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How landlords can beat the credit crunch
By Liam Tarry
Life as a landlord can be fraught at the best of times - from grappling with the reams of rules and regulations to coping with unreliable or troublesome tenants - but the credit crunch is making it even harder.
Competition for tenants is fiercer than ever. According to insurer LV=, there was a 56% increase in rental accommodation in the last three months of 2008. This is because plummeting house prices are forcing many people unable to sell their properties to turn to renting them out instead.
However, the mortgage squeeze and falling house prices have put many buy-to-let investors at risk, and continue to present a challenge going forward. The Bank of England base rate fell to an historical low at the start of 2009, giving some relief to landlords with tracker deals as well as those remortgaging onto lower rates. But what comes down must go up, and it is estimated that landlords could make up over 20% of all repossessions by the end of 2009.
Property Portfolio Rescue, a property recovery firm, says that tenants being made redundant and an oversupply of rental proporty has hit landlords hard.
Nick Hopkinson, director of Property Portfolio Rescue, says that although some landlords will have prudently saved the additional income, a large number will have been forced to divert a proportion of their rental income to service other commitments, such as alternative buy-to-lets and even their own owner-occupier mortgage.
"This ticking time bomb could prove disastrous," he warns.
So whether you're a reluctant landlord or a seasoned pro, our top tips should help you survive the downturn.
Find the right mortgage
"It's tough out there," says Darren Cook, Moneyfacts spokesperson, "but if you own more than 25% of your property and can prove the rental income, that's a big step towards securing a mortgage."
If your buy-to-let deal is about to expire, you should prepare yourself as early as possible, say David Hollingworth, a mortgage expert at London & Country. "Make sure you know what rate your deal reverts to. Most standard variable rates are quite competitive, so many landlords should be able to ride out the difficulty."
You should also prepare for potential mortgage payment shock ahead. Nick Hopkinson says: "Cash flow presents the biggest risk in property investment and landlords must act now rather than be lulled into a false sense of security, in the hope that the market will bounce back. Wise investors will act cautiously over the coming months while rates remain low, taking advantage of a temporary boost in income to bolster their cash reserves."
He suggests that borrowers consider making overpayments to reduce their debt, increasing equity and improving their chances of qualifying for a good deal when interest rates start to rise.
Know your market
David Lawrenson, a rental property expert at lettingfocus.com, says you must ensure your rent is competitive. "The biggest danger for a landlord is an empty property and, if you don't price your rent realistically, your phone won't ring," he warns.
Also remember that different tenants have different needs. Students usually want partially furnished, affordable places close to their university or college, while families are more likely to want an unfurnished property with a garden and garage.
And you don't have to break the bank to make the most of your property's appeal and make it stand out from the rest. For example, energy-saving lightbulbs and draught excluders cost only a few pounds to install and will help towards making your property as energy-efficient as possible. You may also be entitled to help towards insulation costs: the Landlords Energy Saving Allowance enables many landlords to claim back a maximum of £1,500 on their tax return for loft and wall insulation.
Meanwhile, your tenants will appreciate the lower energy bills and will be likely to stay longer in the property.
Cut out the middleman
If you're determined to use a lettings agent, be sure to shop around. "Make sure the agent has a good reputation in the local area and is a member of the Association of Rental Lettings Agents or the National Association of Estate Agents," Lawrenson adds.
If you prefer the hands-on approach, you can advertise your property for free on gumtree.com, spareroom.co.uk or rentfromtheowner.co.uk.
And rather than shelling out management fees, John Coyne, an adviser for the National Landlords Association (NLA), suggests that you give your tenants a list of emergency numbers for tradesmen you know and trust. "They can then call them directly when things go wrong and the bill will come straight to you," he says.
Abide by the rules
Since 1 October 2008, every rental property is also required to have an energy-performance certificate. This informs you and your tenants of your property's energy efficiency, as well as recommending improvements. It costs around £100 and is valid for 10 years. If your property hasn't got one, you risk being fined £200. Check out campaigns direct.gov.uk/epc and find an assessor in your area through hcrregister.com.
Remember that any deposits must be held in a Government-approved tenancy deposit scheme (TDS). These schemes are designed to safeguard tenants' deposits should there be a dispute. Fail to do so and you could face a fine of up to three months' rent. Contact The Deposit Protection Service (depositprotection.com or 0870 707 1707.)
And, if you're letting a house to five or more tenants, you will need to apply to your local council for a house of multiple occupation (HMO) licence. This lasts for up to five years and can cost up to £1,100.
Look after your tenants
Lawrenson advises asking your prospective tenant for a passport and national insurance number, as well as a reference from their current employer. "Also speak to their previous landlord, and be sure to check their credit records," he adds. The credit reference agency Experian's online service checkmytenant.com will provide an accurate credit history and risk profile for your tenant.
Of course, it's also important to look after your tenants. Caroline Hawkesley, an independent financial adviser at Evolve Financial Planning, says: "Keep communication channels open at all times, and address any issues promptly."
Always keep the property in a state of good repair. Small things like leaking gutters or blocked drains can quickly get out of hand and cause a lot of damage. Don't scrimp on repairs - if your tenants get frustrated they might withhold their rent or move on.
Take out insurance
Added landlord liability cover costs around 20% more than a standard homes and contents insurance policy, but a specialist policy can help cover damages and legal fees. As with any insurance policy, you should always read the small print and shop around before you decide on one.
Once you've chosen a policy, draw up an inventory of everything in the property, with photos where possible to be used as evidence should you ever need to contact the TDS.
And if you're worried about tenants not paying their rent, rental guarantee insurance can help meet the shortfall for a fixed period - typically, between six and 12 months. However, Lawrenson warns that these policies are expensive. "Premiums cost around 4% of your yearly rent," he says. "And you have to provide an accurate credit record of your tenants."
Get expert advice
Coyne recommends becoming a member of the NLA - for £70 a year. "We have a free helpline that can answer your questions and help prevent you making any serious mistakes," he says.
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