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LETTING

Whether a seasoned buy-to-let investor or accidental landlord, this guide has been designed to explain the key facts you need to know about letting your property – arranged as a series of steps to success so that you can dip in and out of what’s most relevant to you.

Step 1 – The advantages of Letting Property

Step 2 – Understanding rental yield & capital growth

Step 3 – Understanding your legal responsibilities as a landlord

Step 4 – Finding the ideal rental property

Step 5 – Viewings, negotiating, making offers & securing a buy-to-let mortgage

Step 6 – Finding a good letting agent & tenant

Step 7 – Managing the letting & understanding taxation

If you need advice on buying a property for yourself, or if you have never bought a property before, you may also like to read our Guide to Buying, which is a great introduction to buying property in the UK.

Welcome to Whatley Lane Estate

Agents’ guide to letting property

1The advantages of letting property

The UK has a housing crisis – a severe mismatch of supply and demand has led to a lack of available properties, which in turn has put upward pressure on house prices and prompted affordability concerns across the country. According to Halifax, house prices are more than five times earnings (Nov 2014) for the first time since their peak in 2007. In 2011, the Office for National Statistics (ONS) saw the first fall in home ownership, since records began, down to 64% while the remainder were renting privately. The number of households in England and Wales stood at 23.4m in 2011, and 20% growth in households is expected over the 20 year period through to 2031. By 2032, the UK will see a majority of households renting for the first time since the early 1970s and more than a third of British households will be renting privately.

Demand growth drivers:

Population growth (official projections suggest the UK’s population will increase to 67.8m by 2020, rising to 75.3m by 2035). Tighter lending criteria (limit on the size of loans and need to maintain high deposit levels, following the 2014 Mortgage Market Review). More flexible lifestyles (people moving between work and study frequently and more workers on flexible contracts or self-employed). Higher immigration rates (over the past 10 years net immigration has averaged 200,000 a year). Cheaper accommodation options (allow potential homeowners to save for a deposit). Rising student numbers (from 2m in 2000-01 to around 2.5m in 2010-11). Social changes (later marriage and higher rates of separation).

Supply growth drivers:

Limited land supply, constrained development pipeline and strict planning rules (over 240,000 additional homes will be required each year through to 2031 to meet newly arising demand and need while house-building levels are slowly rising from their lowest levels since the 1920s, at around 100,000 per year).

Assured Shorthold Tenancy (AST) (the 1988 Housing Act re-established market rents and gave landlords confidence that they could regain possession from a tenant). Buy-to-let (BTL) mortgages (in 1996, special products became available to landlords, making it much easier for people to borrow money to buy property to let). Declining social housing availability (following the introduction of the ‘Right to Buy’ scheme).

For many, such factors have restricted the ability to get on and trade up the property ladder and ultimately drive demand into the private rented sector, whilst at the same time empowering would-be landlords to take advantage of letting property.

All this is very good news for landlords.

Making sense of the ‘bigger’ picture

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2Understanding rental yield and capital growth

Relating the dynamics of profitability; asset class comparisons

When investing in property, it is important to have a good understanding of the term ‘yield’. It is the relationship between rental income and capital value (both can change over time). When a property increases in value over time, it is known as capital growth, or ‘capital appreciation’.

Yield can be defined as: the annual return on an investment, expressed as a percentage of the capital value.

It can be simply calculated by dividing the capital value by the annual rent figure. So, if a property is offered for sale for £165,000, and the current annual rental income is set at £10,000, then the yield on this investment would be:

£10,000 / (£165,000 / 100) = 6%.

This is a very straight-forward calculation that is only really carried out to enable an initial direct comparison between investments across types and sub-types. This is known as the Initial Yield figure. The investor will usually have a particular yield figure in mind and 6% may, or may not, be suitable. For illustrative purposes, examples of alternative average returns might be:

UK government bonds – 2% | FTSE 100 company dividend yield – 3% | Bank deposits – 1.5%

In comparison, if the investor can receive a return of 6% on the property above then he/she is likely to go for this. However, direct comparisons are tricky given the illiquid nature of property, the risks it can entail such as non-payment of rent, vandalism and rent voids, associated management costs and by adding value through building or refurbishment work.

The Net Rental Yield figure is a further expansion used to describe the yield once you have deducted all the costs from the rent, resulting in your net expected rental income.

Likely costs to factor in to your Net Rental Yield assumption (ultimately you are responsible for these costs whether the property is occupied or not):

Insurance premiums (vary significantly, but allow for between 2% and 3% of the rent for unfurnished property).

