PLANNING YOUR LET

To get you started on the road towards assessing your property's (or prospective property's) letting potential, let's look at some of the basics. By the end of this section, you will have made a first pass at some major decisions aimed at formulating the nature of your let. You will have:

• identified your target letting market
• chosen between a furnished and unfurnished let
• assessed your property (or potential property)
• considered the use of a letting agent
• identified any restrictions.

At this stage, this is only a paper exercise and no definite commitment is being asked of you. As you learn you can always go back and change your mind. Eventually you will have enough confidence in your decisions to proceed.

Identifying your market

In all commercial ventures the first step in assuring success is to define and then verify the market for the product or service. As one of your very first steps, therefore, you will need to identify all those sectors of the letting market you could aim for. Some suggestions are:

• single student
• group of students
• single person
• group of single persons
• couple
• family
• family with pet(s)
• elderly person
• elderly couple
• budget accommodation
• luxury accommodation.

There may be other markets open to you. Draw up your own list.

Conducting a market survey

Evaluating your market is an important step. Be sure your market exists and that there is sufficient demand for your product. There are a number of ways in which you can make an assessment:

• 1.Contact other landlords.
• 2.Get in touch with representatives of your target market sector.
• 3.Speak to accommodation officers.
• 4.Approach letting agents.
• 5.Check out the competition.

Remember, your venture will be doomed to failure from the outset if you do not have a market for your product.

Considering a company let

Another possibility is to consider a company let. Rather than letting to an individual, a company can take on the tenancy of a property. Under the terms of such an agreement, the company may then house individuals or a family in the property or be free to sublet, usually to one or more of its employees. In the same way, universities and colleges will sometimes rent property from a private individual to house staff or students.

Advantages

• It is usually financially secure.
• Long, continuous lets are often available.
• Unproductive gaps between tenants are avoided or minimised.
• The company may agree to perform some maintenance duties.

Disadvantages

• It is usually not suitable for short-term lets.
• Property which is not self-contained is rarely sought.
• Property outside ‘top of the range’ stands little chance.
• A landlord may have little control over who actually occupies his property.

Considering multi occupancy letting

When several unconnected people or groups of people occupy a property or building, often sharing facilities, the term multi occupancy letting will apply and with it comes compliance with a set of specific rules and regulations involving increased fire safety standards, monitoring of occupants to avoid overcrowding and maintenance of services and communal areas. All multi occupancy lettings have to be registered with the local authority and this usually attracts a fee.

In order to convert a property to multi occupancy letting, planning permission will be required for change of use as well as for any structural changes which may be needed. A landlord will also be liable for the payment of council tax, a cost which he can, of course, pass on to his tenants via the rent.

Choosing between a furnished and unfurnished let

Rented property usually falls into one of two categories, furnished or unfurnished. In theory, however, there is nothing to stop you offering your property with any degree of furnishing you want.

In choosing between furnished and unfurnished letting, points to consider are:

• The market you are aiming for.
• The increased rental income generated by furnished letting.
• The availability and cost of supplying furnishings.
• The extra work and costs involved in maintaining furnishings.
• The extra legal obligations towards safety when supplying furnishings.
• The increased insurance premium to cover contents.

Assessing your property or potential property

Define the property you have (or may have) at your disposal. Where the property is self-contained this is fairly obvious, but where the property to let is part of a larger unit - a room, a group of rooms or a floor in your own home, perhaps - a precise definition is required. Work out if certain facilities will be shared and how you will organise and charge for this. Consider access arrangements and how you could restrict entry to other areas. You may even have to consider the possibility of renovating your property to make it suitable for your purpose.

Matching your property to your market

It is important to match your property to the market(s) you have available to you. The closer you come to satisfying the needs of your market, the more successful your let will be.

If you have a mismatch, consider the following options.

• 1.Change the furnishings. Students require desks and book shelves, for example.
• 2.Upgrade your property. Install a shower, a new kitchen, double glazing or central heating.
• 3.Re-organise your property. Change the use of some rooms, perhaps.
• 4.Subdivide. Split a large property into two or more smaller units. This may provide a higher overall yield. It may also provide twice the work!
• 5.Sell and re-invest. Use the proceeds from the sale of your property to fund one more suited to your needs. This should be your last resort after having considered all other alternatives. The costs of selling and buying will reduce your capital investment, possibly significantly. There may also be taxation implications to consider.

Estimating downtime

From the information gleaned in your market survey, you should have an idea of the rent you can expect from your property. However, there is another aspect to consider in assessing your total rental income. Downtime is the period(s) when your property is not producing income. Listed below are factors which will affect your property's downtime:

• The amount of preparation required to make your property ready for let.
• The strength of your letting market.
• The co-operation of your tenants.
• The length of gaps between tenancies.
• The length of the lease - the longer the lease, the less frequently gaps between tenancies will occur.

