The first point of call for beginner buy to let landlords should be the Association of Residential Letting Agents (ARLA). This is an organisation that represents the letting and management agents that you may need if you ultimately use someone to help you find tenants and to manage your property. It is a well respected organisation with a membership of more than 3500 agents around the country.

There are two reasons you might want to go and take a look at their website. The first is that they publish a quarterly survey of landlords. You can download the one for the second quarter of 2010 here:

This give an indication of returns on buy to let and property investments and is a good gauge of investor sentiment in the market because it asks questions about issues such as how many landlords are thinking of selling their properties over the next 12 months and what the Loan to Value (LTV) of property portfolios is.

The other really useful thing that ARLA publishes is a guide for buy to let landlords. This beginners guide covers most issues that people need to be familiar with such as insurance and mortgages – many of the issues that I also try to cover here. But I’m just a one-man band rather than a full organisation with thousands of members. You can check out their guide here:

Another useful source of information is Rightmove which is a website that lists properties for sale and to rent. You don’t just want to go there if you’re looking to see what’s for sale (or what rental prices are). You also want to take a look at this website for its buying guide. This is not the most comprehensive guide on buy to let out there but it does have some useful mortgage calculators and the like.

You can find it here.

To find out what your responsibilities and rights are as a landlord you can go to the government’s website on private rental property at Direct Gov.

This site is really very useful  because it explains exactly how  rental contracts work and what you have to do as a landlord when holding a deposit (something I’ve also covered in my post on the tenancy deposit scheme).

The government has also got a really useful guide to assured and assured shorthold tenancies  (the sort you will generally be involved in when letting out a buy to let property). It has sections on setting up a tenancy, what the rights and responsibilities are and what to do when a tenancy ends. You can download this guide here.

So there you have it. All the information you could possibly want on buy to let including beginners guides and legal guides. I hope this helps.

1. interest rates are as low as they can possibly go and these have helped support house prices. Even with rates so low many first time buyers are still priced out of the market. This does not seem to me to be sustainable and if interest rates rise, as they must at some point, then a lot of people currently paying almost nothing on variable rate mortgages will be seriously squeezed financially.
2. the main risks on the economy are that it will slow down again or go through a double-dip recession. The government is cutting spending so the civil service will have staff numbers cut. In all past housing downturns there has been a huge correlation between unemployment and mortgage arrears and repossessions. If a lot of people lose their jobs, as now seems likely, then I can’t see property prices staying as high as they are now.

It is now beginning to look as if my worries have not been misplaced. A recent survey showed that most buy to let landlords are most worried about interest rates rising. And the housing market has started to crack. In early August the Royal Institution of Chartered Surveyors (RICS) said its agents reported that house prices have started to fall for the first time in a year. About a quarter of their members said that prices were not falling. Many now think that September will be a key month. This is traditionally quite a busy time in the property market as people come back from the summer holidays and look for homes to buy or put homes on the market. If September is a slow month with more properties on the market than there are buyers then it will be an especially bad sign.
My advice remains the same. If you can find an especially attractive property with a good rental yield and an attractive price then you can probably do okay over the cycle. You need to minimize risk by for instance using a fixed-rate buy to let mortgage, even though these cost a lot more but at least you will be protected against rising interest rates. You will also want to be especially careful with your tenant checks and consider taking rental insurance as well to help protect you against the risk that your tenants will lose their jobs and be unable to pay their rent. All in all now is a difficult time in the market and unless you find an opportunity that is so compelling that you can’t wait, I think you will not be harmed by sitting on the sidelines for another few months to see which way the market is moving. My feeling is that the time to make really great returns on buy to let is still coming.

If you click through to the video interview with him, which I highly recommend, he outlines some useful rules for people looking to buy now. Among them are that people should:

1. look at properties generating a yield of about 7%,
2. not go above 65% on loan to value (LTV) to have a margin of safety assuming that interest rates will go up,
3. only look at paying prices that are 30% below their peaks in 2007.

