The buy-to-let traps: How to avoid the classic mistakes that mean your investment might not pay off
By Marc Shoffman
An influx of cheaper mortgage products and rising property prices should have given buy-to-let property investors a stellar year in 2013, but things may be about to get tougher
Landlords made an average £14,000 return last year off the back of a resurgent property market, according to the LSL Property Services’ buy-to-let index.
But it is solid rental returns that should be the backbone of successful buy-to-let investing and an improving mortgage market means more people able to buy and less demand for lettings.
This means that those considering investing in buy-to-let - or hoping to improve the returns on their existing properties - need to make sure they aren't making common mistakes. We outline three classic errors to avoid to make sure you get the best from buy-to-let - and how to look after your tenants so they look after you.
Yields: Buy-to-let investors are experiencing decent returns
The buy-to-let sector has experienced a resurgence in recent years as investors look for an income investment in the low interest rate environment.
Investors have been helped by mortgage rates falling to record lows thanks to the Funding for Lending Scheme. A two-year fixed rate buy-to-let mortgage can now be snapped up for 2.49 per cent from the Mortgage Works.
At the same time more people have been looking to rent, as they put off or cannot yet afford a deposit for their first home, due to stagnant wages and lenders demanding larger deposits for the best mortgages.
These factors, coupled with rising house prices, should have meant an easier ride for landlords but things may be about to change.
Better mortgage availability for first-time buyers and those with small deposits means that the property market is picking up and more people able to buy means less pressure on lettings.
According to Vicki Wusche, while long term return is important, your properties need to be delivering a positive cash flow each month. This means rent comfortably beating your mortgage costs and avoiding costly void periods - months when your property isn;t rented out - that could see you lose thousands in one fell swoop.
It is also important to have extra cashflow to cover maintenance or periods without tenants. If you are only just breaking even, or making a loss, there are steps you can take.
Ms Wusche outlines three classic things to avoid below.
Don't buy the wrong property for the wrong price
Location is a vital factor when becoming a landlord.
You need to consider the type of rental income you will get in an area as well as the overall return you will get on the property.
It can be tempting to choose a property near where you live, as it would be easier to keep an eye on it.
But your area may not be the best for property prices or rental yields. It may be worth looking further afield for better rental returns and appointing an agent to look after a flat or house if you cannot get to them.
You need to balance where rental returns and demand is strong against the cost of investing. London homes rent in days or even hours, but high house prices make buying in very expensive and keep a lid on yields.
Likewise, you need to watch out for areas that have seemingly temptingly high yields but low demand for property.
According to the LSL November data, London saw the steepest rent rises in 2013, up 4 per cent to £1,131 at the end of last year. This was followed by a 3.2 per cent annual increase in the South West to £662, and a 2.5 per cent rise in the South East to £775.
However, some regions experienced annual falls. Rents in the East of England fell the most, down by 4.4 per cent to £717 in December 2013. This was followed by a 2.7 per cent annual drop in the West Midlands to £550, and with rents in Yorkshire and the Humber 2.1 per cent lower than in December 2012 at £530.
Ms Wusche explains: ‘It’s vital to be clear about your strategy when investing. The investment should generate cash flow – even if you also intend to benefit from the capital gain. You should ask what tenants would want to live in this property and what are they likely to pay in rent and cost in lost income and voids.’
FIND THE RIGHT TENANT
Speak to your letting agent about refurbishing the property and letting to ‘better’ tenants at a higher rate.
Research the potential to rent the property as a multi-let or house of multiple occupancy.
Speak to the council about joining their schemes to house benefit tenants and get a guaranteed rent.
Don't forget to manage your income
Being a landlord is like running a business. Your main source of income is the rent so it is vital to make sure this is paid on time and for the right amount.
This means having a clear rental agreement and making time to check that your tenants are paying when they should and following up if they are not.
It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance.
This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance policy, available from This is Money's landlord insurance finder
If collecting and chasing rent becomes too time consuming, there is also the option of using a lettings agent to help manage your property, but there will be a fee to cover this service.
Ms Wusche explains: ‘Whether you self-manage or use a letting agent it is vital to have a system that triggers an alert when your rent is due. If rent is not paid on time you need to take, immediately, appropriate action to get the rent back up to date.’
Remember that your letting agent is paid to monitor your property, so think about how you can make yourself their preferred client. Answer calls and emails straight away. Don’t pester them but be professional. Help them to like you and want to work with you
Make a note in diary or phone when your rent is due – ON THAT DAY check your bank and if payment is not received query it.
Be prepared to work with a tenant to get them to repay any debts rather than opt for immediate eviction which costs money and loses you income.
You are not maintaining your property
As long as tenants are paying the rent and bills on time, they have a right to live in a property that is safe and in a good state of repair.
This means that if a pipe bursts or the ceiling falls in, you are likely to get a call to get it fixed.
Maintaining a good relationship with your tenants is vital to ensure rent keeps on being paid and that they do not just up and leave, or even trash the place.
Ms Wusche explains: ‘We are providing homes for people. I would not tolerate living in damp or untidy conditions so why should my tenants. If you do not respond to maintenance calls quickly your tenants will leave. For a repair that might cost £250 you could lose £400-£650 in rent.'
What rights does a tenant have? Read our guide
BE A BETTER LANDLORD
Make sure the property is fit to rent on day one. This reduces maintenance and repairs throughout the year while tenants are in place.
Agree with the letting agent that any maintenance requests concerning safety, heating, water or light up to a value of £300 are carried out immediately and reported to you.
Establish a system where the letting agent sends you a copy of their inspection reports on a quarterly or half yearly basis.
If this seems onerous or your life is too busy then maybe this year would be a good year to sell your property. Benefit from the capital gain, while it lasts, and maybe start again with a more focused strategy or a better system.