Replacing fixtures & fittings (allow for 10% of the rent each year – also, allow for re-decoration).

Maintenance & repair (the type, age and condition of property will have an effect on the level of allowance).

Ground rent & service charges (if the property is leasehold).

Empty periods (budget for a month each year when the property is empty – ‘void periods’ in landlord jargon).

Letting agency fee (fees vary but a good agent could get you a higher rent than if you find a tenant privately – remember that they have more market expertise and a greater selection of tenants for you to choose from, which will more than make up for their charges).

Mortgage (many buy-to-let mortgage lenders will only lend up to 80% of the property value, so you’ll need to put in some money yourself – which of course has a cost too – in addition to bank arrangement fees).

Other (other associated purchase costs such as agent fee, stamp duty etc.).

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2Understanding rental yield and capital growth (cont’d)

Risk and return; interest rates

Investment in property is risky; such risk must be managed. Choosing the right property and market will help to mitigate risk (outlined in the next sections). However, risk is the trade-off for an investment return. If a particular property reflects a high risk, then the capital value will not be particularly high. If the rent is set at a level that compares with similar properties, the yield figure will be high. This means the rent will be high in comparison to the purchase price. Therefore, the investor will stand to recoup as much of the capital outlay as possible; as quickly as possible.

So, the risk that a particular property presents can be assessed by the rate of yield. High yield can mean high risk, and vice-versa. This enables valuers, surveyors and investors to compare risk levels between investment properties. A property that represents low risk would be well located, with modern design and in good condition. A high risk property would be the opposite of the above, poorly located and with an older design that is becoming more expensive to maintain. Residential property tends to have a low yield because of a higher capital value.

If interest rates were to go up, the increased return on bank deposits might influence an investor to simply place the capital in a bank, rather than face the risk and work involved in property investment. If interest rates were to go down, it would have the effect of investors looking for alternatives to bank deposits, shares and bonds. If investors felt that property was a shrewd buy, then values would tend to go up because of the increase in demand. If the capital value goes up and the rent stays the same, then the yield figure will fall. This is because the annual rent figure will account for a lower percentage of the property capital value. Using the previous example, if the yield of comparable properties can be calculated at around 5%, we can calculate the increased capital value:

(£10,000 ÷ 5) x 100 = £200,000 (originally £165,000 at 6%)

This illustrates the change in property capital value when interest rates and demand change the yield figure. It also shows perfectly the investment method of valuation. Essentially, two variables are involved to calculate capital value: (Annual Rent ÷Yield) x 100 = Capital Value. The equation is good at providing a very quick way of gaining an idea of what the capital value will be in the region of. Remember, no two properties are the same.

y RV

CV

CV (Capital Value) = RV / y = £200,000

RV (Rental Value) = CV x y = £10,000

y (Yield) = RV / CV = 5.00%

Demystifying the dark art of the yield-rental income-capital value relationship

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3Understanding your legal responsibilities as a landlord

The law states you must maintain the property and undertake any major repairs that are required. As a landlord it’s your legal responsibility to ensure regulations are complied with and safety checks have actually been carried out – failure to do so is a criminal offence, so seek advice and guidance. If you are in any doubt, your local letting agent will be able to help and advise.

Some legal responsibilities include: keeping your rented property safe and free from health hazards; making sure all gas and electrical equipment is safely supplied; following fire safety regulations; providing an Energy Performance Certificate; protecting your tenant’s deposit in a government-approved scheme. Special rules:

All soft furnishings must be fire safety compliant in line with the Furniture and Furnishings (Fire) Safety Regulations 1988 guidelines. Look for the fire safety labels on all furnishings. Also, download ‘Housing: Fire safety’ (PDF, 1.6MB) for further guidance.

Gas appliances, fittings and flues must be safe for tenants’ use in line with the Gas Safety (Installation and Use) Regulations 1988 guidelines. Annual safety checks must be carried out by a Corgi-registered gas installer. You will be awarded a CP12 certificate and a copy must be presented to the tenant.

Electrics must be safe with operating instructions and safety notices supplied before a letting commences in line with the Electrical Equipment and Safety Regulationsguidelines. Get your electrics regularly checked by a qualified electrician (PAT tested).

Landlords should make “reasonable adjustments” to their property to accommodate a disabled person.

Certain types of shared properties (Houses in Multiple Occupation (HMOs) have to be licensed under special rules which also require that the property meets certain extra fire and electrical safety standards. The requirement for a license depends on the size of the property and varies by council and can restrict the number of people who can occupy a property.

