The Landlord's Friend

PART

ONE

PREPARING

FOR

SUCCESSFUL

LETTING

Chapter 1: Is buy-to-let right for me?

Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world. - Franklin D. Roosevelt

The global property industry has changed dramatically since former US President, Franklin D. Roosevelt, made that statement. In a post-credit crunch world, is his advice still valid?

These days, for investors to successfully navigate the buy-to-let market, a level of skill is definitely required. And not everyone will have the discipline to learn these skills. Consequently, contrary to what we are told in the press and all of the glossy sales brochures, buy-to-let is not an industry that everyone can – or should – get into.

But, other than ‘paid for in full’, the essence of what Roosevelt says about property is still valid, especially about it being ‘managed with reasonable care’. As you will learn from reading this book, that can make the difference between a profitable buy-to-let investment and potentially having your property repossessed or, worse still, becoming bankrupt.

Fortunately, with effort and discipline, the skills needed to succeed in buy-to-let can be learnt. Reading this book will give you a solid foundation in the basics but it is by no means exhaustive and you should continually check the decisions you make with professionals, such as estate and lettings agents, mortgage brokers, legal buy-to-let specialists and conveyancers.

You should also – and this is the part that too many investors disregard – have a wealth management or financial investment team that includes tax and inheritance-planning specialists. It’s one thing creating wealth; it’s another thing retaining it.

Before you start, three key questions to ask yourself

1. What are my investment objectives?

Are you looking for an investment that will be held over the short, medium or long term? Buy-to-let is a long-term investment (typically 15 to 20 years). Furthermore, property is an illiquid asset, which means, unlike shares or bonds, your capital will be tied up in the property until you re-finance it to release some equity or sell. So if you need financial flexibility and would worry about not being able to quickly access your capital, buy-to-let is probably not right for you.

Listing your financial objectives will help to prioritise what sort of investments would be appropriate for you.

2. Do I have the capital?

The days of  ‘no money down’ property investing are gone. Lenders are now demanding that property investments have a substantial chunk of equity and the upshot is that you are now likely to need a minimum deposit of 25%. You should also be aware that many lenders will also require proof of your own, personal income and may refuse to lend if your earnings are less than £25k. They may also refuse to lend if you are under 25 or over 75.

New rules enforced by the Prudential Regulation Authority (PRA) mean if you are building a portfolio, lenders will ask you to provide a business plan for your property investment, to show you are clear on your goals and prepared for any financial challenges you may face.

On top of this, you will need access to spare capital during your property ownership to support additional costs, for example, void periods, where the property is not being rented out to a tenant. In these circumstances, you have to continue financing the mortgage and any bills yourself.

It’s highly likely that, at some point, you’ll get problem tenants who will refuse to pay rent; this was the very reason I founded Landlord Action. I spend my days dealing with tenants who won’t pay and won’t leave. And although that’s not the landlord’s fault, the lenders still expect mortgage payments to be made!

Remember that the property will also need periodical refurbishment, in addition to ongoing maintenance.

Do you have sufficient capital reserves to cover yourself in these scenarios?

3. How involved do I want to be?

Are you a hands-on or a hands-off investor? Do you have the resources to manage the property? Do you have the expertise? Do you have the time?

Letting property has changed significantly in recent years, to provide safer housing for tenants. New rules introduced in April 2017 mean councils are now much stricter and can fine landlords up to £30,000 for failing to comply with rules and regulations such as those set out in the Housing Health and Safety Rating System (HHSRS).

Although there are plenty of management agents out there who can manage the property (for a fee, of course), you’re likely to need to be involved at certain points. For example, when taking Court action against a tenant, I always recommend (where possible) that you, the landlord, attend Court and engage in the proceedings yourself.

If you can’t make periodical commitments like this, then you may have to consider other types of investment that can grow without taking up your time.

Who to work with

Many investors make the mistake of thinking you can just walk into an estate agent, choose a house, buy it, have someone let it and watch the money roll in. You can’t!

The first person you need to engage when thinking about property investment is an Independent Financial Adviser (IFA). Your mortgage will be the biggest cost involved in investing in buy-to-let and, for most people, it’s the biggest debt they’ll ever take on. So getting the right expert financial advice is vital.

An IFA should help you to:

·  Identify your risk profile (how much risk versus reward you’re prepared to take)

·  Understand how property investment fits with your other income and investments

·  Refine your investment objectives

·  Understand how much money you can/should invest in buy-to-let

·  Choose financial products that suit your particular circumstances and help you achieve your investment objectives.

Good financial planning is essential for profitable buy-to-let investing. And you MUST make sure the IFA you choose is truly independent, fully qualified to give advice on investments, understands the fundamentals of property investment and is regulated by the Financial Conduct Authority (FCA).

If you have a lot of different investments, and especially if your income puts you in a higher tax bracket, it may be a good move to engage someone who can advise you on the best way to structure your property investment business, in terms of tax, pension and inheritance planning.

