Buy to let Investing

Property Investing

Investing in property has never been more popular; with over 40% of the population living in rented accommodation the demand for rented properties has never been higher. Property investments are particularly appealing as you do not need to fund 100% of the property value to be able to purchase the property. Typically an investor will borrow the majority in the form of a mortgage and invest a portion.

However, if the value of the property goes up, you will nevertheless benefit from the increase in value of the property even though you have only paid for a portion of the property. This gives you the potential for high returns.

Of course, in reality, it is not this straightforward. There are many costs that need to be considered when purchasing property.

It is also important to remember that the value of property can go down as well as up. Property investment needs to be viewed as a medium to long-term investment – a minimum 7-year investment period is usually recommended.

Risks

If you need to borrow money to fund your property investment then you will be committing to monthly mortgage repayments. The cost of your borrowing can vary over the period of your investment depending on interest rates. If interest rates go up significantly it could mean that you are no longer covering your costs with the rental income from the property. Also, if your property lies empty for any reason, you still need to find the funds to cover the mortgage repayments.

In the case of property development, if a property takes longer than expected to renovate, or takes time to sell, the cost of financing the mortgage can quickly eat into the hoped-for profit from the investment.

Property doesn’t always sell quickly, and even if you are lucky enough to find a buyer for a property swiftly, the process of concluding the sale can take many weeks, or even months. That is why property is not considered a very liquid asset – once money is tied up in property it cannot be accessed at short notice.

Cost Implications

There are significant costs attached to buying and selling property, such as stamp duty, and agency and legal fees, and these need to be considered when you are making a decision about whether or not to invest. There are also ongoing costs attached to a buy-to-let investment – refurbishment and upkeep, the cost of drawing up contracts and complying with legislation, and mortgage repayments to name but a few. All of these should be factored in to ensure the investment stacks up financially.

Tax Implications

Any profit from rental income is taxable at the highest rate of tax applicable to you, although many of the costs you incur in running a buy-to-let property, such as the interest on your mortgage and any agency fees, are tax-deductible.

Any gains on the sale of a property bought as an investment are subject to Capital Gains Tax (CGT) and the tax applies to any profit above the CGT tax-free allowance threshold. The costs of buying and selling the property are tax-deductible.

Choosing Your Tenants Carefully

When you become a landlord it is important to be aware of your rights. The first step is to ensure that you pick your tenant carefully this may prevent arrears and disputes.

If a letting agent is used they will be able to carry out the necessary checks that are required of prospective tenants such as:

• credit rating
• employment status
• obtaining references

However if you are not using a letting agent you still need to vet a potential tenant, this can be done by obtaining references yourself and asking for proof of employment and carrying out online credit rating checks.

Making an Inventory

Your first line of defence against tenant damage is to prepare a comprehensive inventory of the condition and contents of your property prior to the start of the tenancy. This can often be done by contracting an independent and competent party to carry out the inspection.

However you could also do this yourself, although if you later need to rely on the inventory in dispute, you will need to bear in mind that your word as opposed to an independent party may not be considered as persuasive. Therefore it is essential that you have proof of the condition of the property prior to the tenancy, one way of obtaining this proof is to take photos of the property that are dated, this will help you to establish the conditions of the property at that time.

Your Rights as a Landlord

Although you may have taken all the necessary precautions and thoroughly screened your tenant, you may still end up with a tenant who has a very relaxed attitude to paying rent. Therefore it essential that you know your rights as a landlord in order to know what to do in the face of tenant problems and disputes.

Payment of rent

• You should ensure that you have a written tenancy agreement in place, such as an Assured Shorthold Tenancy agreement which will set out the amount of rent payable and when.
• It is also important to get your tenant to pay their rent into your account by direct debit or standing order, this will help ensure that payments made and those that are missed are clearly evidenced.
• If your tenant does not pay the rent for a set period and there is no solution then you will have the right to serve an eviction notice. However, you must follow a set procedure. You can also attempt to reclaim any unpaid rent as well.
• Check the terms and conditions laid out by the letting agent (if a letting agent is used) before signing an agreement.