Rules and compliance; types of tenancy agreements & key terms

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Tenancy agreements

A tenancy agreement is a contract between you and your tenants, which sets out the legal terms and conditions of the tenancy – written or oral. It can either be fixed-term (running for a set period of time), or periodic (running on a weekly or monthly basis). Assured ShortholdTenancies (ASTs) are the most common form of tenancy. Others include: excluded tenanciesor licences, assured tenancies, and regulated tenancies. Various key terms should be incorporated and a good letting agent will have in place up-to-date tenancy agreements to reflect current legislation. Should any changes to the terms need to be made, you must have your tenants’ consent and guard against discrimination.

names of all people involved

property address

rental price and how it’s paid

information on how and when the rent will be reviewed

deposit amount and how it will be protected

details of when the deposit can be fully or partly withheld

start and end date of the tenancy

any tenant or landlord obligations

outline of bills you’re responsible for

…and many more that your lettings agent can advise on.

Key terms

4Finding the ideal rental property

As a landlord, you can divide your attention online and offline to find a property to buy that can be rented out.

Online and offline property search; targeting hotspots

When searching online, the website of your local estate agent is a good starting place. An expert agent should provide effortlessly searchable sales and lettings properties with additional information such as extra photographs, virtual tours, floorplans and brochures, a comprehensive local area profile, useful landlord and tenant information and, to make it easier, the opportunity to register for email alerts so you can receive automatic notification in your inbox of new listings that match your search criteria. Also, a good agent will subscribe to the biggest property portals – to help broaden your search; register your details on these sites too. Rightmove hosts 90% of UK property for sale. OnTheMarket is an upcoming property portal tipped to replace Zoopla and other smaller rivals to Rightmove. In addition, various house price indices such as Nationwide, Halifax, Rightmove, ONS and Land Registry can be found online; the latter even provides an index of sold prices in the area.

FINDING THE IDEAL BUY-TO-LET PROPERTY. Remember you are purchasing a property that exudes tenant appeal and not what might otherwise appeal to you. Your offlinesearch should start by identifying areas and types of property that are in demand now and will become increasingly so. These hotspots should enable you to tap into good levels of rental income and capital growth. Things to look for: improvements driven by companies moving in; new transport links or government regeneration money; an area getting “discovered” – this may be because it is close to another attractive area. An upmarket shop opening is often a good sign.

Your local sales and lettings agent will be able to advise:

What type of properties in their area have the strongest (and fastest growing) tenant demand relative to the supply of properties of that type

What type of tenant will be suited to your property –singletons, couples, families, students, corporate tenants or those on housing allowance

What level of furnishings (if any) the tenant will expect a landlord to provide

What approximate level of rent you could expect to achieve – and how quickly you can expect to receive it

What changes are happening locally that will affect future

levels of tenant demand and property prices Whether an oversupply of a certain type or size of property

is likely to develop a few years down the line.

Properties that let quickly tend to have the following features:

Proximity to transport links, shops and parks. For the student market closeness to the university is a big plus

Kitchen and bathrooms in a good state of repair and décor Ample storage Good natural light Parking & good security Garden (important for tenants with children or pets)

If you have a specific type of buy-to-let property in mind, discuss this with your lettings agent.

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5Viewings, negotiating, making offers & mortgages

Always call or email the advertising agent to check availability and any specific aspects relating to the property prior to commencing your onward journey. As soon as you have established the property has potential, book a viewing. Don’t forget to take a camera and tape measure on every viewing you go on.

Remember – buy-to-let properties are not emotional purchases. So be sure to remain rational about what is right for the rental market, not yourself.

Once you have found the ideal property, the next step is to make an offer based on:

Online & offline property search; targeting hotspots

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MORTGAGES

Buy-to-let mortgages are similar to an ordinary residential mortgage and these days the interest rates and arrangement fees on buy-to-let mortgages are only slightly higher than on ordinary residential mortgages.

The two main differences are…

1. When considering whether to give you a buy-to-let mortgage, as well as looking at your own credit history and the property’s value, the lender will also do an assessment of the likely rental income from the property. The lender’s valuation report will give them this information and they will use a calculation of 125% at a pay rate of 5%. For example, a £100k loan would need rent cover of £521 per calendar month (also known as ‘Debt Service Coverage Ratio’ (DSCR))

2. Most buy-to-let lenders will only lend up to 75% of the property’s value as a mortgage (this is called the “loan to value” ratio) – it means you will have to put in the other 25%. Percentages do vary greatly between lenders – as do the types of property they will lend against – so it pays to shop around a bit for the best deal.

