A-Z of Buy to Let: Jargon Buster
This year we’ll be running through the property alphabet, explaining various terms and how they’re relevant to you, as a landlord.
Asbestos is a mineral fibre that was regularly used in construction between the 1950s and 1980s, mainly because of its fire-resistant properties. However, it was banned by the UK Government in 1999 after it was discovered to be potentially very dangerous. Although it’s not considered harmful when intact, if asbestos is damaged and the fibres enter the human body, it can cause diseases of the lungs and chest, including cancer.
Under the Control of Asbestos Regulations 2006, you have a duty to minimise your tenants’ risk of exposure to asbestos. It is specifically listed as a hazard in the Housing Health & Safety Rating System (HHSRS).
If you had a Homebuyer Report or Building Survey at the time of purchase, that should have picked up if there was any asbestos present. But if the property was built before 1999 and you’re not sure, it may be wise to have an asbestos survey. If you do have asbestos but it’s completely intact, it could just be a case of labelling and monitoring it. However, if there’s already some damage or a risk of disturbance, it should be removed by a professional specialist.
See the Health and Safety Executive's (HSE) guide to managing asbestos in buildings
A broker is an intermediary between a client and a mortgage or other product/service provider. In Buy to Let, it’s a good idea to use an experienced mortgage broker, as they can help you find the best products for your particular circumstances, some of which might not be available if you go direct to the lender yourself. Importantly, they know how to progress your application as quickly and smoothly as possible with the lender. Brokers can also be very useful over the long term by letting you know about new deals and helping you refinance at the most beneficial times.
Mortgage brokers are either:
- Independent, meaning they can access every product in the market, or
- ‘Tied’ to a specific panel of lenders - and may be able to access special rates
The most important thing is that the broker you choose is able to deal with the best lender for you. For example, if you need an Houses in Multiple Occupation mortgage, a broker who deals exclusively or mainly with Houses in Multiple Occupation financing can be a huge help.
You should be aware that most brokers are paid commission by lenders and one may be more financially beneficial for them than another. But because they’re legally required to be transparent about their commission, it’s very rare to have a conflict of interest.
In property investment, ‘capital’ appears in a few different terms:
- Capital value: This is the market value of the property, typically confirmed by a surveyor or lender.
- Capital return: This is the return on your investment in the property. To calculate your annual capital return, there are different ways of doing this, one is to take your annual rental profit plus any increase in capital value over the year, divided by the amount of capital you’ve invested, e.g. deposit & refurbishment outlay. This will give you a percentage return that helps you track how well your property performs over time.
- Capital improvements: These are upgrades or enhancements that increase the capital value of your property, e.g. a loft conversion, extension or major refurbishment. If you’ve spent money on capital improvements, that could reduce the impact of Capital Gains Tax (CGT). Always check these with a property tax specialist.
- Capital gains: This is the difference between the value of the property when you bought it and the value today. When you sell (or dispose of the property in another way), this amount is liable to CGT. It’s worth working with a specialist property tax adviser, who can help you to plan ahead and make sure you understand how much tax you might have to pay and when.
As a landlord, there are two types of deposit you need to know about:
- The deposit required by your lender if you’re taking out a Buy to Let mortgage. The minimum deposit required is generally higher than for a standard residential mortgage because the risk is considered greater for the lender. If you’re an accidental landlord and looking to switch a mortgage on a property to a buy-to-let product, be aware that if there is currently a high loan to value, you may need to invest some extra deposit funds before you can legally let.
- The security deposit taken from your tenant. Although there’s no legal requirement for you to take one, it’s highly advisable, so that if the tenant causes any damage or defaults on their rent, you’ve got some cover. There’s no set amount, but it’s usually at least 4 weeks’ rent and capped at 5 for rents under £50,000 per year. Over that annual amount, you can take the equivalent of up to 6 weeks’ rent. When you take a deposit, under an AST, there are some important things to know:
- You must protect the deposit in one of the government-approved schemes within 30 days of receiving it.
