An already booming buy-to-let (BTL) market is set to soar thanks to next month's pension revolution. When, from 6 April 2015, the over-55s no longer need to buy an annuity with their pension funds, some of their cash is likely to flow straight into residential property.
The allure of BTL seems obvious. First, there's the prospect of capital growth. Buy the right property and you may feel confident the only way is up in terms of value. Then there's the rental income, which will hopefully cover your costs and generate some extra income. Also, if you're not a cash buyer, you'll get tax relief on interest paid on a BTL mortgage - a tax break scrapped for owner-occupiers 15 years ago.
But there's more to BTL than watching the rent roll in while the value of your investment grows. If you're thinking of joining the legions of landlords, you've probably already considered the most obvious risks: that a tenant could fall into arrears or wreck your property - or both.
Figures from the National Landlords Association (NLA) should also give pause for thought. According to its most recent survey, 20 per cent of landlords who let out between two and four properties either break even or run at a loss. That figure rises to 30 per cent for landlords who let out a single property. The NLA estimates those figures represent half of all UK landlords.
Given the sharp rise in property prices in recent years, those statistics are perhaps not surprising. As the cost of buying goes up, rental yields - or rent expressed as a percentage of purchase price - go down. But while BTL is no guarantee of quick, easy profits, it can be a great long-term investment if you avoid the pitfalls and follow some simple rules.
What to buy
Focus on the things that appeal to prospective tenants. Somewhere with great transport links, plenty of storage space and good local amenities is likely to be a winner.
Find out as much as you can about the local rental market, too. There's no point investing in a studio flat if there's already a glut of them lying empty nearby. Online advertising sites can help you see what's being snapped up as well as what's languishing under a 'to let' sign.
A bargain is obviously best, but think twice before buying at auction. It would cost a small fortune to carry out a survey on every interesting lot and the chances are you'll be outbid on the day. If you are successful, that great deal could be full of nasty - and expensive - surprises.
New-builds can be problematic for landlords, too. A cluster of similar properties is likely to come on to the market when the development is completed, so competition for tenants will be high. Ideally, you also want a property that would be easy to sell should your circumstances change.
Finding a tenant
A rogue tenant can be ruinous, so don't take any chances. Always meet prospective tenants in person if you can, even if you use a lettings agent to find them. It's not about liking them. I've had tenants I wouldn't want to spend a minute longer with than I need to. It's whether they seem responsible and trustworthy that counts. Tidy freaks and DIY enthusiasts are welcomed with open arms, but if I get the impression someone wouldn't know how to change a lightbulb it would be cause for concern.
References are essential, too. Ask for employer, previous landlord and a personal reference, plus a credit check. If your lettings agent sources these for you, ask to see copies so you can make your own assessment.
'If in doubt, keep them out,' is my motto. Better to have an empty property for a while than have the stress and cost of a dispute further down the line. If you've done your homework and invested in a suitable property in an area of high rental demand, you should have your pick of tenants most of the time.
Deposit and contract
Before you agree to take a property off the market, ask for a non-refundable holding deposit. I insist on at least a week's deposit before I stop viewings. Make it clear this sum won't be refunded should the prospective tenant pull out for any reason. It deters timewasters and cushions you against potential loss of rent from an empty property. If all goes ahead, there's no extra cost to the tenant as the holding deposit effectively becomes an instalment of the main deposit.
Along with the receipt for the holding deposit, I give prospective tenants a blank tenancy agreement. An agent can provide you with a standard Assured Shorthold Tenancy or you can download one online if you're going it alone.
Point out that it's a legally binding document and welcome any questions. Ensuring tenants are aware of their responsibilities under the terms of the contract before they sign on the dotted line helps prevent future disputes.
Many landlords are happy to accept one month's rent as a deposit, but I’d recommend asking for two months' and the first month's rent payable in advance. Tenants do, after all, take possession of an asset usually worth hundreds of thousands of pounds. As well as providing greater security, it gives an extra layer of confidence that tenants are solvent enough to cover their rent every month.
Some prospective tenants can be resistant to a larger deposit, but most agree after hearing the reasoning behind it. Those who don't tend to be overstretching their budgets, so aren't the safest bets.
Never hand over the keys until you've received cleared funds for the deposit and first month's rent. It's important to start as you mean to go on! And make sure you have a full inventory appended to the contract. You can back this up with photos and/or video footage as evidence of the condition of the property prior to the tenant moving in.
Management, repairs and furnishings
Agents' fees could be up to 15 per cent of the rental income, but they are tax deductible. Still, if your BTL is within easy reach of your home, you may prefer to manage it yourself. Hands-on landlords can keep a closer eye on their properties and nip any issues in the bud. It's more work, but it can benefit you and your tenant.
Have a raft of reliable tradespeople on speed dial if you're going to self-manage. It's also vital to be up to speed with regulations on everything from gas safety certificates to registering a deposit. Even if you've handed management over to an agent, as landlord you could still face punitive fines for failing to adhere to the rules.
If you let the property fully furnished, you can claim a tax allowance of 10 per cent of net rental income for wear and tear. There are companies catering for BTL with suitable stock at competitive prices. Second-hand shops are also good for picking up solid bargains.
Think about investing in flooring, too. Easy to keep clean, laminate floors need replacing far less frequently than carpets so could work out cheaper in the long term.
Move-outs
Hand over a property in pristine condition and you're more likely to get it back in a good state. Make sure your contract includes a clause stating fees for professional cleaning will be deducted from the deposit if tenants don't pay these upfront. Your new tenant will appreciate taking possession of a spotless property, so it's a great way to start a tenancy.
Click here to read our golden rules of buy-to-let
