Buying, selling and letting - March, 2007

The government has announced that the Tenancy Deposit Scheme (TDS) will come into force on 6 April 2007. This means that if you receive a deposit after this date you must deal with it in accordance with the scheme. Otherwise, penalties can be imposed.

The scheme will apply to all Assured Shorthold Tenancies but not other kinds of tenancies. Alongside the TDS there will be alternative dispute resolution (ADR) to resolve disputes. Landlords will be obliged to join a statutory tenancy deposit scheme if they take deposits from their tenants; the idea is that this will safeguard deposits.

Critics of the policy claim that there has been insufficient time to prepare for this new regime, while many also question whether the government has put the necessary work into the system to make sure it is ready to go live in April. Below, the Residential Landlords Association answers some frequently asked questions regarding the scheme.

From 6 April 2007, all deposits taken by landlords under Assured Shorthold Tenancies (ASTs) in England and Wales must be protected by a tenancy deposit protection scheme. Landlords must not take a deposit unless it is dealt with under a tenancy deposit scheme. To avoid disputes going to court, each scheme will be supported by an alternative dispute resolution service (ADR). Deposits taken in connection with non-shorthold tenancies do not have to be dealt with under the scheme.

Landlords will be able to choose between two types of scheme: a custodial scheme, of which there is one, and two insurance-based schemes.

In the custodial scheme the tenant pays the deposit to the landlord; the landlord then pays the amount of deposit into the scheme. The deposit has to be sent to Computershare Services Investor Plc who is administering the custodial scheme. Within 14 days of receiving a deposit, the landlord must give the tenant the prescribed information about the scheme being used. This is a prescribed printed form which must be used. Forms will be available in due course.

At the end of the tenancy, if the landlord and tenant agree how the deposit should be divided, they will tell the scheme, which will return the deposit divided in the way agreed by both parties. If there is a dispute the scheme will hold the amount until the dispute resolution service or courts decide the dispute.

The interest accrued by deposits in the scheme will be used to pay for the running of the scheme and any surplus will be paid on the amount refunded. The amount of interest has yet to be set. With insurance-based schemes, the tenant pays the deposit to the landlord, who retains the deposit and pays a premium to the insurer – the key difference to the custodial scheme. The same 14-day rule applies regarding the prescribed information about the scheme as with the custodial scheme, and a particular form must be used.

In the event of a dispute, the landlord must hand over the disputed amount to the scheme for safekeeping until the disagreement is resolved. If for any reason the landlord fails to comply, the insurance arrangements will ensure the return of the deposit to the tenant if they are entitled to it.

In each scheme, the deposit must be returned within ten days of the landlord and tenant agreeing how the deposit should be divided, or within 10 days following notification of an ADR/court decision.

The government has awarded contracts to three companies to run its tenancy deposit schemes: Computershare will run the single custodial deposit scheme, with the Chartered Institute of Arbitrators providing the Alternative Dispute Resolution (ADR) service.

The Dispute Service Limited (which will also run its own ADR scheme) and Tenancy Deposit Solutions administer the insured schemes. The Chartered Institute of Arbitrators will provide the ADR service for Tenancy Deposit Schemes.

It should be noted that although the date for implementation is 6 April, it is understood that preliminary government legal advice is that where the deposit is paid before 6 April 2007 and the tenancy commences (i.e. the tenant moves in) after that date, the deposit will be subject to Tenancy Deposit Scheme. The RLA does not necessarily consider government view to be correct and further clarification is awaited.

Buy-to-let is now one of the economy’s ten fastest growing sectors, ahead of both gold and the stock market, according to This Is Money. And as continuing price rises mean more find themselves renting rather than buying, the health of the market lettings market seems assured, at least in the short to medium term. The Association of Residential Letting Agents (ARLA) says that 48 per cent of its members believe there are now more tenants than properties available, which points to a boost in rental yield for landlords.

The circumstances in which people buy property to let are also becoming more varied. Some popular reasons for investing in rental property include: purchasing with a view to retirement in lieu of (or to augment) a pension; homes for their kids at university, with the choice of keeping on the property after the offspring graduate; letting a home due to a job relocation that is not expected to be permanent; or simply to generate income.

The buy-to-let market is not risk-free, of course, and increasingly tough legislation has meant more responsibilities for the landlord. Investment decisions, therefore, need to be taken very carefully. With this in mind, I present my list of seven things that buy-to-let purchasers should think about.

1 Think carefully about all the finances. Mortgage providers tend to look at gross rents of about 130 per cent to 150 per cent of the monthly repayments. Calculate the purchase, improvement and running costs and balance these against the realistic rental income and the increase in the value of the property itself.

2 Fit out the property according to your target market. Don’t skimp on spec if you intend to achieve a high rental yield from a professional tenant. On the other hand, college students are unlikely to demand top-notch specification.

3 Avoid void periods. Remember that letting it for less will bring in more money than not letting it at all. Be realistic about the rental yield you can achieve; you want to avoid having an empty property.

4 Legislation surrounds residential lettings and incorrect action can have consequences out of all proportion to the error or omission. Current health and safety regulations are strict, covering gas and electricity supply and appliances, furniture, fire safety, etc. Make sure you are fully aware of all regulations or have an expert advise you.

5 A lease must be drawn up, with a proper inventory and condition schedule.

6 The property will need checking regularly and any problems will need action to comply with the law and the tenancy agreement.

7 Finally, seeking advice from a professional or expert nearly always proves a money-saver – and in the end, money is what an investment is all about.

Everyone is getting into buy-to-lets at the moment, but many do not fully appreciate that by entering this particular market they are starting a business – and a business has to make a profit to be worthwhile.

Firstly the buyer has to find the right property to invest in. Time and effort needs to be spent finding a property that can provide the best return. This means looking for a place in an area where demand for rented properties is strong and a property will rent for a good price.

Areas with lots of colleges and universities, industry and general opportunities for work provide the most buoyant letting areas – forget small towns and villages; they may look great, but unless they are near bigger towns and cities, they often have very low levels of letting activity.

Once you have located the desired investment property, financing is a stumbling block for most new landlords; but anyone who is already a homeowner can simply use the potential equity in their existing home to raise the deposit on their first buy-to-let property.

Before borrowing anything, it is essential that the buyer look into the projected rental income of their property. This can be compiled by researching others in the area and by speaking to local lettings and estate agents. This rental income figure acts as a financial forecast and will show the buyer how much money they can make from the property, as well as how much they can afford to pay on a mortgage and maintenance and preparation of the home.

These calculations are essential and will form the basis of the business plan of any buy-to-let venture. After all, there has to be some profit from the rent of the property once all of the outgoings are paid.

In most cases, mortgages will be the single largest outgoing of any buy-to-let venture and finding the right mortgage rate is crucial to profit – every part-percentage more a landlord pays on a mortgage is another chip out of any profit made. Buyers should find advisers that they trust and ask about their experience in dealing with mortgages for landlords, as this is a totally different market from owner-occupier mortgages.

This may seem complicated, but if buyers do their research and build relationships with independent estate and lettings agents and mortgage brokers the whole process becomes quite simple. Like most businesses of this size, smaller independent agents will offer buyers more free advice as they will be looking to build relationships with long-term investors.

And finally, once buyers find a property they like, it’s a good idea to find out what price it sold for previously (this information can be obtained on the internet) and negotiate the lowest possible purchase price.