- Within 30 days, you must also provide your tenant with specific information, including details of the scheme within which the deposit is protected and how to apply to get it back at the end of the tenancy.
- If you don’t do either of these things, your tenant can apply to the courts and they may order you to either protect the deposit or repay your tenants up to three times the amount of the deposit. You may also be unable to evict your tenant if you need or want to.
There is also the option of accepting tenants via the Zero Deposit scheme – see our full article on the benefits.
Electrical Installation Condition Report
If you’ve only been a landlord for a few years – and particularly if you bought a brand new or refurbished property - you might not have had to carry out any electrical checks yet. But with mandatory 5-year full electrical checks coming into force for all tenancies on 1st April this year in England, it’s important to understand what’s involved.
When an electrician carries out an inspection on the electrical system of a property, they complete a written Electrical Installation Condition Report (EICR). This details the results of the inspection and information about any works required to bring it up to standard.
Furnished (and unfurnished)
Should you furnish or not? Well, it’s up to you, of course, but we’d suggest your decision is driven by demand – and your agent can advise you about this. For example, students and first-time renters usually want fully furnished, whereas older tenants and particularly those who have previously owned a home tend to look for unfurnished.
Here’s a guide to what you need to provide in each case:
- Furnished / Fully furnished. Here, the tenant is only expected to have their own clothing, linen and personal items, with the landlord providing all fittings, furnishings and basic equipment such as beds, a sofa, chairs, dining, all white goods and smaller electrical items kitchenware and curtains. And the more rent you’re charging, the better quality all your furnishings should be.
- Unfurnished. This used to mean you gave the tenants pretty much an empty shell: painted and carpeted, with curtains or blinds. However, it’s expected today that white goods are also provided and in better quality rentals should have additional items such as a dishwasher and microwave.
Whatever level of furnishing you’d prefer to offer, we’d suggest it’s a good idea to be as flexible as possible in order to ensure you don’t miss out on the perfect tenant! And don’t forget they will need to meet the Furniture and Furnishings (Fire Safety) Regulations.
In all cases, make sure that absolutely everything you have provided is carefully recorded on the inventory at check in and check out.
The concept of gearing (or leverage) is that you borrow a proportion of the money needed to buy an asset in order to generate a better return on your own capital. In property, when you take out a buy to let mortgage, you’re ‘gearing’ your investment.
A simple example:
- You buy a property for £200,000 using all cash. If the market rises by 5%, you’ve made £10,000, which is a 5% return.
- But if you buy the same property with a 25% deposit and a 75% mortgage, you’ve only had to put in £50,000 of your own money. That 5% rise in the market and £10,000 gain is now a 20% return on your money.
Even after you take into account the mortgage borrowing costs and the impact of monthly repayments on your rental profits, gearing can make property investing much more profitable over time.
An HMO is a House in Multiple Occupation. The definition In England and Wales is:
- a property that houses at least three tenants
- who form more than one household
- and share toilet, bathroom or kitchen facilities.
Landlords of HMOs have to comply with additional legislation, which can be complex, as each local authority can enforce its own requirements on landlords. For instance, although only large HMOs have to be licenced under national legislation, your local council could insist that even smaller HMOs to have licences - possibly planning permission as well. So it’s important to speak to your local council housing department before you go ahead with an HMO, to find out what regulations you’ll need to comply with how much it could cost you.
HMOs also have to comply with specific health and safety standards, particularly those concerning fire safety. You’ll also need a specialist mortgage if you want to buy an existing HMO or a property that you’re planning to convert and let as an HMO. Only a small number of lenders offer this, so it’s worth speaking to a mortgage broker that’s experienced in the HMO market and can make sure you have access to the best and most appropriate specialist products.
An inventory is taken at the start and end of a tenancy to protect both tenants and landlords against any confusion or disagreement about wear and tear, damage or theft that may have occurred during the tenancy.
