16 January 2013
Buy-to-let: a wise investment or a risky business?
The scarcity of mortgages, high house prices and reduced levels of savings are driving a rise in demand for rental properties as families put owning a home of their own on the back burner.
As a result, the buy-to-let market is booming, driven by borrowers with big deposits investing in property to safeguard their savings from plummeting interest rates.
It sounds simple, buy a property, find a tenant and you instantly have a new income stream which not only covers the mortgage, but ideally gives you an added future nest egg as property prices increase.
The reality however, isn’t always as easy. Rogue tenants who fail to pay, damaged properties, eviction fees and a rise in interest rates for buy-to-let mortgages are just some of the issues prospective landlords need to think about.
Property litigation solicitor Sarah McLoughlin has some words of wisdom for those keen to pursue the idea. “Investing in the buy-to-let market should be treated like any other potential new business venture, you need to research your market, analyse your likely costs and think about how you will manage cashflow,” she said.
“For example, it might take a while to find a suitable tenant and you still need to pay the mortgage; refurbishment or repairs may be required to the property at some stage; or you may find yourself having to take legal action to evict a tenant who refuses to move and can’t or won’t pay the rent.”
Sarah recommends finding a good letting agent, ideally ones who are affiliated with Britain’s two major professional bodies, the Association of Residential Letting Agents (ARLA) or the UK Association of Letting Agents (UKALA). They will carry out credit checks and also have standard agreements for landlords and tenants.
For those keen to let a property independently, she suggests the following:
• carry out a proper credit check: ask to see pay slips for the last three months and/or bank statements and keep copies of all documentation
• review your potential tenant’s ability to pay: you can ask someone with a better ability to pay to be made a party to the tenancy agreement either as tenant or guarantor
• follow up tenant references
• take a deposit and make sure it is properly registered, in time, with the Tenancy Deposit Scheme. If you fail to do so, you can be fined and this can also affect your ability to take court proceedings to remove a tenant
• keep an eye on your income stream – if the tenant fails to pay rent without explaining why or letting you know, steps can be taken to recover possession if the rent is in arrears of at least two months
• recognise that even at the end of a contractual term, if a tenant refuses to leave you still need court proceedings to recover possession.
Sarah explains that even once a possession order is received, it can only be enforced by court bailiffs, something that can take several weeks, during which time the landlord is unlikely to be receiving any income from the property.
And she warns that having to go to such lengths can be expensive, not only through lost rental fees, but in the cost of legal action and any post eviction repairs which may be required.
“You can only lawfully recover possession by agreement with the tenant or by obtaining a possession order from the court, which is why it is so important to fully understand all the issues involved in becoming a landlord before you venture into the buy-to-let market,” concluded Sarah.
“Do your homework, talk to a good agent and, if you need to, seek legal advice from property experts who can help you ensure that you are protected as much as possible.”