Running a property investment

So what do you need to think about? "Even before you buy anything you need to have done your homework," says Catherine Cockcroft, lettings director at property agent Aylesford. This involves being businesslike – choosing a particular segment of the rental market and buying an appropriate kind of property in an appropriate area. "Speak to a local agent before you buy and get a feel for who rents what and where," she advises.

Doing up the property

Once you have found and bought a place, it needs to be kitted out appropriately. "Remember," says Malcolm Harrison of the Association of Residential Letting Agents (ARLA), "that renting has become socially acceptable with the rise of buy-to-let – but it has also become much more competitive. Tenants at all levels now expect properties to be up to standard – they want decent kitchens, bathrooms, carpets and paintwork, and if your property isn't up to scratch, then they'll go to the landlord next door."

"So, before you exchange on a property, get the agent to come in and give an opinion on what needs to be done to ensure it rents well in the market you're aiming for," recommends Ms Cockcroft. Not only will you maximise your chances of attracting tenants, but you'll also be able to get a better idea of the costs involved to get the place up and running, and budget accordingly.

Rent levels

Don't be greedy when it comes to setting the rent: if you ask too much, you'll have an empty property for longer periods between lets. The secret of successful letting in this respect is to minimise so-called 'void' periods and keep your property occupied as much of the time as possible – ambitious rent levels will reduce your chances both of getting tenants in the first place, and of keeping them when it's time to renew the tenancy.

To put that into perspective: if you charge rent of £525 a month and your property is empty for two months out of 12, you earn £5,250 a year – if you are able to reduce your annual void period to just one month by reducing the rent to £500, you'll earn £5,500 a year. An agent will be able to guide you in regard to competitive rental levels.

The best idea, if you have good tenants, is to aim to keep them for as long as possible: that way, not only do you eliminate void periods but you don't have to fork out for the initial costs associated with finding and vetting replacements – who may turn out to be less easy to work with anyway. This strategy may involve forgoing a rental increase or even accepting a reduction in rent levels if the market is slackening. It will also, of course, involve being a top-notch landlord in other respects (see below).

Vetting your tenants

This is a crucial job because, as property solicitor Tessa Shepperson points out on the Landlord-Law website, once your tenants are in possession of the property, "it will take time and possibly a court action to get them out again if they prove unsatisfactory".

For real peace of mind, a landlord needs to know not only that the rent will be paid every month on time, but also that the property will be well looked after. At ARLA, spokesman Malcolm Harrison recommends requesting an employer's reference, a bank reference and if possible a personal reference as well. If you use a letting agent, this will be part of the remit.

"We tend to use bank references," says Ms Cockcroft at Aylesford. "A lot of our tenants are newly arrived from overseas, and don't yet have a bank account set up, in which case we require a guarantor (which could be their employer). But equally important, I think, is a reference from a previous landlord. Bad tenants won't have references from past landlords."

It may also be worth getting an eviction history report and a credit report, and checking for a possible criminal background – all of which can easily be done on the internet. Ms Shepperson suggests visiting prospective tenants at their current address and checking out the condition in which they keep that property. "After all this screening, don't settle for tenants that don't meet your requirements," she stresses. "Take time to find suitable people from the start and you'll save yourself a lot of time and money in the future."

Deposits

Once you have approved your tenants, it's deposit time. Tenancy Deposit Protection is mandatory for deposits taken when an assured shorthold tenancy is set up – we look at this in more detail in the 'Legal Requirements' section below.

If you don't do the right thing with your tenant's deposit, you could be required by law to pay the tenant three times the value of the deposit in compensation, so don't overlook it.

Inventory

Another crucial job, at this stage, is to make an inventory of everything in the property, and also draw up a schedule of condition so you know what wear and tear or damage is new and what was inherited. Again, the agent will do this if you're using one to set up the tenancy.

"The inventory checkout is very important if there are problems at the end of the tenancy," says Ms Cockcroft. "If you're disputing the amount of deposit to be returned then the adjudicator will need clear records of what was there in the first place and what is left at the end." If you don't have such records, your chances of winning any dispute are slim.