It should be a detailed document, containing all the information and evidence regarding the contents and condition of the property, including photos. Ideally, it should be carried out by an independent professional.
Whoever is checking the tenant into the property - inventory clerk, ourselves as your managing agent or landlord - should go through the inventory with them and then make sure both parties sign to confirm agreement with the contents. If it’s a larger property and/or an extensive inventory, it’s fair to leave it with the tenant for a few days, so they can go through it properly and raise any queries.
The check-in inventory should then be used at check out, to compare the condition of the property at the end of the tenancy. If possible, the tenant should be there so the cost of repairing any damage or dilapidation (over and above reasonable wear and tear) can be agreed there and then.
Joint tenants vs tenants in common
If you want to invest in a property with someone else, you can own it as ‘joint tenants’ or ‘tenants in common’. These have different legal and practical implications, so it’s important to be clear on the difference.
Obviously, whoever is handling your legals for the purchase can advise you. As with any legal transaction, it’s wise to take independent specialist advice before moving ahead.
You really are buying ‘together’ and have to act as a single entity. From a legal perspective, each person owns the whole of the property, which means:
- You’ll need to get a joint mortgage
- If you want to sell the property or make any alterations that require owner consent, all owners have to agree
- You can’t leave your ‘stake’ in the property to someone else in a will. If one of the joint tenants dies, the property automatically passes to the other(s), known legally as ‘right of survivorship’.
For these reasons, it’s usually married couples or family members that are joint tenants.
(In Scotland, this type of ownership is called 'joint owners with a survivorship clause'.)
Tenants in common
Each person owns a separate, specific share of the property and it can be divided up however you like – e.g. it could be 50/50 or one person could own 60% and two others 20% each.
- Although it’s possible to mortgage each portion separately, not all lenders will agree, so you may need to have a joint mortgage
- If you want to sell the property or make any alterations that require owner consent, all owners have to agree
- You can leave your share to whoever you like in a will
This is how most friends and relatives buying together will own property.
(In Scotland, this type of ownership is called 'joint owners’.)
Does your property create a good first impression? Although you most commonly hear the term ‘kerb appeal’ when properties are for sale, it’s just as important when it comes to letting.
If you want to attract the best tenants and get the highest possible market rent, you’ve got to offer a property that is obviously well cared-for. If people can find faults when they come to view, they’re less likely to offer the full amount you’re asking.
Making sure your property has ‘kerb appeal’ can also help maintain a good relationship with your neighbours. People often complain that rented properties, particularly Houses in Multiple Occupation (HMOs), have a negative impact on the overall look and ‘value’ of the immediate area, so make sure yours doesn’t attract attention for the wrong reason! Have a good maintenance schedule for the property and, importantly, ensure there are enough waste and recycling bins for the number of occupants.
Legionella is a bacteria that can form in water where the temperature is between 20 and 45 degrees Celsius and sludge, scale and/or rust are present. If someone inhales contaminated water droplets, it can cause Legionnaire’s disease, a form of pneumonia that can be deadly. Since 2001, it’s been a legal requirement for landlords to ensure their properties are free from legionella.
The risk is actually very low in a property that’s occupied, as the hot and cold water are generally used regularly and that keeps the supply moving. If your property has a combination boiler and electric showers, the risk is lowered even more because water isn’t being stored.
Some steps you can take to help keep legionella from forming:
- Flush the water system between lets
- Stop debris getting into the system by ensuring any cold water tanks have well-fitting lids
- Set the hot water cylinder temperature to ensure water is stored at 60°C
- Get rid of any redundant pipework.
Further information can be found on the Health and Safety Executive website.
If you would like to have a check made on legionella, we work with experts who can assess your property for Legionella. Simply contact your local Your Move branch for more information.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Embrace Financial Services usually charges a fee for mortgage advice. The amount of the fee will depend upon your circumstances and will be discussed and agreed with you at the earliest opportunity.