Buying Rental Property To Let in 2010
Not so long ago it seemed just about everybody was jumping on the bandwagon, looking to make their fortune from property. Every time we turned on the television there was another program telling us what we should and shouldn’t do and how to get rich quick.
Then along came the banking crisis, the bottom fell out of the housing market and unfortunately a lot of would be property moguls, who were relying on being able to sell their properties quickly and at a healthy profit, ending up having their portfolios repossessed. All of a sudden investing in land didn’t seem quite safe bet it once did.
The fact is however that property is, was and always will be a solid investment long term investment. Even properties bought at the height of the recent price boom will be worth more in 20 years than they were bought for then. Most people’s problems came about because they were looking to get rich overnight from property, and it’s just not that type of investment.
Is Now The Right Time to Buy to Let?
Everybody knows property prices have been in free fall for some time now, but they are finally starting to stabilise, and even to creep up. Lenders are slowly starting to lend again so now is a good time to buy property generally. On top of this, quite a number of landlords have had their portfolios repossessed. When this happens and the properties are sold, the buyers are just as likely to occupy them as let them out, and the result is a reduction in the number of properties available to let. Add that to the increasing number of people who are unable or unwilling to buy at the moment and it equals an increasing demand for rental properties.
Shop around for the Right Property
Although property prices are back on the increase, there are still some bargains to be had for buyers who are prepared to be patient. Sellers are much less bullish than they used to be and are often prepared to accept considerably less than the asking price. Look for properties that have been on the market for a while (though do check that there are no problems which are making them undesirable).
Speak to some estate agents and find out if they do any asset management work (this is where they are instructed by mortgage lenders to manage the possession and sale of repossessed properties) and if so ask to be shown their repossessed property portfolio.
Getting a Buy to Let Mortgage
Unless you’re able to buy a property for cash, you’ll need to get a buy to let mortgage. You will not be permitted to let the property out if you obtain a normal residential mortgage. You can get either a repayment mortgage or an interest only mortgage.
Interest only mortgages obviously have much lower monthly repayments buy you will have to sell at the end of the term because you will still owe the full amount borrowed at the end of the mortgage term. It is obviously not possible to predict what market conditions will be at the end of term, which will be 15 or perhaps 25 years and although you should be able to comfortably pay off the mortgage with the proceeds of sale, it may be that you have to sell at a time when prices are low and it might have been more beneficial to continue letting until the market improves.
Whichever option you choose, you’ll need to account for the fact that once any introductory fixed rate period expires your payments will increase. Many people in recent times have run into difficulties as they expected to be able to sell at a profit once the fixed rate expired and so avoid the higher repayments. This may or may not be possible but should not be relied upon. As things stand, interest are likely to rise in the near future and this should be factored in to any affordability calculations.
Before agreeing to lend the bank’s valuer will assess the potential rental income that can be achieved and this will typically need to be around 125% of the mortgage payments.
The Deposit
Most banks will lend a maximum of 80% of the purchase price, which means you’ll need to pay a large deposit from your own resources. This is useful as it provides a buffer in case prices fall and you have to sell unexpectedly. Obviously this deposit could be funded from your own savings though some people will remortgage their homes to come up with the balance. This is fine but you should make sure that you can afford the new payments even without the rental income from your investment property. If you are intending to get a second loan secured on the investment property to cover the deposit then you will need to declare this to your main mortgage lender and you may find they will not permit it.
Legal Aspects of Buying Property to Let
The conveyancing process when buying to let is basically the same as for any other property, though you should tell your conveyancer that you do intend to let the property. If it is as flat they will need to check that there are no covenants in the lease which require the landlord’s consent to be obtained to letting, or even prevent it outright.
When buying a flat to let you will also need to take into account any service charges and/or ground that is payable as this will obviously affect how much net income you will receive.
Maintenance Responsibilities
You will be required by law to have the gas appliances tested annually by a Gas Safe registered engineer and of course to ensure that they are safe. You will also be responsible for ensuring that the electrical installations are safe, that there is hot water and that there are working wash basins, toilets etc.
Any furniture you provide will need to be fire resistant. These matters are in addition to your obligation to keep the property is a good state of repair generally.
Finally, you’ll need to obtain an energy performance certificate which will need to be updated every 10 years.
The Tenancy Agreement
The tenancy agreement is the contract between you and the tenant and it should contain obligations on the part of the tenant to pay the rent and take reasonable care of the property in exchange for a right for the tenant to occupy for a fixed period. You should use an assured shorthold tenancy agreement. If you are using a letting agency they usually be able to provide the agreement.
Alternatively you could purchase one from a legal stationers or else you are welcome to use the example which can be downloaded below in this article.
Please note that we offer no warranty whatsoever as to the fitness for purpose of this document and if you choose to use it you do so entirely at your own risk. We cannot accept any liability for any loss, whatsoever arising, as a result of your use of this document.
Download an assured shorthold tenancy agreement here.
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