In essensce he argues that you should not expect captial return on any time frame of less than 10 years and should look at the cash a property can generate.  This all seems sensible advice, so perhaps he and I are not as far apart in our views as I might have thought at first.
My advice is to still keep a close eye on the market or take a punt with cheeky offers on especially good prospects. But I won’t be putting money into the market right now. Then again, I haven’t built up a £1 billion buy to let empire, so what do I know.

The new government plans to increase capital gains tax (known as CGT) to as much as 40% or 50%. This is a tax that is charged on the profit (or capital gain) that is recorded from buying and selling assets such as houses or shares. The reason for the increase is clear enough. At its current level of 18% there is a huge incentive for people to try to change income, which is taxed at the normal income tax rate, into capital gains.

In fact, every buy to let investor that uses an interest-only mortgage to minimise income tax is taking advantage of the difference in these two rates of tax because it reduces the amount of tax paid on monthly rental because most of it goes to paying interest on the mortgage. The fact that one could do this and wait for houses to increase in value, with most of that profit being taxed at the lower rate, was a major attraction for many higher-rate tax payers to invest in residential housing.

The bigger worry for the government was not really BTL investors, but those in business and areas such as private equity funds because most of the payment that goes to these people is calculated on capital gains. So in many ways moving to equalize the tax between the two is fairer.

But the new tax could be unfair in one very important respect and that is when it comes to inflation. If property prices rise in line with inflation their owners aren’t actually becoming any richer. Yet they will have to pay a tax of 40% or 50% no that increase in value.

How to protect your Buy to Let Portfolio from CGT

Investors need to quickly take stock of their current portfolio and assess how vulnerable it is to a rise in capital gains tax. If you are an investor who has been relying primarily on rising property values to provide the majority of your income and return then you should reconsider your portfolio with an eye to earning ongoing rental yield from it. If you have several properties that you have owned for many years and that have increased in value considerably, accumulating capital gains all this time, then you may need to sell one or more of them so that your profits are taxed at the current lower rate. You can then reinvest the proceeds in new properties with current market values, which essential sets the clock to zero on the gains.

If you are a couple and are buying properties you should also consider the fact that British tax law treats both partners separately. So it makes sense to ensure that both are able to take full advantage of tax-free income allowances in each tax year. This is also important if you have several properties as there is also an annual capital gains tax allowance before which you have to start paying tax, so it may be more efficient to stagger the sale of properties over several years to save on tax.

What are the advantages of managing agents for buy to let?

The biggest advantage is that it takes away much of the stress involved. A letting agent will have the job of finding tenants and ensuring that they are high quality. That will often mean checking their credit score and telephoning their references such as an employer and previous landlord. You could do these tenant checks yourself but many people don’t so it probably makes sense to pay to be sure it gets done rather than not done. Many letting agents will also offer rental guarantees as part of their service. This means that if the tenants turn out to be bad apples and don’t pay their rent, the insurance policy will kick in and cover legal costs and compensation for their rent until they have been evicted and sometimes even until new tenants have been found. The other big advantage is that they will have to deal with calls late at night if there are problems. They will often have a list of reliable tradesmen such as plumbers and electricians on hand to deal with these faults.

In many cases the quality of the work that is done will be higher than if you hired an electrician or plumber yourself. Simply put, an electrician who gets tens or even hundreds of jobs a year from a single managing agent will work hard to keep the agent happy. He will arrive on time, do the work promptly and do it properly. On the other hand, if he (or she) thinks that they will just get a single job from you to fix one problem then they may well arrive late, keep you waiting and take their time doing the job. If you think about all the times you’ve ever called a plumber who didn’t arrive. The odds are that he was working on a more important job for a managing agent so left you out to dry.

What are the disadvantages?

