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Investment
in residential properties for letting
This document is intended for guidance only for individuals who
are considering purchasing a property for letting. The responsibility
for the financial decision to buy any property can only rest with the
investor and it should be noted that as with any investment, returns
and capital value can go down as well as up. We suggest therefore that
Professional advice should be sought before entering into any commitments.
Residential
Pointers in objective, selection process, yield
and capital growth
Finance, tax implications
Investment in residential properties, capital
growth
Size and type of property, presentation
Rates of return, finance
Tax considerations
Rent and legal protection - insurance
Limits of indemnity - buildings and contents insurance
Guide to safety regulations
Conclusion
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The purpose of this document is to inform
you on the best practice in acquiring property to let and ensuring that
you are left with a property that is in demand over a medium to long
term.
Residential property to let is a medium to long term investment which
should be returning its original investment over a ten to twelve year
period purely on its rental income.
We ask all of our prospective landlords to think carefully about the
commitment they are taking and what their "end game" or ultimate aim
is in making the investment.
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Objective
· Why invest in property?
· What term will the investment last for?
· What amount will be invested?
· Mortgage or cash?
· Take income or re-invest?
Selection process
· Location, location, location
· Optimum returns - size
· Presentation
· Who would live here?
· Type of property
· Tips to avoid expensive set up costs
Yield and capital growth
· What is a reasonable return?
· Which property will increase in value the most?
· What is the bottom line?
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Finance
· 60-80% which is best?
· Risk avoidance
· What type of mortgage would best suit?
·
Basic rules of buy to let
Tax implications
· What are my obligations?
· What expenditure is allowable?
· Mortgage interest
· Overseas Landlords
· How does the tax inspector find out?
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Investment
in residential properties
In
the past, property investment has proved that it can be a very worthwhile
investment, but like all investments great care is required before the
final decision is made. It remains true therefore that all residential
properties purchased for the purpose of letting. If an individual is
interested in investing in a property for letting, it is important that
an understanding of the market is gained and professional advice is
sought at all stages of the process. With understanding and care, a
sound investment is capable of being made which should produce a good
level of income and capital growth.
The market in residential properties to let in the UK is enough. Despite
the fact that the majority of people opt for home ownership as opposed
to renting. It is estimated that £150 billion is invested in residential
properties for letting and that this market, which has grown since the
change in the law in 1988, now accounts for more than 10% of the housing
stock. More and more people turn to the rental market at some point
in their lives where they have a need for short to medium term accommodation.
This may be due to job relocation, lack of desire or ability to make
a commitment to own their own property. Whatever the reason, at this
time the overall demand for good quality rented accommodation is greater
than the supply.
There are three important factors when considering purchasing a property.
"Location, location and location". This rule applies to the purchase
of residential property for letting, as the location will affect the
letting potential and the overall capital growth.
Capital Growth
The potential capital growth, which could be achieved on a residential
property, could be affected by the rent achievable in the letting market
but a greater significance will be the home ownership market, which
is almost nine times as large. If a property is in an area, which is
desirable for home ownership demand in this market, will push up the
value of the property regardless of the potential for letting. The rent,
which can be achieved from such a property in percentage terms -i.e.
gross percentage yield -, may not be as great as for other locations.
When looking at properties for rent, the link between home ownership,
letting potential and potential capital growth must therefore not be
over looked.
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Size of Property
The next decision is to take into account the size of property you require.
This will to a degree be dictated by the amount you wish to invest.
A one-bedroom property will have a greater turn over in tenants, normally
rented out to a single person who has just left home or somebody who
wants a six-month let only.
Type of Property
The choices available for properties to rent can be put into two categories.
1). New or old - newer property may have lower maintenance costs than
old properties, but older property may have greater charm, especially
if they are Victorian or have a quaintness about them.
2). Houses or flats - houses usually come with some form of garden,
flats may have communal gardens. Flats will usually be leasehold and
the cost of ground rents and/or services charges have to be built into
the equation.