Work with self-regulated letting agents who are members of a trade association to understand where the demand is in your investment area, and make sure you buy the right thing. Good agents will be happy to talk honestly with you – remember, these are the experts who are dealing with properties and tenants all day long, and they know what’s in short supply, what rents well and which properties are likely to achieve the returns you’re looking for.

…and who to avoid working with

Until your investment strategy and objectives have been established, you should avoid working with anyone except an IFA. After this has been done, you can carry out research into finance and specific properties types, tenant types and location.

Bear in mind that estate agencies – which is where many investors start – are staffed by salespeople. When they pitch a property to you, they’re looking to get a sale today and they (typically) worry very little about you tomorrow. On top of that, there aren’t many estate agents out there who really understand buy-to-let investing, so they’re certainly not always the best people to be guiding you towards such a major investment.

Property Investment Clubs that pitch investments to you without knowing (or caring) about your particular objectives should be given a very wide berth. Companies offering ‘armchair’ investments – which we’ll come on to in more detail later – should certainly be avoided at this stage.

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Hot Tip

Whether you already have investment properties or are considering buying for the first time, take the time now to write down your investment objectives, what capital you can afford to have locked away for the next 15-20 years, and work out how much time you have spare to invest in buy-to-let. The results will determine what kind of property you should be investing in.

Chapter 2: Landlord education

The private rental sector is forever changing and you have to change, too. I have said many times before that you have to treat this as a business and with business comes a different set of rules.  A landlord’s biggest challenge now is to keep up with all this.  You do not have to invest thousands of pounds into landlord education but you have to be pro-active.

My first port of call would be to join a landlord association, like the National Landlords Association (landlords.org.uk) or the Residential Landlords Association (rla.org.uk). For as little as £80 a year for membership, you will get access to all the latest news, legislation changes, advice on being compliant, information about campaigns, landlord views, guides, documentation, discounts to recommended suppliers, educational courses, local monthly meetings with other landlords, and a free telephone advice line.

At Landlord Action, a very common problem we have with landlords who instruct us is that they didn’t know of a change in the law, or failed to serve relevant documentation. This is especially the case with those who have just one or two properties, and who still don’t see themselves as landlords.  Ignorance is not an excuse, and just costs landlords more money and time. 

Attending property shows, such as The Property Investor Show and Landlord Investment Shows, can be useful, as they have suppliers exhibiting, seminars and debates, and provide networking opportunities with other landlords. They enable you to keep up to date with things and get a feel for the market.

The local authority responsible for the area where your properties are located may put on events for landlords, updating the council’s position and sometimes providing guest speakers. 

Look for networking groups in your area; Property Investors Network run more than 50 meetings a month nationwide for investors, landlords and suppliers to attend, and they are definitely worth a visit.

It’s also worth signing up to webinars, when you can engage with a specialist in the property industry; I often do webinars for Rightmove, Upad, NALS, Urban and many others, as well as being booked to speak to landlords and letting agents at other events all over the country.

Go online and visit property portals regularly, making sure you sign up for updates and announcements. I can recommend website such as LandlordZONE, Property Tribes, Property 118, Landlord Today, Letting Agent Today, Property Reporter, Just Do Property and of course Propertychecklists.co.uk. Lastly, speak to other landlords, as you can learn a lot from them. Tap into their experience.

Remember: education is power.

Chapter 3: Preventing identity fraud

According to CIFAS, the UK’s Fraud Prevention Service, identity fraud hit an all-time high in 2017, with 174,523 cases, up 1% from the previous year and a 125% increase on 10 years ago.

The Annual Fraud Indicator says identity theft cost £1.3bn in 2016.

As a property investor, you might think the only people you need to credit check are prospective tenants. Of course, they should be credit checked (and letting agents should undertake this for you) but they’re not the only people being financially assessed – remember you’re applying for a lot more credit than they are!

So it’s essential you check your own credit rating before you make any financial applications, as it will affect how easily you can secure finance for your property investment.

A credit report gives a snapshot of all your credit accounts and financial history. This information is useful when you’re evaluating financial products, such as mortgages, as it helps establish which products might be more appropriate for you.

A credit report will show all the applications for credit that have been made in your name, so checking your rating periodically means you should pick up any fraud.

A further key benefit of checking your credit rating is prevention of identity fraud. Remember, tenants could have access to your details from any post that arrives for you at a rented property, so make sure all your post is redirected away from the buy to let property in your name.  If a crooked tenant has access to your personal details, they could carry out all different type of thefts and frauds, which could have a huge impact on your life.

I have heard some shocking stories of tenants taking over a landlord’s identity, especially when the landlord is overseas and has no mortgage on the property. The criminal tenant has been able to fake the landlord’s details and successfully remortgage in the landlord’s name, getting the funds transferred to a fake bank account with the monies siphoned off. All without the landlord being aware.

The Land Registry has a fraud prevention service called Property Alert, which is worth a visit: https://propertyalert.landregistry.gov.uk/

Key steps

1. Remove all personal documents from your rental property

Before you let a property, make sure you take away all documents relating to your personal or business affairs. And put them through a paper shredder, rather than just throwing them away.

