06 September 2007
Becoming a landlord: A risk that can pay dividends
Demand for rental properties remains high, although the housing market is showing signs of slowing; meaning that investing in Buy-to-Let property is still a viable proposition.
A recent survey by the Association of Rental Lettings Agents shows that more than half of its members in the South East say there are currently more tenants than properties available.
With average house prices remaining at several times the average salary, the numbers of single people finding it difficult to get onto the property ladder are increasingly looking at private rentals.
However, taking the plunge to become a landlord is a matter that needs careful consideration. Buying a property to rent is never a short term route to riches, instead it needs to be seen as a medium to long term investment, with the ARLA survey finding that landlords believe the average life expectancy of a Buy-to-Let investment is 17 years.
Unlike a regular mortgage, most Buy-to-Let mortgages require a minimum deposit in the region of fifteen to twenty percent and are usually based on the rental income of the property, not the income of the investor. Another issue to keep in mind is that the rental income usually needs to be approximately 115 - 150% of the mortgage payments, so buying in an area where rents can reasonably be expected to reach this is important.
Researching the area is one of the most important things any prospective landlord must do. As well as giving you an indication as to levels of rental income, the area you target should also imply the sorts of tenants you may attract. For example, buying in an area with a nearby college or university is likely to attract student tenants, while a home in a picturesque area may attract older tenants, or may even lend itself to being a holiday home.
It is also important to consider proximity to transport links or shops and amenities, when considering a Buy-to-Let property and it may be worth consulting with a local lettings agent before making any decision. Local lettings agents will know the local market, the types of properties popular with tenants, standards of furnishings expected and the level of rent that tenants are prepared to pay.
No rental property is let all the time and a local lettings agent will also know about demand, for example, the ARLA survey found that the average property sits "void", or unoccupied, for 24 days between tenants, a period where a Buy-to-Let landlord will have no income. The survey also found that on average tenants tend to stay in a property for approximately 15 months.
Agents can be useful in finding and vetting tenants, however this will incur a cost of approximately 10-15% of your gross rental income.
The range of Buy-to-Let mortgage products on offer has grown in recent years, with Saffron Building Society offering eight mortgages, including a fixed rate product, three discount mortgages and four Buy-to-Let trackers.
Saffron's 5.75% Buy-To-Let tracker has been praised by Moneyfacts and offers a Bank of England base rate matching interest rate for two years and no early repayment charge. Two of the Society's Buy-to-let discount mortgages also feature regularly on the national press's best buy tables.
When buying-to-let it can be beneficial to have an interest-only mortgage as the interest paid on a mortgage can be offset against tax. Anyone who is new to the rental market must obtain up-to-date tax advice before proceeding, capital payments cannot be offset and the extra income can affect the amount of tax a landlord pays.
It is also important to keep abreast of legal movements in the rental market, for example April 2007 saw the introduction of Tenant Deposit Protection in England and Wales. This means that landlords must either pay an insurance premium to ensure that a tenant's deposit is still available at the end of the tenancy or transfer the deposit to a custodial scheme, which then safeguards the deposit.
Many mortgage lenders will provide several mortgages to a lender if they believe the properties are well managed and returns are good.
Giving careful and thorough consideration to which style of mortgage meets your needs is essential and, as with any major financial decision, it is prudent to take advice.