Letting agents generally offer two types of service:

• an introduction service, or
• a full property management service.

Check what your agent covers as part of their managed service some letting agents offer arrears management services, whereby they chase arrears and collect missed payments as part of their contract with you, some Agents will even offer rent guarantee schemes for a set premium.

Raising the Rent

• As the landlord you do have the right to raise the rent. However you are only able to so at certain points in a tenancy and it will also depend on the conditions of the tenancy agreement. You can put up the rent at certain points in a tenancy.
• Having said that you cannot charge whatever you like, the rent has to be justifiable and comparable to similar properties in the area, otherwise the tenant can complain and you could be forced to restore the rent to an acceptable level.

Neglect and Damage of the Property 

• Damage caused by tenants or people visiting tenants is not uncommon, whether this is by accident or intentional, there will always be such tenants who cause damages to your rental property and belongings. In most cases landlords themselves will tend to pay for the repairs to save hastle.
• Your tenants have a level of responsibility to keep your property clean and in good condition, and complete basic maintenance i.e. change light bulbs, use the heating system responsibly. Whilst you are responsible for most repairs, if the tenant does cause damage then you should be able to claim these back.
• The tenant is obliged to stick to the terms and conditions of the tenancy agreement, if for example your agreement specifically prohibits the keeping of pets – if damage or maintenance is required because of this, again you can make a deduction from the tenant’s damage deposit or ask them to pay for the cost of repair.
• The exception to this is for ‘fair wear and tear’ such as to carpets or other furnishings – you cannot charge the tenant for these.
• If you do intend to charge a tenant for damage caused make sure you have proof that the damage was caused while the property was occupied by them, take photos and ensure the charges are based on accurate and reasonable quotes in order to back up if the tenant chooses to dispute the figure.
• If the damage caused is beyond ‘fair wear and tear’ and the tenant refuses to either repair the damage or pays for the cost of the repair, you are within your rights to serve an eviction notice to the tenant and retain the sum of money from their damage deposit to cover the cost of repair to the damages caused to your property.
• As a last resort you can also go through a legal process to ask the tenant to repair the damage at their expense, but often this is not a viable option due to the costs associated to this. However there are also specialist tenant eviction services which could help you with the eviction process of required.

What You Cannot Do

• You cannot just pay your tenants an impromptu visit, you have to have a good reason and you will need to let them know in advance.
• You cannot just physically chuck your tenants out on the street. When it comes to evicting problem tenants you have to be careful not to make an illegal eviction as this can lead to legal action.

Gaining Access

• Unfortunately it is illegal for you as a landlord to enter your own property without prior agreement from your tenant. Landlords do have rights to ‘reasonable’ access to carry out repairs for which they are responsible, but you will always need to get permission from the tenant with at least 24 hours prior notice. If you don’t follow this process you could be prosecuted for ‘harassment’.
• If all else fails, you may have to apply for a court order to re-enter or take possession of your property. The Shelter.org website gives more information about how to apply for a possession order.

How to Evict a Tenant
There are three stages to this in most cases:

• The tenancy agreement should normally specify a notice period that you can give your tenants to vacate the property.
• If the tenants remain in the property at the end of the notice period you can apply to the courts for a possession order.
• If you get the possession order granted and the tenant does not comply, you can then apply for an eviction warrant from the county court. The county court will then arrange to send in the bailiffs.

What to do about deposit disputes
If you are letting using an Assured Shorthold Tenancy, you are obliged to put your tenant’s deposit in a Tenancy Deposit Protection (TDP) scheme. Each TDP scheme offers a free dispute resolution service to help agree how much of the deposit should be given back.

If you want to make a deduction from your tenant’s deposit, you must be able to prove that the damage was the tenant’s fault. This can be achieved through an independent inventory conducted at the outset and at the end of the tenancy.

You should also be able to back up why you need to deduct the amount – get quotes for any cleaning or repairs needed. You are unlikely to get the result you want if the dispute boils down to your word against the tenant’s.