2. No personal post should be sent to the rental property

Make sure that all your post is redirected away from the buy to let property in your name.  If a crooked tenant has access to your personal details, they could carry out all different type of thefts and frauds.

If you’re not sure whether there is any post in your name going to your rental property, consider setting up a three-month mail redirection via the Post Office. This will ensure all post comes to your current address and you can then amend it with services and suppliers as necessary.

3. Register with the Mailing Preference Service

This helps to ensure your details are taken off most direct mail advertising databases and should prevent promotional mail that may contain sensitive information going to your rental properties. Register online at: mpsonline.org.uk

4. Keep a note of whose name the utilities are in

After a tenant has left the property, some landlords change the utilities into their name. If you do this, remember to change them back to the new tenant’s name from the day the tenancy starts.

5. Check your statements and credit report

Although it can be a laborious task, all bills and statements should be checked as soon as possible. When a new credit card statement comes through, make sure it’s accurate and correct. Ideally, check your bill alongside receipts for purchases you’ve made.

If any entries or transactions seem suspect, contact the company or organisation straight away, otherwise you may not be covered for monies spent on your behalf and sorting out what you have paid for and what is fraud will be tricky.

Check your credit score either monthly or at least once every six months.

If you think you’ve been a victim of identity fraud:

·  Contact ALL your creditors, not just the ones you suspect are involved. This will alert companies that you may be a target and covers you, should further identity fraud take place.

·  Contact a credit-referencing agency, such as Experian or Equifax, who can offer advice on what to do.

·  Contact CIFAS, the UK’s fraud prevention service. They can register you for Protective Registration – effectively, a note against your credit file stating that you have been a victim of fraud and your identity is vulnerable, which helps prevent further fraud occurring. Visit: cifas.org.uk/pr

Who to work with

There are a number of services available for landlords to check their credit score. Equifax (www.equifax.co.uk) and Experian (www.experian.co.uk) are the most well-known providers and have instant access online services, where you can obtain your credit report initially for free and then for fees ranging from a few pounds to £15 per month.

Questions to ask

Once you’ve obtained a copy of your credit report, the key questions are:

Have there been any applications for credit in your name that you’re unaware of?

If there are, you need to get in touch with the organisation that made the credit check to inform them that you may have been the victim of identity fraud. Individual processes of different companies will vary, but they all have an obligation to investigate further. Always follow up any phone calls in writing and, if necessary, send correspondence by recorded delivery so you have proof you identified a problem.

Are there any bad credit reports against your name?

It is possible for a company to put a bad credit report against your name without you knowing about it. Checking your credit record regularly will ensure you can take steps to remove any of these that you don’t believe should be there.

Can you improve your credit rating?

Lenders and other organisations (credit cards, store accounts, etc) check your credit rating to see if you’re a good person to lend money to. There are ways of improving your credit rating, which will help make you a ‘better bet’ in the eyes of a lender and help you secure buy-to-let finance.

Contact any organisation that has noted bad credit marks against you and find out from them what steps you can take to restore a good credit status.

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Hot Tip

LAND REGISTRY: When registering your title for a property at the Land Registry, include a contact address that is NOT your rental property. You can register a restriction of your property title (by completing Land Registry Form RX1), which ensures that no transfer of registry can take place without the consent of the named party. Make sure you sign up to the free property alert service, which will inform you if anyone attempts to change the register: https://propertyalert.landregistry.gov.uk/

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Case study

Laylah De Cruz and her mother Dianne Moorcroft were jailed for a £1.2m Kensington property fraud, after assuming the identity of a deceased landlord.

The Daily Mail reported that they conspired with others and managed to rent the property with fake references. When the tenancy was secured, Moorcroft changed her name by deed poll to that of the deceased landlord, opened bank accounts in Dubai with a UK passport, then secured a £1.2m loan against the property and spent the cash.

Chapter 4: Financing buy-to-let property

There were 5,100 buy-to-let mortgages in arrears by 2.5% or more of the outstanding balance in Q3 2017, according to UK Finance. In the same quarter, UK Finance reports that there were 600 buy-to-let repossessions.

Post-credit crunch, the mortgage market saw the number of buy-to-let mortgages available drastically reduce and then begin to increase again once the economy and property market started to recover.

Lenders are still more cautious about loaning money than they were prior to the credit crunch, so you’ll have to work harder to ensure you can secure borrowing on the properties you want to buy or refinance.

Any deal you look at needs to be affordable in both the short and long term, so everybody taking out a mortgage – not just landlords – has to pass ‘stress tests’ to show they are able to meet the payments even if interest rates rise. And, as a landlord, your property management fees and tax liabilities, as well as your other sources of income, such as a salary, personal tax liabilities and living costs, will also be taken into account.

On top of this, you must make sure the yield will be great enough that your investment will remain cash positive into the future. Your lender may require the rental income to be up to 145% of the monthly mortgage payments. Requirements will vary from lender to lender, and are likely to be different for HMOs (Houses in Multiple Occupation).

You