From Cliff D’Arcy

“There’s an old expression among landlords: “Better an empty house than a bad tenant.” In other words, it’s preferable to have a few months of voids (when no rent is coming in) than to install a problematic tenant into your property.

Around 20 years ago, a friend of mine found out this valuable lesson the hard way. To disguise her identity, I will call her Mary. I met Mary in the late Eighties, when we worked at the same company.

An older, well-bred (and almost aristocratic) lady with a charming manner, Mary was a delight to work with. Through her family, she had social links to the Royal Family and, being comfortably well-off, she worked part time purely to occupy herself, rather than for money.

After a while, Mary decided to take a year off work and travel the world with her husband. Rather than leave her lovely home in Surrey empty for 12 months, she decided to rent it out to upmarket private tenants.

Through a private advertisement, Mary found two twenty-something chaps willing to pay the full rent she had advertised. Both men were graduates with good jobs in the City of London, so Mary happily headed off on her world excursion, confident that she had chosen top-class tenants.

Unfortunately, Mary was very, very wrong!

Less than six months into her 12-month cruise, Mary received a desperate phone call from a neighbour. The neighbour’s news was so disturbing that Mary cut short her holiday of a lifetime and flew 5,000 miles back to England.

What she found would leave a horrible, everlasting mark on her memory. Her beautiful home was practically destroyed.

As it turned out, her two well-spoken tenants were hedonists who loved to party. Although they paid their rent on time, they used Mary’s house as a venue for a series of raucous raves. The partygoers at these events — and the tenants themselves — had all but reduced Mary’s house to rubble.

Rubbish was strewn all over Mary’s garden, including hypodermic syringes and other drug paraphernalia. Inside her home, the damage was even more destructive. Fixtures and fittings had been ripped out, doors had been kicked in, and there were holes in several walls. Following a fire, the main bedroom was completely burnt out.

In short, almost every feature of Mary’s elegant, period property was damaged to some extent.

By the time Mary arrived to take control of her home, her tenants had ‘done a bunk’ and were nowhere to be found. Therefore, Mary started the painful process of rebuilding her life and home by contacting the provider of her home insurance. Via its helpline, she patiently set out the extensive damage to the building and its contents.

Alas, Mary had made a disastrous error. Before leaving for her worldwide jaunt, she had failed to notify her insurer that her property was being rented out and was no longer owner-occupied.

As owners tend to look after their properties better than tenants do, insurance companies charge higher premiums for rented homes. What’s more, home insurance policies sold to homeowners clearly state that they cover the owners, their immediate family and occasional guests, but not tenants. Indeed, most bog-standard home insurance policies become null and void as soon as a property is rented out.

As a result of Mary’s non-disclosure, her insurer refused to consider her claim. Despite Mary’s written protests (which included getting her MP involved), the company stuck to its guns, as it had a water-tight case.

Learn from Mary’s mistake

Without a valid insurance policy, Mary had to use her life savings to restore her detached home to its former glory. The final bill for this restoration work came to more than £50,000. This payout left Mary and her husband much less financially stable than they were before embarking on their globe-trotting journey.

In summary, Mary learnt the hard way that becoming a temporary landlord is much trickier than it first appears. To protect yourself against falling foul of a similar situation, you should:

• Consider using an established, professional letting agency to rent out your home. While these fees will cost you perhaps a tenth (10%) of the monthly rent, you can pursue the company if you lose out as a result of its actions.
• Ask for a substantial deposit to cover any damages incurred during the term of the tenancy. Ideally, this sum should be at least two to three months’ rent.
• Before letting out your house, you must inform your mortgage lender and insurance company that you intend to take in tenants. Otherwise, you may breach the terms of your home loan and invalidate your insurance!”

Changes to its criteria include dropping the minimum required property value
from £150,000 to £100,000 and reducing the minimum income an applicant needs to
earn from £35,000 to £20,000.

It is also cutting the minimum age of applicants by five years from 30 to 25,
and scrapping the requirement that the borrower must live within 40 miles of the
property. Jeremy Law, head of buy-to-let at Yorkshire Building Society, said: “We have
listened to brokers and taken the opportunity our staged entry has provided to
revise our lending criteria. “However, our lending policy will still reflect the values of the Yorkshire as a prudent mutual and our primary focus is, and always will be, the interests
of our members. “We do not see ourselves as dipping in and out of the market. We are very
much here to stay and will be an active lender in the market all year
round.”

