Can a Buy-to-Let investment be protected?
Insurance cover is now available for rental protection, in the event of a defaulting tenant, and for legal expenses in addition to the normal building and contents insurance.
What's so different?
Historically, borrowing on income-producing property has been viewed by lenders as a commercial proposition. So, mortgages on property to let, even for private individuals, have attracted higher rates of interest than the standard mortgages offered to owner-occupiers.
In addition, until now, rental income has usually been disallowed when assessing a borrowers ability to meet mortgage payments.
Now, the view of many lenders and all other housing professionals is that growth in the private rented sector must be encouraged. Not only does it lag well behind the private rental sectors of all the other advanced economies, the lack of choice between renting and buying is, in fact, bad for the economy and a contributory factor to the booms and busts of the housing market over the last decades.
But, the change in lending criteria and the lowering of interest rates for private investors has only been made possible by the strong presence of professional, letting agents in the lettings market.
What are the returns?
Gross returns - the rent received before taking account of the cost of letting - such as management fees, maintenance, service charges ground rents and insurance varies between 7% and 10%. This can be less for very expensive properties.
The average rental return in Britain today hovers around the 10% mark, and capital appreciation is likely to match, if not exceed, inflation for the foreseeable future.
As a rule of thumb, the gross rents should be between 130% and 150% of the monthly mortgage payments.
What difference does a Letting Agent make?
Buying a property to let is not the same as buying your own home. Mortgage lenders will want to know that an ARLA member agent has been advising on the selection of properties suitable for letting.
The experienced agent will know the local market, whether there is a demand for say, two-bedroomed flats, or four bedroomed houses, or for properties close to schools or transport links or secluded properties with gardens.
The agent will know the standard of decoration, furnishing, fixtures and fittings required.
Also to consider in the management of the tenany is the selection of well-covenanted tenants who will pay their rent on time and leave the property on time and in a proper state.
Knowing that the management of any inherent risk is in the hands of a professional agent enhances the creditworthiness of Buy-Let propositions put to mortgage lenders.
How to Buy-to-Let
Armed with suitable advice from an ARLA letting agent, Buy-to-Let investors can start on a property search or work with the best estate agents in their area.
Once a property has been found, the letting agent will confirm whether or not it has letting potential, the range of the likely rent that can be achieved in current local market conditions and advise on the need - or otherwise -for re-decoration and new fixtures and fittings to attract good tenants and to reduce the risk of lengthy void (empty) periods.
How are mortgages arranged through the Buy-to-Let initiative?
Broadly, there is little difference between arranging a Buy-to-Let mortgage for investor landlords and a standard mortgage for owner-occupation. Buy-to-Let mortgages are subject to the usual status checks. Loans can be arranged for terms of between five and 45 years and for up to 80% of the value of the property.
Through the Buy-to-Let initiative, rents achievable from an investment property can be taken into account, provided an ARLA member agent is to be responsible for letting and managing the property.
What happens after Buying to Let
An ARLA member will introduce and vet prospective tenants, prepare the tenancy agreements, advise on and arrange inventory and condition reports and changes to utility accounts and Council Tax, and collect the rent and pay the balances to the landlord's account.
A letting and property management agent can also pay bills on behalf of the landlord and regularly inspects the property, recommending, overseeing and accounting for necessary maintenance, repair and re-decoration.
Are there any special conditions?
Generally, lenders will expect landlords to use an ARLA member to let and manage the property and for rental agreements to be drawn up as Assured Shorthold Tenancies or other contracts as appropriate.
What other costs should be taken into account?
The letting agent's commission and management fees, Insurance (Building/Contents/Rental and Legal Expenses Cover), the costs of keeping the property in a marketable condition, service charges and ground rents - if a leasehold. The tenant is responsible for such items as utility accounts, Council Tax and TV licence fee etc.
Tax and allowances
Deductions against tax on rents received may be claimed for the costs of maintenance, such as insurance, cleaning, gardening, agent's commission and other reasonable management expenses (but not improvements).
The initial cost of furniture fittings and fixtures is not allowable, but the actual cost of subsequent replacement may be claimed, or a wear and tear allowance of 10% of the rents received may be deductible.