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Letting buy-to-let properties

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How to let out your 'buy-to-let' property

Most property investors in the UK let out their property – this is commonly called “buy-to-let”. The majority of purchasers get a professional letting company to let their property out. These companies will charge you about 8% of the rental for finding a tenant, and 8% of rental for full property management services. These fees vary depending on the area, agent and local competition – the letting fees are negotiable, although you might not get much of a reduction unless you have about 5 or more properties. Some agents do not give reductions for large portfolios, since economies of scale for a single landlord are not that great.

It is important to get a good recommendation for a letting agent, preferably from an estate agent that you believe has no direct business with them.

On top of the say 18% letting agents fees, you will have to take account of service charges, maintenance fees, upgrades and ground rent. The letting company will likely also withhold 22% of your rental against tax, unless you can get your accountant to advise them differently, for example, if your tax liability is zero.

The letting agent will advertise your property, show the tenants around, interview them. If they consider them good tenants, you will be advised to accept the tenants and they will put a deposit down to secure the property. The letting agents will then do a credit check and take references from them – which might take a week or so. The letting agent will draft up the letting agreement which you sign as Landlord and the Tenants sign. The tenants then move in after paying the first months rent.

Most “buy-to-let” property is let using a “Short-hold Assured Tenancy Agreement”. These are commonly for six or twelve months. It is very important to make sure your property is let using such an agreement, since this gives you the flexibility to ask the tenants to leave after a certain period. If you do not have an agreement or it is not a Short-hold Tenancy Agreement, you might have a tenant that moves in and become legally entitled to be a “sitting tenant” – a tenant that you cannot evict. This could drastically reduce the property price and lead your bank to ask for their money back. You need to get good advice from a reputable letting agent on such matters.

The economics of buy-to-let property

I enclose an example of some economics on a property purchase, to make sure you do not forget about anything and get a reasonable estimate:

1 bedroom flat in SE England – value 100,000 pounds, gearing 80%

Monthly Rental

550 pounds

   

Yearly Rental

6600

Void Period (10%)

-660

Yearly Rental minus void

5940

Letting agents – finding tenants (8%)

-475

Letting agents – management fee (8%)

-475

Maintenance fees (10%)

-660

Service charges

-450

Accounting / tax services

-200

Ground rent

-50

Mortgage costs (5% disc of 80,000)

-4000

Net profit / loss

-370

As you can see, this fairly typical example has a negative cashflow, even with 5% mortgage rate. If property prices go down, you have lost considerable money. If they go up, you should be fine. One of the key variables is the interest rate – I have done this calculation based on a 5% discounted rate, a rate you should be able to achieve for the next month or so, but rates are rising and a realistic estimate of an undiscounted rate at present is 6% - this will be rising to say 7% (probably peaking out at this level or a little higher) by early 2005.

Saving money by letting and/or managing your own buy-to-let property

Another key variable is the cost of letting – if you can find tenants and manage the property yourself, you could save about 950 pounds a year, although you might have higher void periods, make an expensive mistake or find the hassle far too high. Most people that have a day job and invest in their spare time have not got the time or energy to manage their own properties. This is particularly the case if you are not living in the area of property investment, or feel uncomfortable taking on the hassle and risk.

Remember, you would be in charge of finding a tenant, drafting up a suitable tenancy agreement, getting it properly signed, checking credit and references etc as well as be first in line if there is a maintenance problem. You may not have the experience, knowledge or enthusiasm for such tasks.

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