Last week, the Co-operative Bank’s Platform promised to increase its mortgage
lending in the buy-to-let sector by one-third to £600m.

According to the Association of Residential Letting Agents’ (ARLA)latest research, in Q4 2011 just over half (55%) of ARLA members reported more tenants than properties available. While this indicates that demand is still robust, the figure is sharply down on Q3, when three quarters (74%) of members noted that trend.

The number of consumers actually signing a new tenancy was consistent with Q3, with an average 34 new tenancies signed per ARLA member office during each quarter. The figure was lowest in Central London, where an average 26 tenancies were signed per branch during October – December, compared with an average 31 in Q3.

Over the same period, 39.2% of members reported an increase in tenants struggling to pay their rent; up from 36.7% the previous quarter.

Tim Hyatt, president of ARLA, said: “The apparent drop in demand for rental properties could be due to the traditionally quite pre-Christmas period. At the same time, it could indicate a reversal of the surge of new tenants who turned to the PRS when they could not afford to buy.

“With household income decreasing and job uncertainty prevailing, it could be that increasing rental arrears is a sign that the wider economic malaise is having a tangible impact on personal finance – some consumers may have reached the limit of their access to finance, while others may be cutting back as many commentators have predicted.

“We are reassured by the fact that the number of new tenancies is stable, but we will be watching the market closely in the coming months to determine how significant these latest figures will prove to be.

“In tough economic conditions both landlords and tenants can find themselves struggling to keep up with rent or mortgage payments. It is therefore more critical than ever to take references and conduct thorough research before signing a tenancy agreement. Seeking advice from a professional, licensed letting agent is the best way to ensure tenants and landlords’ rights are protected.”

….provided by StockMarketWire.com

Ben,

Your client’s can now borrow up to 70% of the property’s purchase price, however once the minor refurbishments have been completed we will lend up to 70% of the new, higher property value.

 We will then release the difference, up to a maximum of £25,000. The difference in funds is released when we have evidence from the surveyor that the minor refurbishments have been completed within 3 months and have increased the property’s value to the estimated amount.

The client does not have to borrow the maximum amount available but can simply choose to cover the cost of the minor refurbishments.”

If this is of interest let me know.

In its April 2011 UK Residential Lettings Survey, the organisation reports a net balance of 42 per cent of surveyors who saw rents rise in the quarter up to and including the month of the report.

This is a barometer-style figure, calculated by subtracting the percentage who saw a fall from the proportion who saw a rise – meaning the actual gross figure for those who saw rents increase over the three-month period could be substantially higher.

James Scott-Lee, spokesperson for RICS UK, says: “Although we are beginning to see more mortgages aimed at first-time buyers, many potential homeowners are still restricted from getting a foot on the property ladder.”

This, he explains, leaves them forced to rent in a market for residential property that is already awash with tenant demand.

Over the quarter, flats were the most likely type of property to be added to the list of available rental property in the UK, with a net balance of six per cent of surveyors seeing instructions to let flats from private landlords.

Meanwhile, houses showed subdued performance, with just two per cent more surveyors seeing them added to portfolios than reported a decline in the availability of houses to rent – a fall of three percentage points over the quarter.

It follows a Court of Appeal hearing after a tenant brought a disrepair claim against the landlord, complaining of damp and mould on the walls. However, the landlord disputed liability.

The recent ‘Grand v Gill’ case centred on whether, in s 11 of the Landlord and Tenant Act 1985, ‘the structure’ of a residential premises, which the landlord is obliged to repair, included plasterwork.

The court held that plasterwork was included, overturning the case of Irvine v Moran in 1991.

This means private and public landlords, including local authorities and housing associations, have a legal duty to maintain the plasterwork of their properties.

John de Waal, of Hardwicke, who acted pro bono for the tenant Tanya Grand said: “This decision is very significant for housing lawyers, and affects every assured shorthold tenancy.

