BUY to LET - A Practical Guide - November 2005
by Ron Hastings

Buying a second home to let out has been seen as a popular way to top up savings and as an alternative to traditional long term investments such as pensions. More than one million people own a second home, according to the Council of Mortgage Lenders with many choosing to invest in property with its proven record of appreciating in value over time, as well as providing an income along the way.

Buy to let is growing in popularity as it becomes easier, and cheaper, to finance. A growing number of specialist buy-to-let mortgages offer buyers plenty of choice and it pays to shop around and take independent financial advice. Standard buy to let loans tend to have higher rates than mortgages on first homes, and require larger deposits. Most lenders require a deposit and if the mortgage is to be funded from rental income it is important not to overstretch yourself. The property may be empty for lengths of time, during which you will have to cover the mortgage. It pays to take advice on the potential yield from those that know the market and that is something you should be seeking at the outset as well as having an idea of costs, demand and how you are going to manage the let-self management can lead to problems particularly if you stay some distance away making it a problem for you to keep an eye on the place.

Before buying, do your research. Don't buy somewhere just because you want to live there yourself. Think of the sort of place that your prospective Tenant will be attracted by and remember it easier to let a property and justify the yield at the lower end of the market and while different considerations may apply if you see the place as your eventual home or have another agenda factors such as proximity to shops, public transport and local amenities are generally important. Smaller properties are easier to rent out than larger ones. According to the Association of Residential Letting Agents (Arla), most buy to let mortgages are for less than £100,000 and in The Borders there are still plenty of buy to let properties available in that range although as mortgage rates have remained at relatively low rates there are signs of the first time buyers coming back into the local market. However with prices still below the stamp duty limit of £120,000 if you can get the right place the associated costs can be kept to affordable levels. Many landlords go through a letting agency for peace of mind. If you do, expect to pay 10 to 15 per cent of the rent in fees to the agent and you should always ask for a rental valuation and written details of the costs and services that are available as they can vary significantly.

A major consideration in making the most of a rental property is to try to avoid the pitfalls. Select the right tenant and let the property on a basis that allows you a degree of flexibility in case your circumstances change. Your letting agents should meet the tenant ,check financial and character references ,including references from employers and any past landlords and if you have re furbished and want to avoid tenants with pets or smokers find out about thee issues and make the tenant aware of the leasing conditions before the tenancy commences. A fully protected sitting tenant can have a significant detrimental affect on the value of property so if you want to retain flexibility a lease under The short Assured Tenancy regime, which must be for a minimum period of 6 months, is a good compromise and if it works out it can always be extended. However the appropriate lease documentation and Notice must be given to the Tenant BEFORE the commencement of the Tenancy or it will not be effective. Remember that even if your Tenant pays a deposit (generally one month's rent) and is paying rent in advance if there are problems and it becomes necessary to remove the Tenant the cost of legal proceedings, lost rental and possible damage to the property in the meantime while the Tenant "legally squats" in your property can be a most frustrating and expensive time for landlords.

Be aware that after some years of self regulation the private rental sector has been subject to a good deal of scrutiny and legislation is on it's way for the Borders which will require compulsory registration of landlords with the Local Authority with the possibility of those not considered "fit and proper" being excluded. There is a separate regulatory regime for "Homes in Multiple Occupancy" and Landlords are being brought into the debate over anti-social behavior with the possibility of Landlords being held criminally responsible for the behavior of their Tenants! Other statutory provisions deal with better practice for handling deposits and safety issues such as regulations requiring landlords to have gas fittings checked, maintained and records kept for a number of years. These and other traps for the unwary require Landlords to adopt a more professional approach to the whole letting process.

Taxation is another factor to consider. Rental income is liable for tax but you can offset costs such as mortgage interest payments, maintenance to the home and management fees against the rental income. If you sell your second home, you are liable for capital gains tax and although indexation provides partial relief the market rises in recent years have taken many second home sellers into the tax net. Looking on the bright side remember tax is only paid on profits and gains justifying your initial purchase.