BUY TO LET.

There is no doubt renting out properties can be profitable. Throughout history, landowners have acquired property as an investment. Today, with new mortgage schemes, tax allowances and the professional skills of managing agents, the investor is more fortunate than his forbears were. Lawsons & Daughters has developed a range of services specifically designed for today?s property investor. The term ?buy to let? is being heard more and more as this type of investment grows in popularity. The growth in the private rental market has arisen in response to people?s requirements for more flexible housing in the wake of economic changes. Two million households in the UK now rent within the private sector, which has led to an increased demand for quality properties in good locations.

QUESTIONS? QUESTIONS?

We assume you are reading this guide as you are considering ?buy to let?, you must have many questions.

Before we answer your questions you should ask yourself a few:

• Why do you want to buy-to-let?
• What are your goals, increasing your income, or investment for capital growth?
• What can you afford?
• What type of property do you want to buy?
• Is the property you want to purchase going to give you the return you expect on your investment?

If you aren?t completely sure of the answers don?t worry we are here to give you the advice and support you need to proceed.

RISKS, NOBODY MENTIONED ANY RISKS!

As with all investments there are some risks involved. You may find yourself unable to find a suitable tenant or you may find yourself with the problem of a tenant who doesn?t pay the rent on time or one who floods the whole apartment block by leaving his bath running. Rentals and house prices may fall whilst interest rates rise.

DON'T PANIC!

Investors can minimise these risks by selecting their property carefully ? taking advice on the viability of a property to let, and choosing a letting agent who draw on their experience to advise on prospective tenants and effectively manage the property. While the potential benefits of buying to let are enormous, a guiding hand will help you avoid the possible pitfalls and ease the decision making process.

PICK A HOUSE ANY HOUSE.

The type of property you will choose to purchase will depend upon a number of factors. Some of these include affordability, whether you are looking for high income, high capital growth or a combination of the two. Some of the best returns in terms of yield are found in the ex-local authority properties, however the capital growth in these types of properties is unlikely to be as high as perhaps a four bedroom detached property in an exclusive area. These properties however tend to produce a lower yield as they can be more difficult to let and may have higher maintenance cost if for example they have a large garden.

AVOIDING THE MONEY PIT.

The costs involved in buying a property buy-to-let are not limited to the actual purchase price. Solicitor?s fees stamp duty, and managing agents? fees must all be taken into account. This will affect the return you achieve on each particular property. The gross yield is found by dividing the annual rental income by the purchase price of the property. For example a property that achieved a weekly rental of ? 200.00 would have an annual rental income of 52 times that ? 10,400. If the property were purchased for ?100,000 the yield would be 10.4%. The net yield is the amount left after the expenses above have been taken into account. Fortunately the rental income is taxed after expenses such as mortgage interest; fees and property maintenance have been taken into account.

HELP WITH THE FINANCES.

Financing your buy to let property is fortunately easier than ever before, with most high street lenders now offering mortgage products tailor made for this market. The maximum amount you are likely to be able to borrow will be 80-85% of the value of the property, and most will insist that the property be let on an assured shorthold tenancy (AST). However the variety of products available often means you can finance a buy to let property at interest rates that compare favourably with the ones offered on owner-occupied mortgages.

Depending upon your individual financial position it may be beneficial to raise a mortgage on a property even if you have the cash to buy outright. This can have considerable tax benefits and it is always advisable to seek specialist financial advice from your financial advisor or accountant.

MORE HELP.

Around 50% of the properties that are let are let through letting or managing agents. A reputable agent will provide you with advice on your obligations under safety regulations. They will provide you with a specialist letting agreement. Agents will also field calls during the letting of your property arrange viewings and accompany prospective tenants on said viewings. All charges made by a managing agent can be offset against tax and you may be required to let through a qualified agent under the terms of your mortgage.

Of course if you have the time, patience and resources you can let your property yourself, however this becomes more difficult if you are working or living abroad. Arranging viewing, vetting tenants, drawing up contracts and supervising tenants move in can be a costly business, both in monetary and time terms.

A good letting agent will thoroughly vet tenants. This will include obtaining references from the applicant?s employer, previous landlord and their bank.

WHAT WE CAN DO FOR YOU.

Most agents will offer several levels of service.