“This is a vexed issue for housing lawyers and has been before the courts three or four times.

“There is a lot of litigation about disrepair, particularly in social housing, and it is quite expensive for landlords. However, this fairly and squarely and on uncompromising terms establishes that the landlord is responsible for plasterwork

SHOULD I BECOME A LANDLORD?
Buy-to-let involves buying a property and letting it to tenants. But it should be seen as a long-term investment to provide regular income, not a get-rich-quick scheme. And it is not stress-free. Dealing with tenants and lettings agencies can be a headache. You should also be aware of the risks. There might be times when the property is empty and you have to meet the mortgage payments out of your savings. As recent years have proved, house prices do not always rise. In March 2002, prices were growing by 26.2 pc a year, according to Nationwide. But in November 2007, they began to fall. Since then, the total drop has been 11.4 pc. Almost a third of landlords will be in negative equity — owing more on their mortgage than their property is worth — if house prices fall by 5 pc in 2011 and a further 5 pc in 2012, according to credit agency Standard & Poor’s.

Against this, though, would-be landlords must weigh rising rents and yields. The yield is the amount of money a landlord receives in rent over one year, shown as a percentage of the property value. If you paid £100,000 for a property and the annual rent was £5,000, the yield would be 5 pc. The average yield across England and Wales was 5.1 pc in April compared to 4.8 pc last year, according to estate agency LSL Property Services, though this varies throughout the country. While rents hit an all-time high last month, 11.8 pc of tenants were in arrears. Average rents are highest in London, at £988 a month, but the high cost of housing means yields are 5 pc. But in the North-West, where rents average £560 a month, yields are 6.5 pc. Rents are expected to keep rising as many young people are unable to get a mortgage and there is a shortage of homes they can afford.

WHERE AND WHAT SHOULD I BUY?
A common mistake novice landlords make is to buy a house they would like to live in themselves, rather than choosing a location and property that will provide the best return. ‘Go to a lettings-only agent, who should be more than happy to brief you on the types of properties that are easy to let and how much rent you can expect,’ says Kate Faulkner, author of the Which? Guide To Renting & Letting. For example, students will want to live near a university, families near good schools and professionals near a train station. The National Landlords Association says that houses of multiple occupation (HMOs) can provide the best returns. These are properties let to three or more unrelated people — often students, young professionals or people on housing benefit. Landlords might need to get an HMO licence from the local council. Rules differ among councils, but you will normally be charged a fee of between £300 and £1,000 every five years and your property will be inspected to ensure it meets safety standards. Planned changes to housing benefit could lead to increased demand for this type of property. From April 2012, changes to the ‘shared accommodation rate’ paid could see about 88,000 25 to 34-year-olds forced to move from one-bedroom flats to shared accommodation. Letting your property to people on housing benefit can produce returns of around 10 pc or even 15 pc. This is because the sort of properties required are often cheap to buy, in less desirable parts of towns and cities. However, these tenants can be more risky and unreliable. Steve Perrons, managing director of property firm Perrons Davis, specialises in letting homes to people on housing benefit. All his tenants pay their rent via a guarantor (usually a parent) who is responsible for paying rent and any damage to the property. If, for example, a tenant steals a boiler worth £2,000, the guarantor would be liable for the bill. ‘I also ensure there is a maximum shortfall of just 5 pc between the amount they receive in housing benefit and the rent payable,’ he says.

HOW DO I GET A BUY-TO-LET MORTGAGE?
You’ll need a specialist buy-to-let mortgage because banks and building societies calculate whether you can afford the mortgage differently to standard home loans. For starters, you will need a good credit history and a deposit of at least 20 pc. Then you will also need to demonstrate you will receive enough rental income to cover 125 pc of the mortgage interest payments. For example, if your mortgage were £150,000 and you took a Coventry BS mortgage at 3.29 pc, your monthly interest-only payments would be £411. To cover this your monthly rent would need to be £513. The difference is factored in to cover other costs, such as maintenance, letting agent’s fees and safety tests. David Hollingworth, of mortgage broker London & Country, says: ‘Some lenders use a flat mortgage rate when working out how much they will lend. ‘For example, The Mortgage Works, part of Nationwide, uses 4.99 pc and Northern Rock uses 5.99 pc, even if your initial rate is lower.’

