Buy-to-let investors can be caught out by unexpected costs.
Thousands of landlords hoping to cash in on the buy-to-let boom are being left £1,500 out of pocket after being stung by unexpected costs.
New research reveals that landlords pay £2.1bn in arrears, property vacancies and maintenance charges a year. The average cost per landlord is £1,532, according to estate agency Northwood, with 84pc of landlords receiving less rental income than they expected.
Nick Cooper, the managing director of Northwood, said: "While buy-to-let has the potential to be lucrative, many landlords don't appreciate the expense and time that are actually required."
The average rent hit a new high of £741 a month in September, 3.2pc higher than the year before, according to LSL Property Services. But before you try to cash in, here are a few pitfalls to consider and how you can avoid them.
= Rent arrears =
Tenants who do not pay rent on time can be stressful and financially crippling for novice landlords.
LSL said 9.1pc of all rent was late or unpaid at the end of September and estimated there were currently 99,000 tenants who had not paid their rent for the past two months, the highest number since its records began in 2008. In the second quarter of 2012, 25,422 tenants faced eviction notices, an 8pc increase on the year before.
David Brown, commercial director at LSL Property Services, said: "This is a nightmare for landlords because they have a property that is neither providing an income nor able to be quickly filled."
While it is hard to predict a tenant being made redundant, you should always obtain a reference directly from their employer and carry out credit reference checks. This should flag up if they have missed repayments on credit cards or mortgages in the past six years. It will not flag up missed rent, so ask for the details of their landlord or letting agent and check that they paid on time.
You can also ask to see bank statements or salary slips for the past three months. A standing order should always be set up for rent collection.
A letting agent can find tenants and carry out these checks for you, usually at a cost of several hundred pounds.
= Damage to property =
Most landlords obtain a deposit from their tenants to cover any damage to the property. This is typically six weeks' rent and must be held via one of three government-approved schemes. But it is unlikely to be enough to cover serious damage.
Kate Faulkner of Designs on Property, an advice service, said: "All landlords expect wear and tear, but clearly some tenants are higher risk. Students are likely to have late-night parties, while young children are likely to drive toy trucks into your skirting boards.
"Think carefully if you want tenants who smoke or have pets. It's not necessarily a bad thing but you must protect yourself for example, you could stipulate that curtains and carpets must be professionally cleaned when they leave."
Always carry out an inventory, with pictures, at the start of the tenancy. This makes it easier to deduct costs for repair work from the deposit.
Landlord insurance can be a useful way of safeguarding against damage to your property. Direct Line, for example, pays out for accidental damage to the property by you or tenants, and will rehouse tenants while repair work takes place. But it will not pay for deliberate or malicious damage by tenants, and does not pay out if tenants are late with rent.
All policies vary and some won't cover landlords who rent to students or those on housing benefit, so shop around and check the terms carefully.
Even routine repairs can be very expensive for landlords, especially for those who have bought an old or poorly maintained house. A broken boiler, leaking roof or faulty electrics can cost thousands of pounds to fix. A letting agent can arrange such maintenance work for you, but will charge between 10pc and 14pc of the rent for the service.
= Periods without a tenant =
A property sitting empty is no use to landlords, and there are occasions when you may find yourself without tenants typically the changeover between tenancies or an interruption caused by refurbishment or repair.
If you are relying on rental income to pay your mortgage, these "rental voids" could be disastrous, which is why you should have enough savings to cover at least three months' worth of mortgage payments.
However, do not be tempted to rush in unsuitable tenants just to avoid having your property empty. Not taking the time to carry out proper checks on tenants could prove a much more costly mistake in the long term.
= Paperwork =
From an Energy Performance Certificate to a House in Multiple Occupation licence, many landlords are surprised at how time-consuming and expensive paperwork can be.
Chris Norris, head of policy at the National Landlords' Association (NLA), said: "There are over 50 Acts of Parliament and more than 70 sets of regulations governing the private rented sector. Even experienced landlords come across new challenges."
NLA members can get advice on these rules; membership costs £99 a year.
Ms Faulkner said it was vital that all landlords also sought specialist property tax advice before letting. Many did not understand the tax implications of rental income, tax reliefs and self-assessment tax returns.
Some landlords are also surprised at the cost of buy-to-let mortgages, despite the Bank Rate being at a record low.
Aaron Strutt at broker Trinity Financial said: "Buy-to-let tends to be more expensive than residential mortgages as they have higher rates and bigger arrangement fees, sometimes as much as 3.5pc of the loan.
"It is also important to check the reversion rate of the mortgage when you choose a rate. Selecting a cheap deal now could cost you a fortune if you find yourself in a position where you can't remortgage to another bank."
Use a good mortgage broker to find the best deal and work out if you can afford repayments once interest rates start to rise.