Buy-to-let: Warning for 'accidental' landlords
Home owners who think they can ride out the housing downturn by offering their properties to let, rather than for sale face a nasty shock.
By Paula Hawkins Last Updated: 11:53AM GMT 16 Jan 2009
Warning for 'accidental' landlords
It may sound like the easy option, but home owners who think they can ride out the housing downturn by offering their properties to let rather than for sale face a nasty shock. This is a difficult rental market in which only the best properties are letting easily, and those "accidental" landlords who take a less than professional approach to renting out their homes are facing long and expensive void periods.
"Contrary to what people might think, the lettings market is not busy across the board," says Tim Hyatt, head of residential lettings at Knight Frank. "As a landlord you have to be totally flexible and you need to treat the property as you would an investment property: it must be well-priced, neutrally decorated, and ready for someone to move into straight away."
Accidental landlords have always been a feature of the private rentals market, but their numbers have risen sharply over the past year.
"The stagnant housing market is making it virtually impossible for many people to sell – at least at prices they are happy with," says Melanie Bien, a director of Savills Private Finance, the mortgage broker.
According to Mr Hyatt, accidental landlords contributed around 25pc of the increase in Knight Frank's stock levels in 2008. Research published by the National Landlords Association (NLA) late last year showed that the number of new landlord instructions to let in the third quarter of 2008 rose at the fastest rate since records began. Booming supply has not been matched by an increase in demand for rental property, however, as the number of applicants is rising, but at a much slower pace.
This trend is set to continue in 2009. "It is likely that if property prices keep falling we will see more people choosing to hold on to their asset and let their property rather than sell it," says Richard Price, director of operations at the NLA.
Thanks in part to the influx of new landlords, the lettings market is now highly competitive. "Stock levels in many offices are up 100pc over the past 12 months, while in some offices levels are three times as high as they were at this time last year," Mr Hyatt says. Jane Ingram, head of lettings at Savills, says that its letting agencies are seeing similar increases in stock levels.
"They are significantly higher than a year ago, with the number of properties doubling, if not trebling – partly due to the rise in accidental landlords coming new to the market," she says.
The result has been a downward pressure on rents, which is particularly acute at the higher end of the rentals market.
"At the top end of the London market, there is a huge variety of stock for people to look at, so this is a highly competitive market," says Mr Hyatt. "In some areas, landlords are having to look at rent reductions of 20pc to 40pc per week."
Knight Frank's figures show that rents are now back to December 2006 levels – and in fact are just 4pc above where they were in September 2001.
Renting out a property in a tough market is not as straightforward as it may at first appear. Seasoned buy-to-let investors purchase the kind of properties that they know to be in demand in a certain area, but accidental landlords do not have the luxury of choice. According to advice from the search website PropertyFinder, "landlords who have not had the power to choose an appropriate property will find it difficult to cover their costs".
This does not mean that you should reject out of hand the option of letting out your property. The key thing is to research the market very carefully, and find out which properties are in demand and at what rates. "Take the advice of your local lettings agent," says Mr Hyatt. "I say this all the time but no one listens: ask your agent for some examples of properties that will let overnight and then compare them to your own. If your property does not match up, you should prepare for long void periods."
You may also need to spend some money up front to make your property appeal to renters. "Accidental landlords are people who are renting out private homes decorated to personal taste," Mr Hyatt says. "These properties may not be ideal for the rental market.
"You need to ask yourself if you are prepared to make the necessary investment in the property, and whether you are prepared to refinance in order to make that investment. If not, you may struggle."
Home owners who are highly geared should be very wary of entering the rentals market – research from the NLA shows that more than 70pc of landlords expect rental arrears to become a problem in 2009.
"For the highly geared landlord whose monthly mortgage payments rely heavily on monthly rental income, tenants not paying can quickly spell disaster," says Simon Gordon of the NLA. In fact, while some mortgage lenders offer buy-to-let loans to those with a 25pc deposit, experts say that in order to make money in the current rental market you need to own a larger share.
"The only landlords who are going to make lets work over the next couple of years are those with a decent slab of equity in their property – around 40pc," says Liam Bailey, Knight Frank's head of residential research.
If you decide to go ahead and rent out your property, your first step should be to inform your mortgage lender. "If you fail to do this, you are in breach of the mortgage contract," Ms Bien says. "Theoretically, if the lender finds out, it could insist that you repay the mortgage because you have broken that contract." Many corporate tenants will insist that you provide proof of your lender's consent before signing a contract.
Your lender may allow you to remain on your existing mortgage for a specified length of time before you switch to a buy-to-let deal, or you may be required to make the switch immediately. "If you have to switch to a buy-to-let deal straight away, this may be problematic," Ms Bien explains, "because there are few deals available, and both rates and fees are high."
According to Moneyfacts, the cheapest buy-to-let loan on the market at the moment comes from The Mortgage Works, with a rate of 4.99pc available up to a maximum loan-to-value of 70pc, with an arrangement fee of 2.5pc.
In addition to getting permission from your lender, you need to inform your household insurer, and if you are planning to let your property furnished it is worth getting specialist landlord's insurance.
It pays to know the rules
Landlords are required to comply with a wide variety of ever-changing rules and regulations. Joining a landlord's association is a good idea: these will keep you informed of the regulations and may also offer discounts on services such as landlord's insurance.
Membership costs vary, but you should expect to pay around £70 a year.
Landlords are required to produce an Energy Performance Certificate (EPC) for tenants' inspection (although EPCs do last for 10 years). They must also arrange for deposits to be held by the Deposit Protection Service, or covered by one of the two insurance-backed deposit protection schemes, Mydeposits or the Tenancy Deposit Scheme.
Those landlords who run houses in multiple occupation (HMOs) must also obtain licences and comply with rules set down by the local housing authority.
There is a host of health and safety regulations to follow, too. Landlords are responsible for the upkeep of the property as well as any supplied appliances, furniture and the gas and electricity systems. A landlords' association or lettings agent will be able to supply you with a full list of the checks that need to be carried out.
See our website, telegraph.co.uk/propertyclub, for much more detail on all aspects of being a landlord.
http://www.telegraph.co.uk/finance/personalfinance/investing/4269824/Buy-to-let-Warning-for-accidental-landlords.html
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