WHAT ARE THE BEST DEALS?
Many buy-to-let lenders have rejoined the market after disappearing during the credit crunch, leading to lower interest rates. A year ago, the average interest rate was 5.3 pc, today it is 4.97 pc — a saving of £42 a month on an interest-only mortgage of £150,000, according to comparison site Moneyfacts. However, landlords can still expect to pay large arrangement fees, sometimes of between 2 and 3.5 pc of the mortgage, and interest rates are around 1 percentage point higher than ordinary residential mortgages. If you have a 35 pc deposit, you can get a two-year fixed-rate with Coventry BS at 4.35 pc with a £999 fee. Monthly interest-only payments on a £150,000 mortgage would be £544. If you have a 40 pc deposit and want a variable rate, Woolwich (the mortgage arm of Barclays) offers a lifetime tracker pegged at 3.49 points above Bank of England base rate, giving a current rate of 3.99 pc. The fee is £1,500 or 1.5 pc of the mortgage — whichever is greater. Monthly payments would be £499. Those with a 20 pc deposit can get a variable offset mortgage with Yorkshire Bank at 4.99 pc with a £999 fee, giving monthly payments of £624.

SHOULD I USE A LETTING AGENT?
Letting agents can find tenants, draw up contracts, collect rent and maintain the property. Most charge from 10 pc of every month’s rent paid for finding tenants and getting them checked in and out (known as ‘letting-only’) to 15 pc or more for full management of the property, including arranging maintenance. A good agent will have the necessary expertise to ensure the property is being let legally and smoothly. Make sure they are a member of the National Approved Letting Scheme or of the Association of Residential Letting Agents, the Royal Institution of Chartered Surveyors, the Property Ombudsman or the UK Association of Letting Agents. Be sure to ask for a clear breakdown of all their fees, including VAT, before signing anything. For example, most charge a fee for renewing a contract if a tenant wants to stay on for another year. Don’t be afraid to negotiate.

WILL I HAVE TO PAY ANY TAX?
The taxman will want his share of your investment when you buy, during the rental period and when you sell. Stamp duty is payable as normal on buy-to-let properties. The rates are 1 pc on properties bought for more than £125,000, 3 pc above £250,000 and 4 pc above £500,000. The highest rate is charged on the whole value of the property. You must also pay income tax on the rent, in line with your basic or higher-rate tax bands (so 20, 40 or 50 pc). You will, however, be able to offset mortgage interest payments, letting agency costs and maintenance expenses against the taxable rental income. For example, if you are a higher-rate taxpayer paying tax at 40 pc and you receive £1,000 a month rent, but you pay £500 for the mortgage and £100 for the letting agent, you would be charged tax on only £400 of rental income. So you would pay £160 of your monthly income to the taxman. If you sell the house, you might also have to pay capital gains tax (CGT) on profits. This does not apply when you sell your main home. CGT is charged at 18 pc (28 pc for higher-rate taxpayers) of all gains over £10,100. Anita Monteith, spokesman for the Institute of Chartered Accountants in England and Wales, says: ‘Investing in buy-to-let will mean filling in a self-assessment tax return every year. There are a lot of tax implications.’

SAFETY AND RED TAPE
Landlords also face paperwork and additional expenses. If you get it wrong, you could be letting illegally. Since October 2008 all rental properties must have an energy performance certificate (EPC). It costs around £50 and you can choose an energy assessor from www.epcregister.com. Landlords must carry out an annual safety check by someone registered on the Gas Safe Register and give a copy of the certificate to the tenant every 12 months. All properties built after June 1992 must have a mains-operated, inter-connected smoke alarm fitted on every floor. Properties older than this should have battery-operated alarms. Any furniture, including sofas and beds, must have a fire resistance label showing it meets 1988 regulations. You must ensure your tenant’s deposit is ring-fenced in one of three schemes. The Deposit Protection Service is free to use, but you must hand over the cash. With My Deposits or The Tenancy Deposit Scheme you keep the cash, but pay a premium to the scheme

From The Daily Mail 25/05/2011