From the demand point of view, the choice is evenly balanced. The decision
really comes down to your personal choice.
Presentation
Whether to let furnished or unfurnished.
Unfurnished normally requires carpets, curtains and cooker. Fully furnished
means all furniture and all kitchen white goods.
If
a property is to be let fully furnished then all items of furniture
or furnishings must comply with the safety regulations under the Fire
and Furnishings (Fire) (Safety) Regulations 1988. You will need to ensure
that the contents are in good condition and adequate for the purpose
of living in the property from the day the tenant moves in.
There
is generally a greater demand for furnished accomodation.
A well presented property it terms of decoration will rent out quicker
than a property that is poorly presentated. From experience, it is also
found that if a property is in good order then the tenant will tend
to look after the property to a greater degree.
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The
Rate of Return
Each investment has to be looked at carefully with known facts and professional
advice should be sought before any final decisions are taken.
To arrive at the rate of return, the following factors need to be take
into account
1. The cost of the property, including solicitors and other costs of
purchase.
2. The gross rent which can be achieved from the property, allowing
for possible void periods.
3. The running costs of maintaining and managing the property during
the let period
4. The extent to which the property is financed from your own resources
or from borrowings from a Bank or Building Society.
Note:
1. For leasehold properties allowances have to be made for ground rent
and service charge.
2. Allowance from a cash flow point of view must also be made for capital
repayments on the loan. This will demand on arrangements made with the
lender.
3. Tax may be due on the net income after interest, depending on an
individuals own position
Finance
With the development of the residential letting market there are now
several lenders who can offer loans on a Buy to Let schemes. These schemes
will vary with each Lender for properties let on an Assured Shorthold
Tenancy agreement. We are able to introduce you to a service provider
who will be able to provide best advice on property finance.
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Tax Considerations
For an individual the net income from letting residential properties
is taxed under Schedule A of the Taxes Act at an individuals marginal
rate. In principle all expenses attributable to a rented property (including
any VAT on the costs) and 100% of any interest borne on finance used
to purchase the property are allowed against gross rental income. In
addition, for furnished accommodation, the landlord has the option of
deducting 10% of the rent as a provision for wear and tear. The overall
net position is then taxed in the hands of the individual and must form
part of the disclosure in the annual tax return. Personal allowances
unused against other income can be allocated against Schedule A income.
For
overseas landlords, net rental income will be assessed to UK income
tax. Unless approval is obtained from the Inland Revenue (Form NRL1),
a Managing Agent will be required to deduct tax at source at the standard
rate before remitting to the overseas landlord. With consent, this tax
will not be deducted, but overseas landlords will still be required
to account for the income and pay the relevant tax on an annual basis.
Independent professional advice should be sought if you are in doubt
about the tax implications.
Conclusions
Investment in residential properties for letting should not be for the
short term and, as a minimum, you should be prepared to lock away your
capital for at least five years.
In purchasing a property, consideration can be given to using bank finance
improving the potential from capital growth as the loan remains fixed
in value terms over its life. However, you should borrow only what you
are comfortable with and be guided by the extent of cover available
for capital and interest from the net rental income.
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Rent and legal protection
- insurance
Any professional Agents aim is to provide Landlords with a highly professional
service that will give peace of mind and a trouble-free tenancy.
Every precaution will be taken to ensure that your interests are fully
protected. However thorough an agents is in vetting prospective tenants
even the most exemplary individual may be unable to pay the rent, perhaps
due to redundancy, marital breakdown or illness.
Without a rental protection service landlords may suffer loss of rental
income and be liable for any legal costs incurred when a tenancy agreement
is breached or possession becomes necessary.
There are rent and legal protection insurances normally available through
the letting agent.
This means that landlords receive the benefit of cover against any possible
rent arrears until full vacant possession can be obtained. It will also
provide you with cover should you incur legal expenses as a result of
the tenancy breaching the tenancy agreement. At no cost to landlords
we will, on your behalf obtain access to legal advice from a solicitor
who specialises in landlord and tenant law. This means that if a dispute
arises we are able to provide landlords with the best professional advise
to resolve matters at the earliest possible moment.