The biggest disadvantage is cost. Many managing agents will charge a fee of about 4% to 6% of the annual rent to look after the property for you. If you have a big mortgage this can leave you somewhat stretched, especially since the typical fee to find a tenant is about 8 percent of the annual rent. That means you could be paying as much as 15 percent of your gross income in fees before you’ve even dealt with your other major costs such as servicing your mortgage. Your maintenance costs will also be much lower if you are handy with a hammer and paintbrush and do much of the work yourself. That said, if you are calling in tradesmen to do the work for you then you may well end up paying more yourself for the job than you would if it was through a managing agent for the reasons I outlines above.

Some people may also feel a loss of control in using an agent. If you are very hands on and want to meet your tenants yourself before agreeing to anything then you should probably stay with your instincts and remain hands on. Either way you probably still want to ensure you minimise some of the risks by ensuring that you have proper landlords insurance and rental guarantee cover. Buy to let investing is uncertain enough as it is without you having to increase the risk that you take on. Using a managing agent can help you reduce some of the uncertainty, but it is certainly not the only way.

Do your homework

All investing is risky. Don’t let anyone tell you otherwise. And the same is true for buy to let investing. In fact, even though many people look at buy to let as a safer form of investment than, say, buying shares or putting money into an insurance policy, there are some ways in which buy to let is far riskier. If you were to invest in a diversified portfolio of shares and bonds then you have little reason to worry about any one of them going bust. Most big funds or ETFs will invest in a basket of at least 50 companies. There is always the risk that one of them will be the next Enron with a crook in charge, but even if it is you will have lost no more than 1/50 (or 2%) of your investment. Now you clearly don’t want that to happen, but if it were to happen you  would not be financially wiped out.

The big difference with buy to let investing is that unless you have a huge empire of properties then you will end up putting a very large portion of your wealth into one basket. If you owned just one or two properties, as most small landlords do, and one was to run into trouble then you really could see yourself wipe out.

These risks also have their rewards. And if bought at the right time and in the right place, the returns that can be earned from property can be higher than from shares in the market. That said you need to be aware of the risks and need to take what steps you can to mitigate them.

One of the biggest risks you will face is that your tenants won’t pay their rent on time, if at all. A couple of months of missed payments can cause serious financial harm, especially if you have a mortgage on the property that has to be paid every month. There are a couple of steps you can take. The first is to check your tenants carefully. If you have hired a letting agent, then you should ensure that they do this as part of their service. You can also double check yourself. The National Landlords’ Association (NLA) offers a cheap tenant check service to its members that costs just £8 (non-members can get it for £12). This will include checks on their identity, whether there are any court judgements against them and whether they have filed for bankruptcy or insolvency. It doesn’t cost much and gives some peace of mind.

A more comprehensive test can also be done that  costs £23 (£28 for non-members) that will also include references from their employers and previous landlords or letting agents. It is a simple step that can be done online so that at least you have a better chance of weeding out the real no-hope tenants.

You also want to be sure you have proper landlords insurance cover over the property. This needs to cover your liability (if a tenant was to be hurt, for instance, through some fault of your own) as well as damage that tenants might cause. You don’t want to be caught short here.

Beyond that you might want to consider rental insurance or rent guarantees as well as legal expenses insurance that will cover your costs and lost income if a tenant stops paying rent and has to be evicted. This process can take a couple of months and run up large legal bills, so you really want to have at least a minimum level of cover. If you have a large portfolio of properties, say 10 or more, then you can opt to give this a miss and rely instead on self-insurance. After all, with 10 properties the odds are slim that tenants will be defaulting on their rent in more than 1 property at a time. So you can probably take a chance knowing you can still keep up with mortgage payments from the other properties. But for a small landlord, tenant checks and some forms of landlord insurance are essential to reducing the risks in buy to let investments.

How much do Tenancy Deposit Protection Schemes Cost?

