How landlords can beat the credit crunch
Life as a landlord can be fraught at the best of times – from grappling with the reams of rules and regulations to coping with unreliable or troublesome tenants – but the credit crunch is making it even harder.
Competition for tenants is fiercer than ever. According to insurer LV=, there was a 56% increase in rental accommodation in the last three months of 2008. This is because plummeting house prices are forcing many people unable to sell their properties to turn to renting them out instead.
However, the mortgage squeeze and falling house prices have put many buy-to-let investors at risk, and continue to present a challenge going forward. The Bank of England base rate fell to an historical low at the start of 2009, giving some relief to landlords with tracker deals as well as those remortgaging onto lower rates. But what comes down must go up, and it is estimated that landlords could make up over 20% of all repossessions by the end of 2009.
Property Portfolio Rescue, a property recovery firm, says that tenants being made redundant and an oversupply of rental proporty has hit landlords hard.
Nick Hopkinson, director of Property Portfolio Rescue, says that although some landlords will have prudently saved the additional income, a large number will have been forced to divert a proportion of their rental income to service other commitments, such as alternative buy-to-lets and even their own owner-occupier mortgage.
"This ticking time bomb could prove disastrous," he warns.
So whether you’re a reluctant landlord or a seasoned pro, our top tips should help you survive the downturn.
Find the right mortgage
As property prices continue to slide, finding a buy-to-let mortgage will be more difficult without a large deposit. Twelve months ago, more than two-thirds of buy-to-let mortgage deals were offering up to 85% of a property’s value says Moneyfacts; now, the most lenders are willing to offer is 75%.
“It’s tough out there,” says Darren Cook, Moneyfacts spokesperson, “but if you own more than 25% of your property and can prove the rental income, that’s a big step towards securing a mortgage.”
If your buy-to-let deal is about to expire, you should prepare yourself as early as possible, say David Hollingworth, a mortgage expert at London & Country. “Make sure you know what rate your deal reverts to. Most standard variable rates are quite competitive, so many landlords should be able to ride out the difficulty.”
You should also prepare for potential mortgage payment shock ahead. Nick Hopkinson says: "Cash flow presents the biggest risk in property investment and landlords must act now rather than be lulled into a false sense of security, in the hope that the market will bounce back. Wise investors will act cautiously over the coming months while rates remain low, taking advantage of a temporary boost in income to bolster their cash reserves."
He suggests that borrowers consider making overpayments to reduce their debt, increasing equity and improving their chances of qualifying for a good deal when interest rates start to rise.
Know your market
Once you’ve secured a mortgage, it’s crucial to get to know your local rental market inside out. Websites such as gumtree.com, rightmove and findaproperty.com allow you to check out similar rental properties in your area.
David Lawrenson, a rental property expert at lettingfocus.com, says you must ensure your rent is competitive. “The biggest danger for a landlord is an empty property and, if you don’t price your rent realistically, your phone won’t ring,” he warns.
Also remember that different tenants have different needs. Students usually want partially furnished, affordable places close to their university or college, while families are more likely to want an unfurnished property with a garden and garage.
And you don’t have to break the bank to make the most of your property’s appeal and make it stand out from the rest. For example, energy-saving lightbulbs and draught excluders cost only a few pounds to install and will help towards making your property as energy-efficient as possible. You may also be entitled to help towards insulation costs: the Landlords Energy Saving Allowance enables many landlords to claim back a maximum of £1,500 on their tax return for loft and wall insulation.
Meanwhile, your tenants will appreciate the lower energy bills and will be likely to stay longer in the property.
Cut out the middleman
If you want to keep your costs low, you will have to weigh up whether it’s worth using a lettings agent to market and manage your property or not. “The majority of lettings agents charge around 10% of the annual rent upfront, plus an additional 5% over the year for managing the property,” warns Lawrenson. “Many also charge annual renewal fees.”