• Find tenant only: The agent will advertise your property, find and reference a tenant, draw up the legal agreement, set up the standing order for the payment of rent, take the initial month?s rental and deposit and handle keys. Fees are typically 10-12%
• Rent Collection: All of the above, but in addition they will demand the rent from the tenant and pass this on to the landlord ? particularly useful if you are away from the UK and perhaps would not know if the rent had been paid into your account on time. Fee typically 11-13%
• Full Management: Both of the above but also taking control of the full day to day running of the property, liaising with tenants and moving them in (and out) of the property, arranging gas safety checks, and organising the maintenance and repair of the property in addition to covering all other aspects of the administration of the property. Fee typically 13-15%.

HOW MUCH COULD I GET?

The rental value of the property will be determined by several factors.

Your letting agent should visit your property to carry out an appraisal. This appraisal will give you an estimated market rental. Criteria they may apply will include market conditions, the area and its facilities, is there a great demand at the present time for this particular type of property, current rental prices of similar properties nearby. Taking the estimated market rental you decide the price you want to market the property.

IMPROVEMENTS TO CONSIDER 

A way of increasing the rental is to make improvements to the property. Advice is available on how much difference each improvement should make.

Furnishing a property does not necessarily increase the rental value, however it may make the property easier to let, thus reducing the time the property is without tenants. A property that is well presented in terms of d?cor and carpets will also let more easily and usually for a higher rental value. These minor works can usually be achieved without too much financial outlay.

NUTS AND BOLTS

The length of time it will take to find a suitable tenant will depend upon the prevailing market conditions, however most properties tend to let within one to three weeks. If demand is very high this could be much quicker, although referencing of the tenant would be expected to take between three days and one week.

Typical tenancy agreements last for a period of six or twelve months. In terms of minimising the time that the property is without tenants most landlords tend to opt for a twelve-month tenancy.

Legislation requires that a property must be safe to let, and various certificates must be in place before the property is let. For example, gas appliances and their associated pipework must be checked annually. Any soft furnishings must comply with the fire regulations and upholstered furniture must pass aflame test. The electrical supply and all electrical equipment must be safe. A good letting agent will be able to advise and assist in ensuring the regulations are met.

It can never be guaranteed that a tenant will pay you rent. The risks can be minimised though by ensuring that the references obtained on applicants are of a good quality.

It is also important to ensure that an inventory is prepared listing the contents of the property and the state of repair of carpets, d?cor etc. A deposit equal to at least one months rent also needs to be taken.

It can also be advisable to take out a specialist legal and rental insurance policy. This would offer you protection against costs, which could be involved if you had to take possession proceedings.

It is vitally important to ensure that your letting agent uses an assured shorthold tenancy.

BEWARE THE TAXMAN.
 
Tax is only paid on any rental income remaining after expenses. Therefore some tax, if not all, can be offset against insurance, ground rent and repairs; legal and accounting charges; loan interest; wear and tear of contents; Agents fees; unused personal allowances. In order to simplify your tax affairs it is prudent to ensure that you retain invoices for sundry expenses such as ground rent and interest statements from lenders. Retain invoices for work incurred during or between lettings. Ensure that the nature of the work is shown clearly. Ensure that the contents are clearly described on the inventory. This will avert any possible dispute with the Inland Revenue over replacement costs. Arrange borrowing to finance the purchase of property to maximise tax deductions.

THE REAL THING.

Below are a couple of examples of properties recently bought by clients and then let through Lawsons & Daughters under our Full Management Scheme.

Mrs X purchased a property in Fulham, a three bedroom ex-local authority flat in excellent condition that was sold with all furniture included. -

• The property was purchased for £ 230,000.
• The property was let within one week of completion @ £ 360.00 per week.
• This gives an annual rental income of £ 18720.
• 15% of the annual rental income was payable in full management fees; £ 2808
• Deducting this from the annual rental income
• gives a return of £ 18720 - £ 2808 =  £ 15912 / £ 230,000 = 6.9%

Although this is not the highest yield available, the property is situated in a very desirable location and should therefore produce a reasonable capital growth potential.

Mr Y purchased a three bedroom ex local maisonette in Roehampton, the property needed some refurbishment and the purchaser decided to take the opportunity to change the internal layout of the property to gain a fourth bedroom in order to maximise annual return. -

• The property was purchased for £ 160,000.
• The property was refurbished at a cost of £ 10,000.
• The property was furnished to a high standard at a cost of £2,000.
• The property was let within three weeks of completion (the time it took to do the work) @ £ 300.00 per week.
• This gives an annual rental income of £ 15,600.
• 15% of the income was payable as full management fees; £ 2340.
• Deducting this from the annual rental income gives a return of £ 15600 - £ 2340 =  £ 13260 / £ 172,000 = 7.7%

This is a reasonable annual return that is sustainable, and he now has a property that would sell for around £ 180,000 as it has been refurbished to a high standard.