The A to Z of a sound investment...
A is for Appreciation. Decide whether you want your buy-to-let property to deliver a regular income, or if you want its value to grow to give you a windfall or retirement pension down the line. The golden rule is that buying an inexpensive property in a more depressed market will bring you a higher yield than if you buy in an expensive area where the bigger rent will be wiped out by steeper entry costs. However, if you do buy in a struggling market you are less likely to see the property’s value grow rapidly. Buy in a regeneration area and play a long game for the best long-term profit.
B is for Bank of England. When you consider whether buying to let will pay dividends for you, bear in mind that if the Bank does, as promised, increase interest rates this year, mortgages will become more expensive — and your potential profits will be cut.
C is for Choosing a letting agent. Unless you plan to manage your rental property yourself, you will need a good agent to collect rent, find tenants and fix problems. The Association of Residential Letting Agents (arla.co.uk) and the Royal Institution of Chartered Surveyors (rics.org) both have databases of accredited members. Find out who your point of contact will be, exactly what they will be doing for you, and how much it will cost — usually about 10-15 per cent of each month’s rent. Speak to several firms before deciding, and check if they are registered with the Property Ombudsman (tpos.co.uk) which can arbitrate if you run into difficulties.
D is for Deposits. You are legally required to protect deposit money a tenant pays up front, using a registered tenancy deposit scheme (depositprotection.com; mydeposits.co.uk; tds.gb.com). This means you can’t use the money to subsidise your buy to let. If there’s a dispute at the end of the tenancy, the scheme operator will arbitrate to decide how much of the deposit should be returned to the tenant.
E is for Effort. Buying to let is not an easy way to earn money. The initial property purchase will be stressful and time-consuming, and even with an agent running the place, you will need to help solve any problems. If you manage the property yourself you will be on duty 24/7. For info on all aspects of buying to let, contact the Residential Landlords Association (rla.org.uk).
F is for Fixtures and Fittings. It’s tempting to make your rental property look fantastic but you will not get your investment back on luxe finishes unless you are aiming at the top of the market. Go for mid-range, hard-wearing, fireproof, flexible furniture and neutral colours. H&M Home, Ikea, M&S, British Home Stores and Argos all do bargain furniture with style.
G is for Gas safety. Landlords are legally responsible for the safety of their tenants and must get gas appliances checked regularly by a registered engineer. Electrics should also be checked, furniture must meet fire safety standards, you should install fire alarms and it is well worth investing in a carbon monoxide alarm. The National Landlords Association (landlords.org.uk) has information on your responsibilities.
H is for rent Hikes. You can increase the rent whenever a new contract is signed or renewed by your tenants — but if local rents are flat, they might just leave. It can be worth keeping rents stable to hang on to good tenants.
I is for Illegal immigrants. The Government is making landlords responsible for checking that tenants have the right to rent in the UK. If you rent - deliberately or accidentally — to someone whose status is illegal, you could be fined up to £3,000. The Guild of Residential Landlords offers a guide (see landlordsguild.com/new-how-to-rent -guide-tenancy-agreements-and-right-to-rent/).
J is for Jumping prices. As would-be landlords scramble to buy before new higher stamp duty kicks in from April 1, agents across London are reporting surging prices for investment property. Don’t rush to pay over the odds. It’s better to take the tax hit and get a good deal further down the line.
K is for Keeping it simple. Unless you have fantastic DIY skills, choose a property that’s cheap and easy to maintain — not a listed building, or a wreck, or somewhere with a huge garden.
L is for the Little Black Book of reliable tradespeople you should build up so that when the central heating breaks down or the washing machine floods the kitchen, you know who to call.
M is for your Market. Before you start shopping for a buy-to-let property you need to decide who you want to let to. Young professionals will prefer a modern flat, but prepare yourself for a fairly fast turnover. Family houses can be harder to maintain, but you are more likely to find long-term renters.
N is for Nearness to a station. Homes in five minutes’ walk of Tube or rail stations command up to 10 per cent more rent than those further away.
O is for Osborne. Chancellor George Osborne has launched a two-pronged attack on buy-to-let profits. From April, stamp duty on buy-to-let and second homes will rise three per cent, while in the longer term, landlords will no longer be able to claim mortgage interest tax relief.
P is for Property taxes. Landlords pay income tax on earnings from a buy-to-let property and might also have to pay capital gains tax if they sell.
Q is for Quizzing your tenants. You need to be sure they can pay the rent, so ask to see their bank statements, find out what their job is, how long they have held the job and whether they work full or part time. Call in references, and make sure you both sign a properly drawn-up and legally binding assured shorthold tenancy agreement.
R is for Red tape. Before you rent out a property you need an Energy Performance Certificate to assess its energy efficiency. You must also sign up to a deposit protection scheme (see “D” for Deposits) to safeguard money your tenant pays up front. Some councils have landlord registration schemes, so check — or risk a fine.
S is for Service charges. These can be substantial, so don’t forget to factor them in when you buy to let at a development where they apply. A flat with a share of freehold will be more expensive to purchase, but could well work out cheaper in the long term.
T is for Two-bedroom flats. Most experts say this is the most reliably rentable type of buy-to-let property in a city. In a commuter town, a house, for the family market, can be a better bet.
U is for Up North. A study by Sequre Property Investment reports that 61 per cent of investors in North of England property are based in London and the South-East. These buyers are targeting good-value locations like Manchester, Liverpool, Preston and Salford where entry prices are low.
V is for Void periods. There will inevitably be times when a rental property isn’t let and you will need to be able to cover the cost of the mortgage. Also bear in mind that tenants aren’t always the most punctual of payers — so you may have to cover times when they are in arrears.
W is for: “What happens if my tenants default on the rent?” If the rent stops coming in, you must give them two months to start paying again before you can issue a possession notice and go to court. This process can take several months and you will have legal costs to consider. If your tenants are noisy or trash your property and refuse to leave, you can again issue a possession notice against them.
X is for eX-local authority flats. Don’t turn up your nose at them — they tend to be great value, and renters won’t be as fussy as buyers when it comes to the outside appearance of their home. The same is true of homes above shops, and young renters might quite fancy the idea of living over a café or a convenience store.
Y is for Yield, which is the income you can expect to earn from a buy-to-let property compared to its market value. So if you spent £225,000 buying the place, and you rent it out for £950 per month, your yield would be 5.06 per cent (11,400 divided by 225,000 times 100). Calculating a precise yield is not quite as simple as this, however, as there may be “wildcard” expenses to consider, such as management and maintenance costs.
Z is for Zeitgeist. While the buy-to-let sector is facing challenges, with 64 per cent of 20- to 45-year-olds believing they’ve no chance of ever owning their own home, the rental market is likely to stay strong for the foreseeable future. And as Generation Rent will tell you, rents are only going in one direction.