The key thing is to be comfortable with what you have borrowed and to be happy that if the property was empty for a month or two with no rent coming in, or if interest rates went up, that you would still have enough money to pay the mortgage and other expenses.

And remember – if you are thinking of letting out your former home, you must contact your mortgage company as you’ll need to convert your residential mortgage to a buy-to-let one.

If you haven’t arranged your mortgage yet, your local agent should be able to help, or point you to a broker who can.

Your position – buyers with pre-arranged mortgages have a head start on most of the competition. If you’ve a buy-to-let mortgage sorted, make the agent and seller aware of this as it can put you in a favourable negotiating position.

Your budget – decide your maximum limit from the start and stand firm – after all, you’ve done your maths and know the investment’s potential. If the seller refuses to budge, you need to think very carefully if the property really is worth the extra money.

Seller’s position – are they in a hurry to sell, or have they been trying to sell for a long time? If so, they may be willing to accept a lower offer to make the sale. Sellers who are not in a hurry to move are more likely to hold out for a higher price.

The market – in tougher times when there are fewer buyers, sellers may be more willing to negotiate on price. Once you make an offer, make it clear that it’s subject to contract and a satisfactory survey.

6Finding a good letting agent & tenant

If you are lucky enough to know of reliable tenants, that’s great. If not, finding and managing tenants can be expensive, time consuming and hard work.

FINDING A GOOD LETTING AGENT

A letting agent will save you time and hassle by showing potential tenants around your property, which is great if you haven’t got the time to handle calls, stay in for viewings or respond to emails.

Your letting agent will also

Conduct a market appraisal to assess the potential rental income Find and filter good tenants for you Draw up a suitable tenancy agreement

To save time for both yourself and your agent, be clear about the type of tenant you will be happy with: are pets or smokers an issue for example?

Once they have found a suitable tenant and you’ve consented to the property being let – you, the tenant and the agent will agree a move-in date.

On move-in day, the agent will ensure the first month’s rent and the deposit is received and they will get the tenancy agreement signed.

Set-up of rent guarantee insurance may also be an option to keep you from being out-of-pocket in the event that a tenant fails to pay the rent.

They may also arrange to have utility meters read, get the utilities and council tax transferred into the tenant’s name, show the tenant how everything works and give them written instructions of who to contact in an emergency.

To find a good tenant an agent will do a thorough check of each applicant’s credit status (using all major UK credit agencies), income, employment and previous history as a tenant. They will also check each tenant’s ID and where necessary ask for references. Such checks help prevent fraud and money laundering.

More often than not it is a false economy to use the agent who charges the lowest fees to find you a tenant, or who claims he can get the highest rent. Instead, ask them about what’s included in their fees – for example, some agents will include making out an inventory, whereas other might charge extra for this. The very best letting agents will have a service level tier to choose from.

Letting & management service

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7Managing the letting

As a landlord, you are essentially running a business and need to maintain accurate records and provide good customer service in the same way as any other private company. If a tenant contacts you on a Friday evening because their hot water isn't working, you will have to respond immediately to find someone who can investigate the problem within a reasonable time. If you work full time, spend a lot of time travelling, or live overseas, it may be more useful to hire an agent to look after the management of the property.

By choosing an agent who has specialist third-party accreditation and is a member of The Property Ombudsman scheme, you can be assured that the agent promises to adhere to a code of guidance and have a form of redress if you, or your tenant, is unhappy with the service provided.

ENDING OR RENEWAL OF TENANCIES

There are 2 main routes to regain possession of property under the 1988 Housing Act:

Section 21 gives a landlord an automatic right of possession once the fixed term has expired, whereas Section 8 allows a landlord to seek possession on specific grounds (reasons) such as ‘rent arrears’ and anti-social behaviour.

In all cases, you must give your tenant written ‘notice to quit’ – usually at least 2 months. If the notice period expires and your tenant doesn’t vacate, you can start the process of eviction through the courts. Your local letting agent should be able to advise you how to end or extend a tenancy and the correct form of wording to use.

Using a professional agency; ending or renewing tenancies

TENANCY DEPOSIT SCHEMES

All new Assured Shorthold Tenancies in England and Wales, which started on or after 6th April 2007 and where a deposit was taken, must now have the deposit protected under a government approved Tenancy Deposit Scheme. Your agent will be able to arrange the negotiation of the deposit allocation, and hand-over to the DPS, should this become necessary. You will have to return the deposit within 10 days of the end of the tenancy subject to the property being left in the same state as at the beginning.

