Buy-To-Let is a joint initiative by the Association of Residential Letting Agents
(ARLA), and supported by a team of mortgage lenders. The scheme is designed to stimulate
the growth of the private rental sector (PRS), by encouraging private investors to
take the opportunities given by competitive interest rates and the reasonable certainty
of a sustained capital growth over the coming years. Historically, buyers of property
to let have been surcharged or forced to borrow at commercial rates and potential
rental income has not been taken into account for servicing the borrowings. Now,
the panel of lenders supporting the Buy-To-Let scheme have brought their interest
rates into line with the rates for owner occupation and take rental income into account
for servicing the loan. This policy switch has been encouraged by the knowledge that
professional letting and property management agents will be involved in the selection
of suitable properties for the rental market, in the selection of tenants and in
the management of the properties. This enhances the creditworthiness of Buy-To-Let
propositions. Through the ARLA member offices the lenders have a countrywide network
of experienced letting agents who comply with the ARLA codes of practice and ARLA
training and qualification requirements in letting and property management. ARLA
members are covered by the ARLA fidelity bond which is linked to required accounting
procedures and high levels of professional indemnity cover.Through these agents,
and through their own branch networks and links to independent financial advisors,
accountants and family solicitors, the Buy-To-Let panel of mortgage lenders are bringing
a new impetus to the PRS and an investment opportunity, as attractive as commercial
property or gilts, for private individuals to add to their investment portfolios
and to consider for their own private pension planning.
What are the returns from letting property?
Gross returns - the rent received before taking account of the cost of letting such
- as management fees, maintenance, service charges ground rents and insurance varies
between 7% and 10%. This may reduce by up to half for very expensive properties.
The average rental return in Britain today hovers around the 10% mark, and capital
appreciation is likely to match, if not exceed, inflation for the foreseeable future.
As a general guide, the gross rents should be between 130% and 150% of the monthly
What difference does a Letting Agent make?
Buying a property to let is not the same as buying your own home. Mortgage lenders
will want to know that an ARLA member agent has been advising on the selection of
properties suitable for letting. The experienced agent will know the local market,
whether there is a demand for say, two-bedroom flats, or four bedroom houses, or
for properties close to schools or transport links or secluded properties with gardens.
Also the agent will know the standard of decoration, furnishing, fixtures and fittings
required. Then there is the selection of well-covenanted tenants who will pay their
rent on time and leave the property on time and in a proper state; and there is the
management of the tenancy. Knowing that the management of any inherent risk is in
the hands of a professional agent enhances the creditworthiness of Buy-Let propositions
put to mortgage lenders.
How to Buy-to-Let
After gaining suitable advice from an ARLA letting agent, Buy-to-Let investors can
start on a property search. Once a property has been found, the letting agent will
confirm whether or not it has letting potential, the range of the likely rent that
can be achieved in current local market conditions and advise on the need - or otherwise
-for re-decoration and new fixtures and fittings to attract good tenants and to reduce
the risk of lengthy void periods.
How are mortgages arranged through the Buy-to-Let initiative?
Broadly, there is little difference between arranging a Buy-to-Let mortgage for investor
landlord's and a standard mortgage for owner-occupation. Buy-to-Let mortgages are
subject to the usual status checks. Loans can be arranged for terms of between five
and 45 years and for up to 80% of the value of the property. Through the Buy-to-Let
initiative, rents achievable from an investment property can be taken into account,
provided an ARLA member agent is to be responsible for letting and managing the property.
The Dos and Don'ts of Buying to Let
DO Think of buying to let as a medium to long term investment.
DO Seek advice from an ARLA letting agent on local market demands.
DO Get your sums right. Will the rent cover borrowings and costs, after allowing
for void periods?
DO Decorate, fit out and furnish to high quality standards, especially kitchens and
bathrooms, to attract the best tenants and let quickly every time.
DO Use an ARLA member as your letting agent. They are bonded, hold Professional Indemnity
Insurance to required standards, have been in the business for a minimum of two years
and are kept up to date with the latest legal and regulatory requirements.
DON'T Let personal taste cloud your judgement. Be sure the property you choose meets
DON'T Purchase anything with potential maintenance problems like a lot of woodwork
or large gardens. It will add nothing to the rental value and cost a lot to keep
DON'T Think that the running of an investment property to let can be left to friends
or relatives in your absence. Tenants require a full management service.
DON'T Use off-the-shelf tenancy agreements from HMSO or law stationers, or forget
to issue the right notices or fail to have a proper inventory and condition report
made before a tenant moves in. Leave all documentation to a professional agent.
DON'T Furnish with second hand furniture or cast-off soft furnishings.This will probably
contravene the Furniture and Furnishing Regulations.
What happens after Buying to Let ?
An ARLA member will introduce and vet prospective tenants; prepare the tenancy agreements;
advise on and arrange inventory and condition reports and changes to utility accounts
and Council Tax; collect the rent and pay the balances to the landlord's account.
A letting and property management agent also pays bills on behalf of the landlord
and regularly inspects the property, recommending, overseeing and accounting for
necessary maintenance, repair and re-decoration.
Are there any special conditions?
Generally, lenders will expect landlords to use an ARLA member to let and manage
the property and for rental agreements to be drawn up as Assured Shorthold Tenancies
or other contracts as appropriate.
Can a Buy-to-Let investment be protected?
Insurance cover is now available for rental protection for legal expenses in addition
to the normal building and contents insurance.
What other costs should be taken into account?
Letting agent's commission and management fees, Insurance (Building/Contents/Rental
and Legal Expenses Cover), the costs of keeping the property in a marketable condition,
service charges and ground rents - if a leasehold. (The tenant is responsible for
such items as utility accounts, Council Tax and TV license fee etc.)
Tax and allowances
Net rental income is subject to tax at the current marginal rate but expenses of
a revenue nature are allowable,including loan interest. Furthermore,a 'wear and tear'
allowance of 10% of the rent, less water rates,is available where the property is
furnished. Capital gains on investment property are subject to capital gains tax,also
at the marginal rate and will vary according to the length of time the property is
Further information on this subject can be obtained at www.buytolet.co.uk
NOTE:This information concerning Buy-to-Let is for guidance only. The responsibility
or the financial decision to Buy-to-Let can only rest with the investor. Most letting
agents will not accept responsibility for the validity of investments, costs incurred
or for mortgage arrangements made, although those who are also registered as financial
advisers may do otherwise. It should be noted that as with any investment, returns
and capital values can go down as well as up; and the investor should be fully aware
of the terms and conditions applied by the chosen mortgage lender. Letting agents
must present their own written terms of business for letting and managing properties