Identifying running costs

As a landlord, you will meet with expenses. The costs you are most likely to incur are:

• insurance
• repairs and maintenance
• mortgage or loan payments
• letting agent fees
• other professional fees
• wear and tear to furnishings
• advertising
• taxation
• utility services bills
• council tax
• incidental expenses: travelling to the property, rent collection, telephone calls, stationery and stamps, cleaning materials, etc.

When a property is self-contained, the tenant is usually directly responsible for utility service bills and council tax. When not self-contained, the landlord is normally responsible. These expenses are covered more fully in later sections of this book.

Letting mortgaged property

Mortgaged property can only be let with the mortgage provider's permission. Where a property is to be purchased especially for the purpose of letting, a Buy-to-let mortgage can be sourced through many of the leading building societies. (See Chapter 2.)

Where the usage of a mortgaged property is to be changed from owner/occupier to tenanted, the mortgage provider must be consulted and, most likely, there will be charges and/or penalties incurred in making the transition. It would be wise also to consult an independent mortgage adviser to provide unbiased recommendations on your situation.

To reduce income tax liability, a landlord can choose to offset some or all of his mortgage interest payments against rent received. However, if he already receives some form of mortgage tax relief, he cannot normally get relief on the same interest twice.

The rent-a-room scheme

The rent-a-room scheme offers attractive tax relief on rooms rented within your own home. Chapter 11 gives further information.

Using a letting agent

A letting agent is a person or company engaged to perform, on behalf of a landlord, some or most of his letting duties in return for payment. Before deciding whether to use an agent, ask yourself the following questions:

• Do I live within reasonable travelling time of my property?
• Do I have time to take on the day-to-day workload?
• Do I want to work as a landlord?

If you answer ‘no’ to any of these questions, you are likely to require the services of an agent.

Considering joint ownership

If there is a joint ownership of the property to be let, you should consider:

How will you share the responsibilities and workload of being landlords?

Does this need to be formalised in writing, perhaps as a business plan or as a working agreement?

How will you share the costs/profits?

Who will pay the costs of repair, maintenance, etc? Who will receive the rental payments? Will you share profits according to percentage share of ownership in the property? Will there be a bias in the share of profits towards the one(s) doing the majority of the landlord duties?

Have you considered all the tax implications?

Have you thought through how each owner's personal tax liability may affect the profit figures?

QUESTIONS AND ANSWERS

FORECASTING YOUR LETTING PROFITABILITY

Now that you have started to think about your own letting situation, this section will help you assess your letting profitability. Attempt a first pass at the figures now, but come back later and refine your calculations as you learn. Consider this an on-going process, improving in accuracy as you gain knowledge and select options.

This basic self-assessment acts only as a guide to likely profitability and in no way substitutes for a professional consultation which is recommended before committing to any path.

Supplying data

To start with, evaluating future income and expenses may seem like trying to look in a crystal ball, as few of the figures will be known with certainty and estimates will have to suffice. But it is worth trying to be as realistic as possible, and some research will be necessary to achieve this. The greater the accuracy you can put into these figures, the more reliable the results.

Forecasting your profit (or loss) figures

Letting should be considered a long term venture and it would be unrealistic to analyse just one year's figures in isolation. In making a profit forecast, look ahead over a few years and you will gain a more accurate overall picture of the profitability of your let.

Use the chart in Figure 3 to calculate your ‘net profit after tax’ and ‘yield’ figures, adapting the expenses headings as necessary, to suit your own circumstances.

Analysing your figures

The last two rows of Figure 3, ‘net profit after tax’ and ‘yield', sum up the potential profitability of your let. Remember that yield is a percentage figure, and will give you a measure of the return you may make on your investment.

The capital profit of your property must be taken into account in looking at your investment as a whole. Indeed, you may consider this as being where your primary area of financial gain lies. Whatever your situation, both elements of profitability need to be considered in coming to a decision.

In reviewing your proposed investment, make sure your overall financial gain is likely to:

• Compare favourably with other forms of investment.
• Compensate you for your workload.
• Compensate you for the element of risk involved.
• Be more than enough to allow for some inaccuracy in your estimates.

TAKING STEPS TOWARDS LETTING

Up to now this has only been a paper exercise. Unless you are very sure of your assessment, it is prudent to consult a professional to look at your letting potential and the analysis you have made before making any binding commitment. A suitable professional may be:

• a financial adviser
• a solicitor
• a bank manager
• a letting agent
• an accountant.

There may be a fee for the consultation. Ask in advance how much he or she will charge. You may wish to shop around, but select your adviser carefully and do not choose solely on the basis of cost.

SUMMARY

• Understand what it takes to become a landlord.
• Go over the basics of profit and loss, and consider investment risk.
• Begin your plan to let.
• Assess your potential.
• Check out other types of investment.
• Have your plan checked professionally.