PURCHASING AND PREPARING A PROPERTY FOR THE PRIVATE RENTED MARKET
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Introduction
Factors to consider when purchasing a property
Valuing the rent potential of a property
Furnished or Unfurnished?
Presenting the Property
Maintenance Agreements
Council Tax
Inventory of Contents / Schedule of Condition
Taxation of Rented Properties
Capital Gains Tax
Introduction
Purchasing a property to let on the private rented market requires a considerable financial investment. If the property is to be either part or fully funded by a mortgage, then it is essential that the landlord takes the necessary steps to ensure that he purchases and presents, a property that will give him the maximum possible occupancy and financial return.
Factors to consider when purchasing a property
- Location, location, location, location……. It can never be emphasised too much.
When researching the requirements for private rented accommodation in a locality, think of the type of person their possible occupation (and thus income) who may be attracted to the sort of accommodation that you are offering. For example, consider local transport and public transport routes, the proximity of local companies who may employ staff on short-term contracts etc. Buying a nice property in the wrong location could cost you dear in terms of lower rent or lack of occupancy.
Also note that buying properties in areas considered not desirable to live in will put a limit on the maximum rent achievable. Personal safety (particularly at night) and security may also be an issue for many prospective tenants.
- Appearance Initial impressions are just as important to people viewing with the intention of renting, as they are to those buying. Therefore an attractive property in a pleasant locality will always be a good investment.
- Property Surveys are essential for prospective landlords as a safeguard to spending a large proportion of your rent on property repairs. Use your eyes (and nose!) when viewing properties for signs of property defects or damp. If in doubt, seek professional advice. If you are obtaining a mortgage on a property, all lenders will insist on a survey but these are often cursory and designed to ensure that the lender will recover their investment if necessary. Therefore for peace of mind, consider arranging for a more comprehensive survey (full structural) to be carried out. If there are structural alterations needed to prepare the property for letting, then take along a builder with you both for advice and, if necessary to prepare a full and detailed quotation for the work to be done.
Valuing the rent potential of a property
Always gather as much information on potential rental values for similar properties in the same locality as possible. Local newspapers, letting agents and private advertisements are very useful sources in determining the market rent for your property. However there is no substitute for taking the time to view other similar properties that are available for rent.
However, in times of rising house prices, it is always worth remembering that market rents are determined by many factors, not least by a person's ability to pay! Therefore to maintain a high
occupancy level for your property it is advisable to be realistic about the rent that you can charge. The loss of even one month's rent can substantially reduce your financial return.
Furnished or Unfurnished?
This depends on the potential market that you have identified for the property. Student accommodation for example will always be offered furnished, as will smaller units of accommodation that are often favoured by young professionals at the outset of their careers. Those who are letting their own main home will often offer it furnished, but without items that are valuable or personal to themselves.
There is an increasing trend towards offering unfurnished accommodation (although this usually means that a lower rent will be charged). This can encourage a sense of ownership and permanence, which may lead to longer lets and less damage. However many landlords still offer at least carpets and curtains, a cooker in the kitchen and often other white goods as well.
Presenting the Property
The best presented properties always let first. If the property is to be let furnished, 'lifestyle' is the current buzz word, and consideration should be given to the type of furnishings that your prospective tenant may be expecting to see as he enters the property for the first time. A few tips are listed below:
Decoration should be neutral but fresh so that it is acceptable to most people. Carpets should again be neutral, clean and in good condition. They should also be fitted securely (particularly to stairs). Remember that in a small property, the same carpet fitted throughout will give an illusion of space.
Furniture should be adequate, in good condition and contribute to giving a pleasing overall impression of the property. Do not be tempted to use old secondhand furniture, as this will usually de-value the maximum rent achievable. All furniture and furnishings must comply with all current legislation (see section on safety matters).
Supply only what is needed and do not clutter a room. Always leave room for the tenants' own personal possessions.
When letting fully furnished a full sized cooker and fridge/freezer and perhaps a microwave oven should be offered in the kitchen. Beds should always be comfortable with a good quality mattress (and a mattress cover to both prolong its life and keep it clean). All furniture must comply with current legislation.
Kitchens and bathrooms 'sell' rented properties in the same way they do to would-be purchasers. D.I.Y. stores now offer very good deals on 'value' kitchen units and bathroom suites, and your investment can be recovered many times over either in terms of improved rents or lack of voids. A shower is an important item for most tenants.
External appearance is essential as properties in poor external condition can often deter potential tenants from viewing the interior. All paintwork should be fresh and on no account flaking. Windows should be clean and curtains hung neatly. Gardens should be tidy and approach paths free from weeds and overhanging bushes.
Cleanliness is one of the most important factors as dirty and ill-kept properties are both difficult to let and tend to attract poor quality tenants.
