Key questions for landlords

Does renting out a property let you off the hook? Ken Welsby reports

There are two ways to become a landlord. "Accidental" landlords are those who need to move house but are unwilling or unable to sell, often because of negative equity. Lenders, traditionally wary of renting, are now becoming more flexible, and a number are introducing mortgage packages specifically catering for this market. There has also been a flurry of activity on the part of lenders catering for those who see residential property as an investment.

Whether you are moving into the market by accident or design, probably the key question to ask is: will it pay? Yields - rent as a proportion of a property's value - vary according to the type of property and the location. On Barratt's new Cardiff Bay development, for example, more than 40 homes have been sold as investment properties, achieving yields of at least 10 per cent. In London's Docklands, one of the country's rental hot-spots, gross yields are being quoted up to 14 per cent.

Most letters use an agent to find tenants, arrange the lease and collect the rent. Many also use agents to manage the property. In recent weeks, a barrage of complaints have come from home owners in London regarding a Wimbledon agency, Lettings Professional, which reportedly pocketed substantial commissions but failed to hand over rents. The agency has now closed and is being investigated by trading standards officers. It is the third such case this year, and underlines the need to employ a reputable agent who is well-established in the locality.

Firms that belong to the Association of Residential Letting Agents (Arla) are required to operate separate client accounts and have professional indemnity insurance. The same applies to firms whose principals are members of the Royal Institution of Chartered Surveyors.

If you are planning to buy a new home and rent your existing home, you must talk to your mortgage lender.

Most lenders will increase the interest rate on your existing mortgage, perhaps by 1 per cent, and may impose other conditions. When it comes to obtaining a mortgage on a second property, policies can vary widely.

Abbey National, for example, says: "If you already had a 90 per cent mortgage of three times your income, I think we would be very reluctant to offer you a mortgage on another property, but if the percentage loan to value and the income multiples were a lot lower, then we would certainly consider it."

John Charcol, a leading firm of mortgage advisers in London, has recently launched its own discount-rate second-property scheme. This works on the principle that the rental income from the first property will cover that property's mortgage and rental costs in full. The mortgage on the first property remains in place with the original lender. On the second property the loan can be up to 90 per cent of the value, but the balance must be fully funded from your own savings, not borrowed from elsewhere. The rate is set as a discount of 1.5 per cent to the building society variable rate, so is currently 5.49 per cent. Ian Darby, Charcol's marketing director, says the scheme is not simply intended for people suffering from negative equity.

"A number of clients are people who simply think this is the right time to invest in the property market by renting their existing home and moving to a new one."

Other special schemes include the Let and Buy mortgage unveiled recently by Mortgage Express, part of Lloyds TSB Group, and the Restart mortgage from The Mortgage Business, a lending arm of Bank of Scotland.

Although you lose Miras tax relief on the first property, rental costs, including the mortgage, can normally be offset against the rental income for tax purposes. But remember that investment property may attract capital gains tax when you come to sell.

There are a number of other questions to consider when looking at the financial viability of becoming a landlord: What happens if your first tenant leaves and there is a lengthy interval before the next one arrives? Or if the property suddenly needs expensive repairs or redecoration? At present, rental yields are high relative to mortgage rates. But you need to consider what will happen if that relationship changes. Will the first property still be self-financing?

o A free booklet, 'Trouble Free Letting', is available from the Association of Residential Letting Agents (Arla), Maple House, 53-55 Woodside Road, Amersham, Bucks, HP6 6AA. Send an SAE.

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