Tenancy agreement

Make sure you have a proper form of tenancy agreement – typically an assured shorthold tenancy – which sets out the tenants' obligations and protects your position as landlord, and get all the tenants to sign it before they take possession of the property. "Beware older forms of tenancy agreement, which will probably not comply with current legislation," warns Ms Shepperson.

Troubleshooting

The main problems likely to occur are tenants falling into rental arrears, and disputes at the end of the tenancy over damage done to the property. The latter will now be resolved through the arbitration service of whichever tenancy deposit scheme is used. Landlords facing damage to their property that is more serious than the deposit will cover have no choice but to go to court if they want to try and reclaim the costs involved. Often, if it's only a matter of a few hundred pounds, it's not worth the hassle and expenses involved.

As far as arrears are concerned, Ms Shepperson stresses that landlords need to take action once two months/eight weeks have passed without the usual payments. "Take immediate steps to serve a Section 8 Housing Act 1988 notice and consider bringing proceedings for possession," she says. "Remember that if the tenant pays no further rent, arrears of at least four months will have accrued by the time the Possession Order is obtained [because a further six to eight weeks will pass before the hearing takes place and the judge makes the Possession Order]." But don't take these steps if the property is in need of repair, because the tenant could use the work needed to justify the withholding of rent.

The Residential Landlords Association has a useful website with more legal guidance and a valuable free helpline for members, among various other resources.

If the tenants appear to have scarpered altogether, go carefully. "Be very careful indeed about re-entering the property without a court order," warns Ms Shepperson. "Remember that unlawful eviction is a criminal offence and can also make you liable in the civil courts for a substantial order in damages (plus you will probably have to pay the tenant's legal costs)."

The ideal landlord

There is a strong argument that says that if you foster a good relationship with your tenants, then not only will they be more likely to renew the tenancy, but when things go wrong they will be more understanding. So how can you be a first-rate landlord to your tenants?

"The best landlords are those who respond quickly and sort out any problems straightaway," says Ms Cockcroft. "I think that if you bend over backwards to get the small things fixed swiftly, tenants are more forbearing when really big problems crop up. In practice, the first 10 days or so of a tenancy are when most stuff happens – so if you can react quickly to resolve problems at that point, life generally quietens down a lot after that."

Remember, also, to give your tenants plenty of warning if you need to gain access to the property, whether for maintenance visits or repairs, or when you're showing prospective tenants round. Try to fit in with them, and they are more likely to do the same for you. Once again, though, such a strategy has a greater chance of success if you vetted your tenants effectively in the first place.

Agents

Many landlords prefer to leave the business of running their property in the hands of a full-time manager. If that's your choice, it's sensible to choose a letting agent that is an ARLA member, because you will then have the reassurance that they operate in line with the ARLA code of practice and will be up-to-date and compliant with letting legislation.

Even if your aim to manage the property yourself in the long term, if you're a first-timer, there's an argument for using an agent to begin with,just because you're up against a steep learning curve when you start out as a landlord.

There are various levels of agent involvement. You can, if you wish, use an agent to find and vet tenants, draw up the tenancy agreement and collect the deposit and the first month's rent – and then take over the management yourself, thereafter. Most agents charge approximately 5-8 per cent of the annual rent (deducted from the first month's rent and deposit) for this 'introductory' service.

A step up the ladder is the rent collection service, where the agent sets up the tenancy and then retains responsibility for collecting rent and holding the deposit, and serving notice to quit. This is typically charged at 10-11 per cent of the annual rent, but deducted on an ongoing basis before the balance is passed on to the landlord.

Full management involves everything from dealing with maintenance jobs and checking appliances to sorting out full-blown emergencies. Expenses for repairs would normally be agreed with the landlord before the work was done, but emergencies are dealt with first and charged to the landlord thereafter. If you're an overseas landlord you really have little option other than this arrangement, unless you rely on a compliant friend or relation to take charge on an informal basis (which is not ideal from anyone's perspective).