If you’re determined to use a lettings agent, be sure to shop around. “Make sure the agent has a good reputation in the local area and is a member of the Association of Rental Lettings Agents or the National Association of Estate Agents,” Lawrenson adds.
If you prefer the hands-on approach, you can advertise your property for free on gumtree.com, spareroom.co.uk or rentfromtheowner.co.uk.
And rather than shelling out management fees, John Coyne, an adviser for the National Landlords Association (NLA), suggests that you give your tenants a list of emergency numbers for tradesmen you know and trust. “They can then call them directly when things go wrong and the bill will come straight to you,” he says.
Abide by the rules
There’s an ever-increasing list of regulations you have to comply with as a landlord. For example, your property should be in good condition, gas appliances should be checked yearly by a Corgi-registered tradesman, and all furniture and fittings must be fire-safety compliant. Fall foul of any of these rules and you’ll be hit with a hefty fine.
Since 1 October 2008, every rental property is also required to have an energy-performance certificate. This informs you and your tenants of your property’s energy efficiency, as well as recommending improvements. It costs around £100 and is valid for 10 years. If your property hasn’t got one, you risk being fined £200. Check out campaigns.direct.gov.uk/epc and find an assessor in your area through hcrregister.com.
Remember that any deposits must be held in a government-approved tenancy deposit scheme (TDS). These schemes are designed to safeguard tenants’ deposits should there be a dispute. Fail to do so and you could face a fine of up to three months’ rent. Contact The Deposit Protection Service (depositprotection.com or 0870 707 1707.)
And, if you’re letting a house to five or more tenants, you will need to apply to your local council for a house of multiple occupation (HMO) licence. This lasts for up to five years and can cost up to £1,100.
Look after your tenants
Reliable, considerate tenants are worth their weight in gold. “Unfortunately, a large number of landlords don’t do any checks on their tenants,” says Lawrenson. “But, if they don’t pay their rent, it can take over five months to get a tenant evicted – and you’ll still have to pay your mortgage in the meantime.”
Lawrenson advises asking your prospective tenant for a passport and national insurance number, as well as a reference from their current employer. “Also speak to their previous landlord, and be sure to check their credit records,” he adds. The credit reference agency Experian’s online service checkmytenant.com will provide an accurate credit history and risk profile for your tenant.
Of course, it’s also important to look after your tenants. Caroline Hawkesley, an independent financial adviser at Evolve Financial Planning, says: “Keep communication channels open at all times, and address any issues promptly.”
Always keep the property in a state of good repair. Small things like leaking gutters or blocked drains can quickly get out of hand and cause a lot of damage. Don’t scrimp on repairs – if your tenants get frustrated they might withhold their rent or move on.
Take out insurance
Forget burnt sofas or ripped carpets, safety is potentially one of the greatest financial risks a landlord can face – you can be sued for negligence if your tenant has an accident or injures themselves.
Added landlord liability cover costs around 20% more than a standard homes and contents insurance policy, but a specialist policy can help cover damages and legal fees. As with any insurance policy, you should always read the small print and shop around before you decide on one.
Once you’ve chosen a policy, draw up an inventory of everything in the property, with photos where possible to be used as evidence should you ever need to contact the TDS.
And if you’re worried about tenants not paying their rent, rental guarantee insurance can help meet the shortfall for a fixed period – typically, between six and 12 months. However, Lawrenson warns that these policies are expensive. “Premiums cost around 4% of your yearly rent,” he says. “And you have to provide an accurate credit record of your tenants.”
Get expert advice
Whether you’re an experienced landlord or new to the renting game, joining a local landlord association will give you access to plenty of useful information and sound advice. “You’ll learn a lot by attending meetings and speaking to other landlords with similar problems to yours,” Hawkesley says.
Coyne recommends becoming a member of the NLA – for £70 a year. “We have a free helpline that can answer your questions and help prevent you making any serious mistakes,” he says.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.