Eddie Goldsmith answers:
BTL has come under scrutiny recently for two main reasons. First, the changes to capital gains tax, which will either lead to an influx into the sector, or a stampede away from it, depending on who you believe. Second, the enduring ramifications of the credit crunch and how this could affect the market.
I am no accountant, so I am not about to dip my toe in the capital gains debate, but what is apparent is that BTL investors are effectively replacing first-time buyers (FTB) in the market. I don’t mean pricing them out, by the way – I mean replacing them. FTBs have traditionally been more sensitive to market forces, whereas BTL investors are usually made of stronger stuff.
While I say BTL investors are made of stronger stuff, I am thinking more about the professional landlords, as opposed to the ‘occasional landlord’ that has emerged over the past few years.
Fuelled no doubt by the slew of television property development programmes, amateurs flocked to sector with the belief of high yields and quick returns.
The recent stagnation of the property market following rising interest rates has led to a reality check for some of these investors who have subsequently disposed of portfolios. However, the growing likelihood of rates dropping in early 2008 could trigger a new surge of investment.
BTL issues
So what are the issues in BTL and how do these differ from traditional property purchases? Shrewd investment could lead to a potential BTL cash cow, but investors must be aware there are some crucial differences between buying a house to let out and buying one to live in.
Key to the whole investment is the right house, at the right price, in the right area. Agents with local knowledge can advise on a particular location and highlight properties that not only offer the best price, but also the highest rental yield. This intelligence can guide client decisions on where to buy, and also establish a realistic timescale for return.
Despite what some may tell you, there is no financial ‘quick fix’ to be found in BTL. Investors should be aware that any return is long term. But it does provide a secure, consistent revenue stream over a period of years, from what is an appreciating asset.
However, it is important that calculations on future rental income take into consideration periods of time when properties may be empty between lets, and that adequate financial resource is set aside to meet mortgage commitments during these periods.
A legal minefield
The whole area of BTL is governed by a complex legal and regulatory framework. Negotiating this particular minefield will require an understanding of the finer details of several statutory provisions and many acts of parliament. Brokers should advise clients to seek expert legal counsel on tax issues before entering any contractual agreement.
It is not just the tax implications that investors need to consider. The legal issues governing the relationship between tenant and landlord are also essential. The legal contract with the tenant is determined by the Assured Shorthold Tenancy (AST) agreement.
This allows the landlord to recover possession of the property at the end of the fixed term or after the first six months, as long as the contract is short-term and the landlord has served the correct notices. It is illegal to evict a residential tenant without a court order. A possession order can be obtained within two months of the end of an AST where the tenant has not vacated the premises as contracutally and where they have been served the correct notice.
Recent regulation has also seen the advent of the Tenancy Deposit Scheme, a government-backed initiative to govern arrangements around the deposit. Since April 2007, landlords are required to protect their tenants’ deposits using a government-authorised scheme. Within 14 days of receiving a deposit, a landlord is required to inform the tenant of how it is protected.
Keeping the lender onside
Keeping the lender onside is also crucial to continued BTL success. Clients who already have a mortgage, or are planning to rent out a leasehold property, should always check whether permission has to be obtained from the lender or the leasehold landlord before going ahead. Without this, they could face legal action from the lender and have their assets seized.
BTL undoubtedly has the potential for long-term investment gains and arguably offers less volatility and better returns than the stock market or pensions. But it is not for everyone. Careful consideration of the issues, supported by expert advice and local knowledge, will offer the best chance of success.
The market may be stagnant at the moment but a wise investor should see the potential. Talk of falling property prices that still remain out of the reach of FTBs because of more cautious lenders could be the ingredients for a BTL bargain. BTL could be seen as a bit of a white knight for FTBs as if they cannot afford to buy a property, landlords offer an alternative to staying at home with parents. However poor investment choices could lead to a rental white elephant rather than a cash cow.
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