Rent and Legal Protection insurance is a part of quality property management
service providing the highest possible service to fully protect Landlords'
interest and minimise any unnecessary financial loss when letting property.
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Limits of indemnity
The maximum liability under one certificate of insurance is normally
around £25,000. The maximum liability in respect of rent is a) £2,000
per month unless special agreement has been obtained, b) 12 monthly
payments.
Buildings
and contents insurance
It
is important, that the property is adequately insured against all reasonable
expectations and eventualities. It is essential, that you advise your
existing insurance companies that the property is to be let. If you
do not, the insurance may be invalidated.
We are able to offer a number of specialist insurance policies for let
properties.
Buildings - a comprehensive building policy at competitive premiums
either with or without accidental cover. Third party is also provided
which protects you against a claim from a third party if, for instance,
a tile was to fall off the roof and injure the person or damage property.
Contents - a comprehensive contents policy either with or without accidental
cover. We strongly recommend the policy with accidental cover be taken
out. This policy also has third party cover, which is essential, even
if the property is to be let unfurnished. A tenant could bring a claim
against the landlord if any article within the property, which could
include the carpets, which injures them. For instance, a tenant may
trip over a stair carpet, fall down the stairs and break his/her leg.
A claim for damages could be substantial.
Buildings and Contents - A joint policy with extremely competitive premiums
and particularly well suited to unfurnished accommodation where only
minimal amounts of contents cover are required. Buildings insurance
on its own is available on its own as well as Contents insurance.
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A guide to safety regulations
relating to let properties
Landlords
often express concern regarding safety matters, we have outlined below
some of the current legislation. We strongly advise that you take professional
advice from a letting agent on these matters.
Furniture and Furnishings
The Furniture and Furnishings (Fire) (Safety) Regulations 1988 cover
all upholstered furniture and furnishings manufactured after 1950, including
headboards, cushions and pillows, covers for furniture but not carpets,
curtains, bed clothes and loose covers for mattresses.
Such furniture and furnishings in respect of all lettings must comply
with the regulations from 1st January 1997 and meet the appropriate
fire resistant tests laid down. This regulation applies to all homes
let to third parties in the course of business. They do not apply for
homes where the landlord is letting for a temporary period, and not
in the course of business, but temporary usually relates to a very short
period of time. In this case the Landlord has a moral - not legal responsibility
to comply. However, a Landlord not complying in such circumstances may
leave them open to a civil action by a tenant if something went wrong.
Gas
The owner of any gas appliance, pipework or installation must ensure
that an approved person who must be CORGI registered carries out a safety
check every twelve months.
A record must be kept of all safety inspections and the result, which
is open to tenant's inspection. Copies of the gas safety certificate
must be given to a tenant prior to them taking on the property.
Electricity
Landlords must ensure that all electrical appliances and the electric
supply is safe and will not cause danger. Inspectors could request confirmation
that inspections have been regularly made, although no specific time
scales is given nor is any requirement for inspections to be made by
members of certain bodies.
Smoke Detectors
All new homes built after June 1992 must be fitted with mains operated
smoke detectors. They must be installed on every floor and must be inter-linking.
These rules are incorporated in the Building Regulations 1991. There
are no specific regulations governing older buildings, but Fire and
Safety Officers recommend the installations of at least battery operated
device
Conclusion
Being a landlord comes with legal responsibilities which are probably
best dealt with by an efficient and professional Lettings and Management
Company.
You
will receive best advice at each stage of the process from advice on
the initial acquisition to the first letting of the property and the
maintenance of the tenancy thereafter. They will ensure client’s
monies are correctly dealt with in the event of a dispute. Most reassuring
is that all reputable lettings companies are insured for professional
indemnity in the event that they fail to act correctly in managing your
property. Movewithus can assist you in finding an agent for your area
that has been assessed for quality and value in delivering service.
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