Interest rate cuts tempting property investors back in to the market

Landlords have been buying more properties in the last quarter according to a survey. The Association of Residential Letting Agents (ARLA) quarterly survey revealed a “bounce back” in the buy-to-let market. In the ARLA members’ survey of the Private Rented Sector (PRS) for the second quarter of this year, nearly twice as many ARLA members reported landlords are buying more properties.

The Bank of England’s decision to cut interest rates to historic lows over the past year has also helped struggling landlords, according to ARLA. Half of those surveyed said they thought the cuts are tempting investor landlords back to the market because of the minimal interest to savings rates.

The ARLA survey also indicated the rise in buy-to-let activity could be as a result of “increased average weighted rental returns”. Houses had risen from

4.8 per cent to 5.1 per cent, with flats up from 4.9 per cent to 5.0 per cent. Returns for flats remained consistent throughout the UK.

However, optimism is muted in the buy-to-let market by the lack of buy-to-let mortgages on the market.

Checklist for investing landlords

This checklist is an introduction to buy-to-let highlighting the types of questions you should be asking yourself before buying a property to let out. It is not intended as an exhaustive list, merely an introduction for new buy-to-let investors, to a range of issues they should consider before entering the residential lettings market for the first time.

You should consider the following points before making any financial commitments:

Making your investment

Are you investing to generate an income or hoping to see your capital grow and are your expectations realistic?
Do you have sufficient capital of your own to invest in a property?
Are you prepared to tie-up your capital for a considerable period?
Will you have sufficient savings and other forms of capital after you have made this property investment?
Have you taken specialist tax advice about the implications of buying and selling a buy-to-let property, and the tax treatment of all income and expenditure from renting?

Choosing and managing your property

It is equally important that the property you buy is appropriate for the purpose and is properly managed thereafter.

You should consider the following points before deciding to proceed:

Are you regarding this as a medium to long term project?
Have you consulted a professional, qualified local letting agent before beginning your search for a property?
Have you thought about the type of household which will want to rent your property?
Have you considered that demand for this type of property may change from year to year?
Have you made independent inquiries to confirm a likely rental figure?
Is the location of the property attractive to tenants?
Most lenders will require you to have an Assured Shorthold Tenancy agreement with your tenants. Are you aware of the legal implications of this?
If you are thinking of buying a leasehold property, what is the length of the lease remaining and is sub-letting allowed?
Have you consulted a solicitor about the legal implications of renting out your property?
Have you investigated the running costs of the property (e.g. ground rent, service charges, repairs, letting and management fees, etc)?
Have you allowed for furnishings and other start-up costs in your calculations?
Have you considered how you will repay your mortgage if you have no tenants paying rent?
Are you aware that your property could decrease, as well as increase, in value?
Are you aware of all the safety regulations applying to rented property?
Have you considered the likely costs of dealing with tenants who do not pay their rent or damage your property, including the costs of evicting a tenant in court?
Have you considered using the services of an agent to let and manage your property on a day-to-day basis or will you be doing this yourself?
If you are using a letting agent, have you assessed how much they will charge you for their services?
Will the net rental yield i.e. the rent remaining after you have paid your running costs, be sufficient to meet your monthly mortgage payment?

Choosing your mortgage

If you are thinking of raising a mortgage to help fund the purchase of a property, you should consider the following:

Have you considered what type of mortgage to buy your property with?
Have you considered the impact of any future rises in interest rates?
Could you meet the monthly mortgage payment from your own resources, if the rent was not paid or the property was empty?

If you are unsure of any of your answers to the questions in this checklist, you should seriously consider taking appropriate professional advice. In particular, you may need to take specialist legal and tax advice from suitably qualified professionals.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.