Security should include basic precautions such as a five-lever mortise lock on the front door and window locks. Many tenants may regard a security alarm as an important feature.
Maintenance Agreements
Particularly for the small landlord who may additionally have a full time occupation, maintenance agreements on both heating and domestic appliances will be very useful. They also guard against high call out charges and are tax deductible.
Consents :
Mortgagee - Where the property is subject to a mortgage it will normally be a condition of the mortgage that the property owner cannot let the property without prior permission of the lender. Most lenders are prepared to do this but many will ask for a copy of the tenancy agreement and associated documentation before giving their consent. Many mortgage lenders will not allow you to rent to certain groups of tenants.
Insurance - The landlord will continue to be responsible for the insurance of the property and many companies offer specific policies for landlords which not only cover the insurance of the building itself, but offer the landlord public liability insurance protection as well. Contents insurance should be considered where items are of value. Please note that if you do not inform your insurer that the property is let, then they may not pay out in the event of a claim. Some insurers will not accept certain classes of tenant but normally policies arranged through insurers offering their services to NFRL affiliated landlords can be arranged. It is advisable to check first with the insurer.
Council Tax
The person responsible for council tax is either:
- The landlord if the property is let under more than one tenancy agreement and/or is considered to be a house in multiple occupation (HMO)
- The tenant if only one tenancy agreement applies to the property.
The term property is defined as a single dwelling. The local authorities classification of a property will revert back to its original status when constructed unless the landlord has applied for a change of status. An example of this is a three-storey house that was built as a single dwelling and has been converted into three flats.
A local authority can claim up to 6 years back payments whether a council tax bill was issued or not. It is therefore important that landlords co-operate with their local authority both to establish the current status of the property and to pay any council tax they are liable for, or to provide information about past tenants.
Houses solely inhabited by students are not required to pay council tax but only if they provide the local authority with an exemption certificate issued by their university or college. Note that a council tax liability occurs if someone who is not a full time student is also resident at that property.
Inventory of Contents / Schedule of Condition
Prior to letting, a complete inventory of the contents of the house and the condition in which they are offered should be prepared.
This must be prepared very carefully, as the condition of the property and its contents will be checked against this document at the end of the tenancy. It should be as detailed as possible and for each room, should record both its overall condition and that of the items contained in it.
Meter readings taken when the tenant moves either into or out of a property should also be recorded on this document.
It is also advisable either to take photographs of each room or to use a video camera. If a camera film is used, it is not necessary to actually develop the film unless a dispute occurs with the tenant.
Remember - if a tenant causes unreasonable damage, the more detailed the proof of the condition of the property/item at the start of the tenancy, the less likelihood of an unpleasant and costly dispute at the end of it.
Taxation of Rented Properties
Most Landlords retain personal ownership of their properties unless they accumulate larger portfolios. This means that as the persons 'receiving' or 'entitled to the income' they will have to pay income tax on any profits made.
Details of allowances that you can use to offset rental profits can be found in the Inland Revenue publication 'Taxation of Rents'. Broadly speaking you can claim for the following:
- Repairs to the property but not for capital improvements.
- Interest payable on business related loans
- For furnished accommodation, 10% of the net rent for wear and tear or the net cost of replacing an item of furniture (called a renewals allowance)
- Costs of employing cleaners, gardeners etc.
- Insurance, water rates (if paid for by the landlord), gas/electric safety checks
- Membership of a Landlords' Association
- Professional and legal costs (not capital related)
- Travel expenses 'wholly and exclusively' related to business activities
Note that any taxation charged is at the highest level of tax paid by an individual Landlord and therefore may be as high as 40%.
Another alternative for Landlords is to set up a Limited Company, which either owns or owns and manages their properties. Income earned by a company is taxed at corporation tax rates, which from 1st April 1999 could be as low as 20% on profits up to £300,000. However that's fine if you leave the money in the company or plough it back into further investment, but if you draw it out as a fee or dividend, it will be taxed again as personal income.
A Landlord's choice will be based on individual circumstances but it is advisable to obtain as much advice from suitably qualified people (which is tax deductible!) as possible.
Capital Gains Tax
The indexation system for calculating Capital gains Tax only applies to assets acquired before 1st April 1998. and only for the period of ownership up to this date.
Landlords who own their properties now benefit from the Taper Relief Scheme. The longer an asset is held, the lower the percentage of gain that is taxed. There is no taper relief for a residential property before it has been held for three years. Relief is then tapered by 5% for every complete year above three, up to a maximum reduction of 40% for properties held for 10 years.
A company however receives no taper relief but is instead entitled to deduct from the profit of a sale of a property an amount that should remove any amount due to inflation (from tables published by the Inland Revenue).
