Buy to let pitfalls to watch out for
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The property crash just a few years ago, and the subsequently stagnant market, has meant that the rental market has been booming since the recession began and landlords have been cashing in as a result.
But with the mortgage lending and property prices growing, is the buy-to-let boom going to continue in 2014, and what pitfalls should you be looking out for as a prospective landlord or landlady?
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Mortgages
Since the beginning of the recession landlords have been making the most of rock bottom interest rates, and excellent returns gained from a market where demand for rental properties has been high.
But with the property market showing increasingly promising signs of recovery, it won't be long before interest rates rise, and with buy-to-let, it's absolutely essential that you are able to cope with that rise, even if the property sits empty for a couple of months.
Remember that buy-to-let mortgages require a sizeable deposit, often as much as 25 per cent or more, and many charge hefty fees. Lenders typically look for rent that covers 125 per cent of the mortgage repayments, and since most buy-to-let mortgages are interest only, you must be sure that you can cope with a drop in property prices and hang on for a long-term investment rather than getting rich quick.
Check, double check and triple check your maths, taking care to factor in possible interest rate rises, and shop around for the best deal.
Financial extras
On top of your mortgage, it's important to consider all those extra potential costs. If you're making money from property lettings, you must be fully aware of your tax requirements, and don't forget should you come to sell the property, you will need to pay capital gains tax. Since tax can be complex for landlords, you are strongly advised to seek specialist financial advice on that score.
On top of the taxes, potential new landlords must be ready to deal with repairs, redecoration or letting agency fees if they plan to hold on for the long-term investment.
Agencies obviously take the hard work out of managing the property, but they will charge you a fee. Remember to set aside a contingency fund for anything from roof repairs or a new boiler, to new carpets and redecoration.
Insurance woes
As a private landlord things can quickly go wrong if you haven't fully checked your legal responsibilities, and even then, a bad tenant can cost you dear.
First-time landlords should be prepared to thoroughly research what is necessary, but for example, in order to get a standard assured shorthold tenancy agreement, you must provide an Energy Performance Certificate, ensure gas and electrical appliances have been installed correctly and are safe, and protect any deposit paid in a government-backed tenancy deposit protection scheme (TDP), so do check www.gov.uk to make sure you haven't missed anything.
For further reassurance, it is advisable to look into specialist professional landlord insurance, which can cover everything from contents and buildings, to a rent guarantee insurance that means you'll still get an income if the tenant fails to pay the rent.
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Finally, do consider background checks on tenants if you are planning to do things yourself without the help of a lettings agency. The latter may charge a sizeable sum, possibly as much as £300, to carry out this service, but you can get cheaper reports from 192.com (£30), which checks for identification as well as financial issues, while the National Landlords Association offers a similar service. Credit agencies Experian and Equifax are other options to consider.
All in all, a buy-to-let investment can still be worthwhile, and many existing landlords are expected to invest in further properties while there are so many on the market. Just be careful to factor in the potential costs of becoming a landlord, and be sure you're not getting in over your head.
Are you a landlord or landlady? What advice would you give to buy-to-let first-timers? Leave your comments below...
