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Buy-to-Let is a joint initiative by the Association
of Residential Letting Agents (ARLA), and various mortgage lenders.
The scheme is designed to help private individuals to invest in property
to let without being penalised by mortgage surcharges or paying commercial
rates of interest. Mortgage lenders in the Buy-to Let scheme will take
account of rental income likely to be achieved from a property.
What's so different?
Top
Historically, borrowing on income-producing property has been viewed by
lenders as a commercial proposition. So, mortgages on property to let,
even for private individuals, have attracted higher rates of interest
than the standard mortgages offered to owner-occupiers.
In addition, until now, rental income
has usually been disallowed when assessing a borrowers ability to
meet mortgage payments.
Now, the view of many lenders and all other housing
professionals is that growth in the private rented sector must be
encouraged. Not only does it lag well behind the private rental
sectors of all the other advanced economies, the lack of choice
between renting and buying is, in fact, bad for the economy and
a contributory factor to the booms and busts of the housing market
over the last decades. |
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But, the change in lending criteria and the lowering
of interest rates for private investors has only been made possible by
the strong presence of professional, bonded letting agents in the lettings
market.
| What are the returns
from letting property? Top |
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Gross returns - the
rent received before taking account of the cost of letting - such
as management fees, maintenance, service charges ground rents and
insurance varies between 7% and 10%. This can be less for very expensive
properties.
The average rental return in Britain today hovers
around the 10% mark, and capital appreciation is likely to match,
if not exceed, inflation for the foreseeable future.
As a rule of thumb, the gross rents should be
between 130% and 150% of the monthly mortgage payments. |
What difference
does a Letting Agent make? Top
Buying a property to let is not the same as buying your own home. Mortgage
lenders will want to know that an ARLA member agent has been advising
on the selection of properties suitable for letting.
The experienced agent will know the local market, whether
there is a demand for say, two-bedroomed flats, or four bedroomed houses,
or for properties close to schools or transport links or secluded properties
with gardens. Also the agent will know the standard of decoration, furnishing,
fixtures and fittings required.
Then there is the selection of well-covenanted tenants
who will pay their rent on time and leave the property on time and in
a proper state; and there is the management of the tenancy.
Knowing that the management of any inherent risk is
in the hands of a professional agent enhances the creditworthiness of
Buy-Let propositions put to mortgage lenders.
| How to Buy-to-Let
Top
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an ARLA letting agent, Buy-to-Let investors can start on a property
search; or a letting agent may do this for them, instruct their
own sales department or work regularly with the best estate agents
in their area.
Once a property has been found, the letting agent
will confirm whether or not it has letting potential, the range
of the likely rent that can be achieved in current local market
conditions and advise on the need - or otherwise -for re-decoration
and new fixtures and fittings to attract good tenants and to reduce
the risk of lengthy void (empty) periods. |
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How are mortgages
arranged through the Buy-to-Let initiative? Top
Broadly, there is little difference between arranging a Buy-to-Let mortgage
for investor landlord’s and a standard mortgage for owner-occupation.
Buy-to-Let mortgages are subject to the usual status checks. Loans can
be arranged for terms of between five and 45 years and for up to 80% of
the value of the property.
Through the Buy-to-Let initiative, rents achievable
from an investment property can be taken into account, provided an ARLA
member agent is to be responsible for letting and managing the property.
| The Dos
and Don'ts of Buying to Let Top |
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Think of buying to
let as a medium to long term investment. |
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Seek advice from an ARLA letting
agent on local market demands. |
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Get your sums right. Will the
rent cover borrowings and costs, after allowing for void periods?
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Decorate, fit out and furnish
to high quality standards, especially kitchens and bathrooms, to attract
the best tenants and let quickly every time. |
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Use an ARLA member as your letting
agent. They are bonded, hold Professional Indemnity Insurance to required
standards, have staff trained to ARLA's competency standards and are
kept up to date with the latest legal and regulatory requirements.
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Let personal taste cloud your judgement.
Be sure the property you choose meets market requirements. |
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Purchase anything with potential maintenance problems
like a lot of woodwork or large gardens. It will add nothing to the
rental value and cost a lot to keep up. |
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Think that the running of an investment property
to let can be left to friends or relatives in your absence. Tenants
require a full management service. |
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Use off-the-shelf tenancy agreements from HMSO
or law stationers, or forget to issue the right notices or fail to
have a proper inventory and condition report made before a tenant
moves in. Leave all documentation to a professional agent. |
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Furnish with second hand furniture or cast-off
soft furnishings. These will probably contravene the Furniture and
Furnishing Regulations. |
What happens after
Buying to Let Top
An ARLA member will introduce and vet prospective tenants; prepare the
tenancy agreements; advise on and arrange inventory and condition reports
and changes to utility accounts and Council Tax; collect the rent and
pay the balances to the landlord's account.
A letting and property management agent can also pay
bills on behalf of the landlord and regularly inspects the property, recommending,
overseeing and accounting for necessary maintenance, repair and re-decoration.
Are there any
special conditions? Top
Generally, lenders will expect landlords to use an ARLA member to let
and manage the property and for rental agreements to be drawn up as Assured
Shorthold Tenancies or other contracts as appropriate.
| Can a Buy-to-Let
investment be protected? Top |
Insurance cover is now available
for rental protection, in the event of a defaulting tenant, and for
legal expenses in addition to the normal building and contents insurance.
What
other costs should be taken into account? Top
Letting agent's commission and management fees,
Insurance (Building/Contents/Rental and Legal Expenses Cover), the
costs of keeping the property in a marketable condition, service charges
and ground rents - if a leasehold. (The tenant is responsible for
such items as utility accounts, Council Tax and TV licence fee etc.)
Tax and allowances Top
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Deductions
against tax on rents received may be claimed for the costs of maintenance,
such as insurance, cleaning, gardening, agent's commission and other
reasonable management expenses (but not improvements).
The initial cost of furniture fittings and fixtures
is not allowable, but the actual cost of subsequent replacement
may be claimed; or, alternatively, a wear and tear allowance of
10% of the rents received may be deductible.
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Note: This page is for guidance only. The responsibility
for the financial decision to Buy-to-Let can only rest with the investor.
Most letting agents will not accept responsibility for the validity of
investments, costs incurred or for mortgage arrangements made, although
those who are also registered as financial advisers may do otherwise.
It should be noted that as with any investment, returns and capital values
can go down as well as up; and the investor should be fully aware of the
terms and conditions applied by the chosen mortgage lender. Letting agents
must present their own written terms of business for letting and managing
properties.
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