Legal requirements

Landlords have been bombarded with legislation over the past couple of years, as a result of the Housing Act 2004. The aim is laudable enough – to improve safety and raise accommodation standards generally – but there's no denying that it makes for extra work for the landlord. Below are the main rules to bear in mind.

Tenancy deposit protection

It's a legal requirement for assured shorthold tenancies set up after 6 April 2007 that any deposit taken by the landlord must be held in a statutory tenancy deposit scheme, of which there are three. The tenancy deposit scheme has a two-fold aim.

First, to keep the money safe with an independent third party (so unscrupulous landlords cannot use it, for example, to invest in new properties).

Second, to provide a swift and practical arbitration service (as an alternative to going to court) if there is a dispute over how much deposit should be returned at the end of the tenancy.

Lettings agents must be a member of one of two insurance-based schemes, so if you're using an agent your money will be held with the scheme to which that agent has signed up. This will be either the ARLA and NAEA-backed Tenancy Deposit Scheme, or Tenancy Deposit Solutions Ltd backed by the National Landlords Association (NLA). In most cases you, as a private landlord, will not be charged, or the cost will be nominal.

If you are managing your property independently, you can join the TDS (but you'll have to pay up to £95). Otherwise, you must put your tenant's deposit with the Deposit Protection Service, a custodial scheme that is free to landlords as it covers its running costs through the interest earned on deposits held.

Gas appliances

It's now a legal requirement to have every rental property with gas appliances (boilers, cookers, fires) inspected annually by a CORGI registered plumber. You should provide the tenants with an up-to-date certificate when they move in, and every year thereafter. The electricity should be checked every five years.

Furniture

All furnishings need to comply with the Furniture and Furnishing Regulations 1988 (updated 1989 and 1993). This basically means that you cannot furnish your rented property with elderly, non-compliant sofas or hand-me-downs dating back 20 years.

Houses in multiple occupation

If you own a larger rental property, it may count as a house in multiple occupation (HMO). There are various definitions, but your property qualifies as an HMO if, for example, you are renting to three or more tenants who form two or more 'households' and who share a kitchen, bathroom or loo (so larger student properties may fall under this classification). Click here for a full definition of HMOs.

As of April 2006, HMO landlords need to obtain a licence from the local authorities. This will mean ensuring the building complies with various health and safety standards (which may involve getting some work done), and also paying a licence fee. Each authority sets its own fee, so there is considerable variation in both the level of fee and the way they are calculated, but most HMO landlords can expect to pay several hundred pounds. The Landlord-Law website has useful information on HMO fees set by different councils across the country, as well as more background on the regulations.

CASE STUDY: bad tenants

Mrs M owns several properties. Last year, she had problems with a tenant. He had not paid rent for two months. The shorthold tenancy was coming to an end and she was keen to regain possession of the property as quickly as possible. Relations between landlord and tenant were not good. Mrs M got in touch with the National Landlords Association (NLA) to ask for advice.

The NLA advisers discussed the issue with Mrs M and examined various solutions. Options included using a Section 8 notice (Housing Act 1988) to gain possession for non payment of rent or, as the fixed term of the tenancy had come to an end, using a Section 21 (Housing Act 1988) notice instead.

In this case, as the tenant had been awkward, Mrs M was advised to use the Section 21 notice as there was a high possibility that the tenant might counter claim on the issue of a Section 8 and thereby draw the process or possession out. He might, for example, claim that he had been forced to withhold the payment for other reasons. This is a common tactic.

Another common tactic used by tenants is to claim that the date set by the Court for the hearing is not convenient to them, that that the court papers had not been received or that they are ill.

Mrs M followed NLA's advice and filled in court form N5B which she then submitted. She was delighted when everything went smoothly and the court awarded her possession of her property without the need for a court hearing. The NLA then told Mrs M that if she wanted to pursue the tenant for the outstanding rent she could use the small claims procedure.

The National Landlords Association can be contacted at www.landlords.org.uk or 0207 840 8937