Property red tape ties up landlords

New regulations to protect tenants are reducing buy-to-let returns, says David Prosser

Buy-to-let investment is supposed to be simple - it's one of property's major selling points. Investors buy a property, rent it out at a rate high enough to cover their mortgage costs, and then wait for capital gains over the longer term.

However, there is a complication that is worrying increasing numbers of landlords: the need to comply with a series of new laws designed to protect people who rent properties. The latest of these regulations takes effect next week.

From Friday, all new tenancy agreements where the landlord asks for a deposit will have to be covered by the Tenancy Deposit Protection scheme. Within 14 days of taking the deposit, landlords will be required to tell their tenants which of three national arrangements they are registered with.

The three schemes are set up slightly differently, but work in a broadly similar way. Tenants' deposits are safeguarded by the schemes and, when they move out, the schemes will arbitrate in the event of a dispute over how much money should be retained by the landlord.

In theory, the initiative is good news for everyone. One of the most regular complaints among tenants is that landlords unfairly retain deposits when they move out. Equally, landlords have little protection from rogue tenants who move out having damaged the property, or without paying rent.

However, many landlords are concerned about the costs of administering the scheme. Some research suggests that many plan to stop asking for deposits so that they don't have to worry about the schemes' requirements.

Nicola Severn of the Mortgage Trust, a specialist lender to buy-to-let investors, says: "There is a wide divergence of opinion on whether the scheme is a good idea or not - many people think this regulation is a step too far."

On its own, the Tenancy Deposit Protection scheme is not a major contributor to landlords' costs. But David Salusbury, chairman of the National Landlords Association (NLA), points out that it is just the latest piece of regulation. "We are becoming concerned about the amount of regulation landlords face," he says. "There is a balance to be struck between protecting vulnerable tenants and supporting landlords, and I'm concerned about how well that balance is being managed."

Other new regulations include higher health and safety standards, rules on rent disputes, a crackdown on empty properties, and especially challenging legislation on houses in multiple occupation (HMOs). An HMO is a property that has three or more storeys and is occupied by at least two or more families - so a great deal of student accommodation, and properties let out to young professionals sharing a house, come within the definition. Following reforms introduced by the Government last July, landlords must have a licence from their local authority if they wish to let out an HMO.

To get a local authority licence, your property must meet certain standards. Some are routine, but others may be more costly - each bedroom in an HMO is expected to have a wash-basin with plumbed-in hot and cold water, for example. In addition, you have to pay a fee for the licences. Councils aren't supposed to charge more than it costs them to process your application, but licence fees vary enormously. In some parts of the country, landlords pay nothing. In others - Newcastle, for example - the cost is as much as £1,500.

The costs of HMO licences can therefore substantially reduce the yield - the income you are earning on a property relative to its value. Moreover, the licences aren't transferable, so each time you purchase an HMO you'll have to apply for new paperwork, even if the existing owner had already done so.

"The huge variation in the cost of a licence between local authorities means location is now an even more important factor when purchasing a buy-to-let property," says Ray Boulger, of independent mortgage adviser John Charcol. "The worry is that some local authorities will use the licence fee as a revenue generator and there is little to stop an authority increasing the fee on a whim." In certain circumstances, local authorities are even entitled to widen the definition of an HMO.

The idea is that councils should be able to target areas blighted by anti-social behaviour or other problems. If they get permission from central government, they would then be able to designate all properties within the area as HMOs, in order to more closely control and monitor landlords and tenants.

Salusbury says landlords aren't opposed to this in principle, but have concerns about how it will be applied. Salford council has just become the first council to use the powers, but others are expected to follow. "Where local authorities are tackling genuine social problems, landlords are likely to support them," Salusbury says. "But there is a danger that some authorities will try to use these powers unnecessarily."

The NLA is also concerned about another Government initiative, due to come into effect later this year, whereby all housing benefit would be paid direct to the claimant. Currently, tenants who have to claim housing benefit in order to pay rent are entitled to ask their local authority to pay the money directly to their landlords.

"Ministers see this as empowering tenants, even though many have explicitly said they would rather the money went straight to their landlords," says Salusbury. "We're concerned that there will be tenants who fail to pay the rent, leading to hardship for both them and their landlords."

When the tenant/landlord relationship breaks down

* Your ultimate sanction as a landlord with a problematic tenant is to evict them, so that you can rent the property to someone else. But while the law protects landlords from residents who don't pay the rent or who breach the terms of their tenancies in some other way, enforcing your rights can take time and money.

* Almost all private lettings agreements are now "assured shorthold tenancies", a contract created by the Housing Act of 1988. The tenancy must be for a minimum of six months but both sides can agree a longer period if they want.

* There are two ways to end an assured shorthold contract. If the agreed period has finished, you can serve a written notice giving the tenant two months' notice that you want the house back. Alternatively, if the tenant has failed to pay rent or breached the terms of the agreement, you can end the tenancy early by serving a notice to quit.

* In theory, the latter option requires landlords to give as little as two weeks' notice to quit. But in practice, with either option, if the tenant refuses to move out, you'll need a court order. If you try to evict a tenant without such an order, you're committing a criminal offence.

* The average eviction order takes about six months to secure according to the National Landlords Association. During that time, you may be receiving no rent - plus there's the danger that your tenant is not looking after the property properly, or even deliberately damaging it.

* In theory, you would have the right to pursue such tenants for damages and costs. In practice, even if you win, they may not have the money to reimburse you. More often than not, troublesome tenants simply disappear, leaving you out of pocket.

* Getting good references from employers and previous landlords is one way to weed out potentially difficult tenants before you sign contracts, though there are never any guarantees. Always check references carefully - tenants have been known just to make them up.

* If you do run into trouble, take legal advice. The NRA runs a free legal helpline for members (call 020-7840 8937 for details on membership).