that if the property is empty, you will have to cover the mortgage yourself. The average void period - when the property is empty - is 29 days a year, according to ARLA.
Setting the rent
Pitching your rent is key to finding and keeping tenants, as well as paying the mortgage. Find out what similar properties in the area are rented. Website www.landlordzone.co.uk recommends working on an initial yield (income return on your outlay) of 6 to 10%. This should cover your mortgage with something to spare for void periods and maintenance.
Choosing the right property
The most important thing to remember is to buy in an area full of potential tenants - town and city centres are a better bet than remote rural regions. Good public transport links are also a must and tenants also like a variety of shops and local amenities close by. Also, remember you are buying to rent out, not buying for somewhere to live yourself.
Deciding on your tenants
Your aim is to have a reliable tenant all of the time but having no tenant is better than having a troublesome one. Bear the following mind when taking in tenants:-
- Ask for references and check them carefully. Don't accept a letter of recommendation from the prospective tenant - it could be fake
- Check with past landlords to find out whether that person was a good tenant. Don't ask their current landlord as they might give a glowing reference just because they want to get rid of them.
- Beware of tenants who struggle to supply a month's rent in advance and the equivalent of a month's rent as a deposit. Don't let them move in without paying the deposit in full - it is your security in case they damage your property.
- Make sure the tenant signs a watertight tenancy agreement before moving in and an inventory is taken of the property's condition and its contents.
Useful Contacts
Council of Mortgage Lenders (CML) - the CML publishes free leaflets on buy-to-let. Visit www.cml.org.uk
Small Landlords' Association (SLA) - www.landlords.org.uk