Buying a second home for investment

The house next door to mine is permanently rented. Before the present tenants moved in, the landlord spent nearly £15,000 on the house as it had been thrashed, doors kicked in, the dog not allowed to go outside to do its business, curtains ripped and pulled down, the carpets beyond cleaning, deep scores in kitchen work top surfaces etc. Admittedly some of that money was for new double glazed windows but the remainder was getting the house and garden back in order again. Even the bath etc. had been thrashed. The female did not pay rent for around 6 months, choosing to take her sons on holiday during term time instead. We had a couple of police visits as her live in boyfriend was drug dealing.

Butter would not melt in her mouth. I was fooled as were the letting agents. Please ask your friend to think twice as some people are serial non rent payers.

jeannie renting a property out is not as simple as one might think. There are a lot of associated costs which one would not ordinarily have with one's home. In order to realise a profit or even a break even point your friend will need to factor in each and every one of those fixed and variable costs and then account for contingencies. I don't know where in the country you are but currently the rental market is reasonably buoyant but very competitive and the governments policies are making it harder to turn a profit as people are rightfully concerned as to the state of the economy and as a consequence the security of their employment and to a degree the possibility of suffering under what has been called the bedroom tax should they find themselves unemployed and claiming a benefit.
Most of the comments have covered almost everything but the secret is to buy cheap, renovate if necessary, and pitch the rent at a competitive level. The one thing I would impress on anyone is never forget the property is for renting out, not for you to live in. So do not fall into the trap of kitting it out with what you would like in a home because that will add to the costs.
I think I am right in saying that apart from London and areas of the home counties, in the last 8 or so years one would have been better off living in and paying for an hotel rather than buying a house using a mortgage. Such has been the degree of capital appreciation; very low and will remain so for a while longer. A rental portfolio is a long term committment and in my humble opinion fraught with hazards for those not in the landlord business. In saying that it can also be quite profitable if undertaken in a business like manner.

I agree with Grannyknot. I would go further and say that most agents aren't worth a you know what.
We only used an agent once and only found out that our flat was being used by 8 people as to the 3 we let it to.
We evicted them ourselves and never heard from them again.
The most glowing reference we had from someone was from a Pastor for two of his congregation. This flat was completely refurbed before they moved in.
At the time we were living abroad. They only ever paid us the deposit and one months rent. I had to get some 'heavy' friends to get them out.
They left the flat in such a state ( dogs mess on new carpets) I had to get proffesional cleaners in.
The best tenant I had was a ' lady of the night' although I didn't know it at the time. LOL.

I was a landlady for 5 years when we rented out a flat. I didn't use an agent, preferring to vet the tenants myself, and I never once chose badly. When we sold the flat it was left cleaner than even my high standards for a flat on sale would have achieved! The place shone. We didn't have to pay CGT either, something to do with the fact that the flat was our primary home for a while, plus a whole host of other factors, calculated for us by our accountant.

So I think that if you suss out the rental market in your area, buy a rentable flat, make sure you get tenants that you know will be good (check references, ask to see pay slips etc, it's not that hard - plus give them a good once over yourself, interview them) - then it can be a very positive experience. And we made a good profit out of the flat when we did sell it, even with taking into account council levy, insurance, gas certificates, maintenance and repairs. In fact when I find another property to invest in, I'll do it again.

On the other hand, I think many agents just take their commission (some up front for a year) and after that don't give a toss.

Thanks for all your comments, this is what I had thought myself and renting out is not just pocketing the rental money like she thinks.

Not sure what I should do, I don't think for one minute that she as considered any of your comments on costs.

It's not always easy to give advice if it's not asked for when the person is set on doing something and she may think I am being very negitive with her good idea for generating income.

I think the whole enterprise is fraught with possible pit falls. Get very good independent advice and don't try to seek this from a letting agent.

It depends on the location, the type of property that can be bought, the costs of making the house suitable for letting.
Agency costs, landlords insurance. Is that type of property going up in value in that area? Plus many many more such issues.

About a month ago I read in the Sunday Times that rental properties in the right area are a much better investment than savings at the moment. I think your friend needs to do her research well because of everything already mentioned. It may also be worth considering a buy to let mortgage for part of the cost as the interest could be set against tax.

One good reason for using a reputable letting agent is that the tenant can contact them when anything goes wrong and they will know who the reputable tradesmen are to arrange to get things fixed.

Your friend needs to do a lot of research and then do the sums. If she is sure she can get an annual return of over about 3% it might be worth it at the moment while savings rates are so low as long as she can cope with the hassle.

I rented a flat out for 5 years. .

I would say that if you do buy an investment property, check the rental market in your area. Is it strong or is letting less easy? Remember that fewer people are going to university now they have to pay £9,000 fees or else choose to live at home rather than move out.

Use reputable estate agency, preferably part of a large chain, and leave the vetting of tenants and the every day maintenance to them. It will cost 10 - 20% of the gross but it means no midnight or Sunday morning calls when things go wrong or you are on holiday.

I would avoid small local letting agency, even though they may offer cheaper fees. One such agency locally went bust and it was found that all the deposits had gone into - and out of the agents pocket instead of being placed in a protected bank account.

Allow for months when the property will be unlet because you need to maintenance or decorating or tenants are slow appearing. You also need to pay for insurance, annual energy and safety checks, servicing of all equipment. Maintenance charges on a flat, if that is what you buy.

I would say that it is not a good investment unless you are property savvy, can afford go at least six months without income to cover when it is unlet or if you have tenant problems and know and understand all the regulations about servicing appliances, having regular safety and energy assessments and can read and understand these reports when you get them. If not invest the money in a Building Society in 3, 4 or 5 year bonds that also give a better return and can be liquidated more easily.

Another cost to consider is that of legal fees for drawing up a water-tight contract, or later if eviction is needed.

Making sure the rent is paid and the house is not trashed is the responsibility of the agent in most cases.

Also you have to make sure , as much as you can that

a] They will look after your property

b] they are always on time with the rent

And the rental income will be taxed, although certain expenses, such as agent's fees can be set against it.

I have not seen any accounts but I have a friend in London and he inherited a small terrace house in Erdington which is near where I live.
He decided to rent it out when the housing market was low and his plan is to sell it in a better market.
He has let it through an agency which arranges repairs etc and he has said it is surprising how much you spend on maintenance etc.
He does say he does make a profit from the rental but he has said it is not great once the expenses have been paid.

Frank

Yes, there would be CGT payable on any profit, and of course there is no guarantee a the moment that the house would increase in value. She would also have to pay for somebody to find and vet the tenants - I paid 12.5% of the gross rent for this service.
The only exception to the CGT rule is if a person has so many rental properties that it amounts to a business, in which case they would pay tax on the profits. The houses are just classed as assets of the business.
If you google 'CGT on rental properties' you will find the relevant page from the HMRC website.