How to rent your way up the property ladder

If you need a bigger house or want to move nearer to a good school but can't sell your home, returning to the lettings market may be the solution. As the Chowdhury family found out.
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The Independent Online

Kamal Chowdhury may not know it but he is a symbol of a new trend in today's lacklustre housing market – a trend in which owners leave their own homes, let them out and rent a new base for themselves and their families instead of continuing up the traditional property ladder.

He is not so much an "Accidental Landlord", cited as a symbol of market torpor, as an "Intentional Landlord": an owner with no prior experience as a landlord but who believes one of the few ways to make money from property today is by renting out his home.

"I had a plan to sell and move to a new catchment area for my children. But uncertainty over the sales market – and the strength of the rental market for landlords – meant I chose to let. This seems more profitable for the next year or two," explains Chowdhury, a freight company director.

So he let out his three-bedroom house in Milton Keynes and moved a few miles away to a larger, five bedroom house, which he rents with his wife and two children, aged 10 and 17. He is in no rush to buy – at least for himself. "I will rent out my owned home for two or three years and see what happens. If I buy something soon it's likely to be another house for letting out," he says.

It is unsurprising that people are letting. Average rents across the UK have risen for five months, according to LSL Property Services, owners of Your Move, Reeds Rains and several other High Street agencies.

Rents rose 0.5 per cent in May alone, the most recent figures available, taking the average UK rent to £696 per month. Rents have risen fastest in London, where they are 7.8 per cent higher than a year ago, but the lettings market is good for landlords almost everywhere: the north-east has seen a 6.4 per cent increase and the East Midlands a 6.2 per cent rise, according to LSL's monthly Buy To Let index.

"Soaring inflation has taken its toll on would-be buyers' deposit funds. This rocketing cost of living, combined with the difficulty first-time buyers are experiencing in obtaining a mortgage, is increasing the numbers reliant on renting," says LSL's commercial director, David Brown. As a result, he says, "rental gazumping is more commonplace and properties are being let beyond asking price, putting further pressure on the market. For tenants, unable to buy, renting is becoming less affordable. Rents are increasing twice as fast as wages."

A booming market

Figures from Countrywide – owners of estate agents ranging from top-end Hamptons to small, regional firms selling lower-cost homes across the country – show a 20 per cent rise in new tenants registering for accommodation in May alone. The firm's chief executive, Grenville Turner, reports "an increasing number of owners dual-marketing their properties in the sales and rental markets, to see where the greatest financial value is".

The potential to make more money from renting than selling is what influenced chiropractor Janet Simpson to let out her home in Plymouth, Devon. "I was going to sell to move closer to my mother in Bristol but found, if I let it out, I could afford a rental property for me, plus a small profit. I haven't been a landlord before and don't intend to be one for long, but there's a profit to be made right now," she says.

"Will I buy a home for myself again? I don't know. There's a lot to be said for renting – no mortgage rate worries, less maintenance than as an owner. I might just stay as I am and see how long it pays to be a landlord," she adds.

Not trouble-free

Not that acting as a landlord is trouble-free. Experts say there are six key issues to address, the first of which is to ensure your mortgage lender and insurer are on board.

"Although many people let their homes without informing their lenders, this is in breach of your mortgage contract. You should seek 'consent to let', which means you can rent out your home for a short period of time – usually a year or two, depending on the lender," says Melanie Bien of mortgage broker Private Finance. "Lenders decide this case-by-case. You'll either continue with the same mortgage terms, pay a premium or in the worst case you may have to move to a buy-to-let mortgage. This usually means a higher rate and could mean you must pay off a chunk of the outstanding mortgage to fit the lender's maximum loan-to-value requirement," she says.

You should also tell your insurer you are letting your home, and possibly switch to a specialist landlord insurance policy. Failure to do so means the firm could refuse to pay out should you make a claim.

Second, gas appliances must be checked and certificated, electrical appliances must be checked, modern furniture must meet strict fire-resistant regulations, and new Energy Performance Certificates must be issued for your home whenever a new tenant moves in.

"Even if [an owner] has just one rental property, they must remember they're subject to the same laws and regulations as a landlord with 50 or 100. With around 50 Acts of Parliament and 70 separate sets of regulation, there's plenty for a landlord to get his head around," says David Salisbury, chairman of the National Landlords Association.

Third, charge a competitive rent. If you hire a lettings agent, who will charge a (tax deductible) fee of up to 15 per cent of your rental income, they will advise you. If you go it alone, check local agents or property websites such as www.primelocation.com and www.rightmove.com to see what they charge for similar properties.

Fourth, when you find tenants, check they are bona fide. Again, a lettings agent will do this but if you are a DIY landlord check the tenant's references, name, address, employment status and credit history. The National Landlords Association's www.nlatenantcheck.org.uk does this for £28. It is usual to take a six-month deposit but this has to be placed into a recognised deposit protection scheme – for example, www.mydeposits.co.uk or www.depositprotection.com.

Fifth, set up a proper contract to safeguard yourself and your tenant. A standard shorthold tenancy agreement (the typical contract when you let out your home for six months or more, with two months' notice to quit from yourself or your tenant) can be downloaded from sites such as www.rla.org.uk.

Hard work pays off

Finally, be prepared to work for your income. You should respond to tenants' requests if there are problems. When the stopcock sticks or the toilet blocks, you may recognise the need for good insurance or, perhaps best of all, the usefulness of hiring a lettings agent for the duration of your time as landlord.

If all this sounds like hard work... well, it is. Being a responsible landlord is not meant to be easy, but the rewards are good in today's market, even outside London and the south-east. LSL figures show that the average rent in East Anglia is £719, while in the south-west it is £625 and in the north of England it varies from £513 to £565.

One day, a glut of lettings property may lead to a drop in those figures, but no expert believes that day is coming soon. For intentional landlords, this is a time to make hay.

The Accidental LandlordsThe rise of the 'Intentional Landlord' has not meant the end of that other phenomenon, the 'Accidental Landlord' – an owner-occupier who tries and fails to sell, so lets out their home while still trying to find a buyer.

"About 30 per cent of our landlords are reluctant," says Rosanna Guest of John D Wood lettings agency in Esher, Surrey. But this trend is not a new one – it happens in every recession.

Estate agents first used the term in 1990, with the last downturn in full swing. Then in 2006, a year before the latest slump, a survey by the National Landlords Association showed 43 per cent of landlords did not buy their first rental property with the intention of letting it out.

They "stumbled" on letting because of a change in circumstances, such as inheriting a property, ending a marriage or being obliged to work in another area. Back then, homes were often not sold because owners felt they would see prices rise if they waited; today's slump is down to buyers not getting mortgages and thinking that if they wait, prices will fall further.

The latest figures from the Land Registry show a continuing decline in transactions with an average of 44,300 sales per month – less than half the peak figures reported six years ago – so don't expect 'Accidental' or 'Intentional Landlords' to disappear any time soon.

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