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.
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.
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.
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:
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
Letting agents generally offer two types of 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
Neglect and Damage of the Property
What You Cannot Do
How to Evict a Tenant
There are three stages to this in most cases:
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.