The cost for these plans ranges from free for the Deposit Protection Service (which uses interest on the money it holds to fund itself)    to almost £90 pounds (including joining fee) for My Deposits.co.uk, an insurance-based scheme where the landlord keeps the deposit. If you are just a small landlord holding just one or two deposits then it would probably be worth your while to go for the free safekeeping plan since you would not be losing much interest anyway. The insurance schemes are much better suited to letting agents and landlords with larger portfolios over which they can spread the fixed costs of an insurance plan, which usually has a high joining fee because the insurance company needs to run credit checks.
One can also get discounts on some plans through membership of landlords associations such as the National Landlord’s Association, which owns part of MyDeposits.co.uk.

What other requirements are there?

Landlords also have some other responsibilities and should be sure to follow the rules. The main one is that within two weeks of receiving a deposit they have to write to the tenant explaining exactly where the deposit is held. The also have to give details of the protection scheme they have selected, contact details and information about what tenants can do in the case of a dispute.

What is changing?

Later this year the government will be changing the laws affecting letting agreements where the rent is between £25,000 and £100,000 a year. Once that happens tenant deposits within this new bracket will also have to be protected.

By many indications the market is still falling sharply. Take the case of Fergus Wilson and his wife Judith, two British maths teachers who between them built a staggering empire of buy-to-let homes with more than 700 properties in their portfolio. Little wonder then that they were dubbed the king and queen of buy to let by the British press. Yet this massive investment portfolio, which at one point reached 900 properties and was worth more than 225 million pounds to them net of debt, has come under enormous pressure in the downturn. Last year tenants in almost 100 of the properties were missing rental payments. Many had lost their jobs. Banks were threatening to take back the properties. Now the whole portfolio is in a sort of managed run-down with the Wilson’s trying to sell what they can without dumping properties. Provided markets hold up they may be able to salvage something. But their experience should be a warning to new investors. The fact that such experienced investors with such a diverse portfolio and with significant capital are experiencing difficulties does not auger well for the state of the market. Especially since the Wilson’s invested in sections of the market, mainly small family-sized buy-to-let houses, that were thought to be far more stable than some such as city-centre flats. The first lesson of their experience is that unless you have deep pockets and the ability to ride out a downturn and significant period of negative equity then now may be a risky time to invest indeed

The second lesson is that the Wilson’s first started building their empire in the early 1990s when Britain was suffering a previous and deep property downturn. Mr Wilson initially started buying houses at deep discounts on auction during that downturn. He was then able to immediately lever them up by getting them valued for more than he had paid and getting 100% mortgages over the properties. Interest payments were then entirely made using income from renting them out. In fact he didn’t put any of his own money in since he had 28 days after the completion of the auction to line up financing. It is an amazing tale of an empire that pulled itself up by its own bootstraps. Yet the second lesson here is about timing. One would think that Mr Wilson knows a thing or two about property downturns, having started to make his fortune buying houses during a particularly deep one. If he is now selling it probably suggests that he thinks prices may well fall further.

That’s the bit about blood in the street. The bit about why the buy-to-let cycle may be turning up is found in recent indications that rents are increasing, which would lead to improved rental yields for buy to let properties. The latest survey released in mid March 2010 by the Royal Institute of Chartered Surveyors (RICS) showed that the supply of new rental properties coming onto the market has slowed for a second quarter in a row and that rents seem to have stopped falling for the first time in more than a year and a half. Many of them now expect rents to start rising. This suggests that many unwilling landlords who put their properties out to rent because they didn’t want to sell into a falling market are taking advantage of the recent blip in property prices to sell. This is a positive development but it is not unmitigated good news for landlords. This is because property prices have picked up so that rental yields in many areas still look unattractive.

The recovery in housing prices also looks dangerously fragile with the real prospect of a big dip in house prices coming as soon as the Bank of England starts to increase interest rates.  There may be plenty of buy-to-let blood on the streets, but perhaps not enough to get people to start buying.