View a sample inventory & schedule of conditions report

INVENTORY

Some agents will also arrange for a thorough inventory to be carried out – describing and listing the state and condition of the property and all the fixtures and fittings within it. This should be signed by the tenant.

EMERGENCY FLOAT

For the landlord who wishes a hands-off approach, an agreed float deals efficiently with small maintenance issues as they arise using a trusted contractor network. Your agent will be able to organise inspections or to carry out repairs, providing tenants at least 24 hours’ notice.

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7Managing the letting (Cont’d)

Claiming tax deductibles as a landlord can significantly reduce your HMRC bill and you’ll find the taxman is actually quite generous in allowing you to offset a large number of running costs:

Mortgage fees (broker and arrangement fees and any incidental costs associated with taking loan finance are allowable)

Mortgage interest (you can use all the interest you pay on your mortgage each year to offset your tax bill. If your repayments are roughly equal to your net income, you will not have to pay any income tax on the property at all).

Letting agent fees (you’ll probably pay between 10% and 15% of the monthly rental income in fees to an agent, which means on a typical tenancy worth £750 per calendar month, you could claim as expenses £1,350 a year for letting fees alone).

Buildings & contents insurance premiums (specialist landlord insurance will cover the building, your liability as a landlord and loss of rent. You can also typically add contents cover, home emergency, legal expenses and rent guarantee insurance).

Maintenance & repairs (money spent keeping the property in a good state of repair is tax deductible e.g. mending broken windows and doors, repairing broken cookers, white goods, furniture or guttering, painting and decorating and replacing or fixing the roof).

Furniture (if furnished, you can choose to claim back either a general “wear and tear” allowance (10% of the rent annually), or the exact cost of replacing individual items).

Ground rent & service charge (if you are a leaseholder, you can claim back charges that cover cleaning, maintenance, heating and lighting for common areas and many more).

Council tax & utility bills (if you pay any council tax or utility bills on the behalf of a tenant, you can claim the whole cost, even during void periods).

Others (other direct costs of letting the property e.g. phone calls, stationery and the costs of travelling between different properties for the purposes of the rental business).

Understanding taxation of rental property

Before submitting a tax return

As a landlord, you must submit a self-assessment tax return each year – whether you make a profit, or not. If an accountant prepares this for you, the fees are tax deductible.

You must keep all records, invoices, receipts and statements for up to six years. Since 2011, HMRC has strengthened its efforts to track payments by landlords and have gone beyond the scope of land registry records by contacting letting agents.

Where you make a loss on your buy-to-let property, you can carry forward and set it off against rental profits in future tax years (but you cannot set it off against other income).

If you aren’t a resident in the UK and use a letting agent for management, you can get an exemption from HMRC so that the rent can be paid over to you in gross.

Ask your sales and letting agent for a recommendation of an experienced firm of accountants. Your agent will have developed close professional ties in the local business community. From managing various other client property portfolios and submitting landlord statements to third parties, they will know the best in the business.

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About Whatley Lane Estate Agents (WLEA)

We take pride in offering exceptional service on all types of property throughout the region. We specialise in high quality sales and lettings advice to buyers, sellers, landlords and tenants alike.

We are an independent established family firm, progressive in attitude, yet with a deep understanding of traditional values and ethics. We base our success on the following principles: integrity, communication and commitment. Our team of specialists combine knowledge, experience and attention to detail in order to drive value on behalf of all interested parties. Together with our innovative online and offline property marketing approach, our tenacity and passion get the desired results.

As all of our staff members have grown up in East Anglia, we know the people, the places and the property – therefore providing essential local insight. James and Mark Sawyer, having gained RICS accredited honorary degrees from RAU, benefit from having both local and national experience and are thereby able to ensure that even the most complex of transactions will succeed.

We deliberately limit our portfolio of properties to a manageable size in order to attain high service standards and exceed expectations, while delivering that all-important personal touch. Moreover, we have successfully launched a tailored sales and acquisitions service.

We embrace the entire property spectrum, commercial and residential, throughout East Anglia, offering a wide range of services. Our offices cover the area from Cambridge, through Newmarket, to Bury St. Edmunds and the surrounding villages and countryside on both sides of the A14 / A11 (M11) – with further offices planned – thereby encompassing the Cambridge-London growth corridor.

We are passionate about life and business in the town and in the countryside.

Please do not hesitate to contact the team to discuss your particular requirements.

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