Want to make millions playing the property game? Always fancied yourself as a landlord? Buy-to-let property has proven lucrative for thousands of investors over the years, but it is not as straightforward as buying your own home. If you are thinking of entering the market, here are a few basics to consider.

Choosing a property

The criteria used to choose a buy-to-let are different to those when buying your own home. Mortgage lenders will want to know the property's suitability for letting and the level of demand in the area. You are more likely to find tenants for a one-bedroom city centre flat than a three-bedroom countryside cottage, for example.

Your choice should also be based on the requirements of potential tenants rather than your own personal taste.

Buy-to-let investors can maximise rental returns

Make sure your property beats the competition by attacting your target market

The credit crunch explained

• How to improve your credit rating

• How to choose a credit card

• How to pay off your debts

BACKGROUND

• How to remortgage

• How to buy a house

• How to release equity from your home

BACKGROUND

• The beginner's guide to mortgages

• How to buy to let

Related Links

• Buy-to-let: A warning

ARLA, the Association of Residential Letting Agents, advises landlords not to purchase anything with potential maintenance problems, such as a lot of woodwork or large gardens, because this will add nothing to the rental value.

Arranging a mortgage

The squeeze on the mortgage market following the credit crunch means that landlords need a deposit of 25 per cent of a property’s value to obtain a buy-to-let mortgage.

Arranging a mortgage is subject to the usual status checks and different types of deals available, such as fixed-rate loans or trackers. However, the arrangement fees on buy-to-let deals are often quite high, many being a percentage of the loan, so this must be factored in when calculating the overall cost.

One thing that lenders will take into account is rental cover – the amount of rent that covers the mortgage. Before last autumn landlords needed only 100 per cent rental cover, but now lenders commonly insist on 120 per cent or even 130 per cent cover to ensure that landlords have a buffer to pay for running costs.

Approach with caution

Buy-to-let mortgages are not regulated by the Financial Services Authority in the same way as owner-occupier home loans. This means that lenders do not have to follow such strict rules on how they sell, promote and advertise their deals. When approaching your broker, be sure to ask questions and read the paperwork carefully.

What rental returns can I expect?

Average rental yields have been falling steadily over the past six years. A rental yield is simply the return on the capital, so if the property value is £100,000 and a landlord receives £5,000 in rent, the yield is 5 per cent.

In recent years capital appreciation on buy-to-let investments has been high because of rising property prices, making the yields look relatively low.

In the second quarter of 2002 the average rental yield was 6.8 per cent, but this fell to 5.8 per cent in 2003 and 5 per cent in 2005. In the first quarter of 2008, the average annual rental yield was only 4.66 per cent, according to ARLA.

Professional landlords with large portfolios have been best placed to withstand falling yields because they have made a lot of capital to protect themselves. Amateur landlords with only a few properties are more exposed to housing market downturns.

Other costs to consider

As well as letting agents' commission and management fees, there are several other costs to consider. The first is insurance, including building, contents, rental and legal expenses cover. Then there is the cost of maintaining the property, which could run into thousands of pounds if the property is quite old or in a state of disrepair. There are also service charges and ground rents if the property is leasehold.

The tenant is responsible for all utility bills, council tax and the TV license fees. You will also have to bear any legal costs associated with drawing up a formal rental contract.

Should I use a letting agent?

An agent can introduce and vet prospective tenants, prepare tenancy agreements, advise on and arrange inventory and condition reports and changes to utility accounts and council tax, collect the rent and pay the balances to the landlord's account. For this type of letting service agents will usually charge about 11 per cent of the tenant’s total rent.

The agent can also pay bills on behalf of the landlord and inspect the property, recommending, overseeing and accounting for necessary maintenance, repairs and redecoration. This is called a management service and the agent will usually charge an additional 6 per cent of the tenant’s total rent.

An ARLA spokesman says: “Do not be fooled into thinking that you can rely on friends or family to help you to run a buy-to-let property – tenants require a full management service.”

Tenancy deposits

Many landlords choose to ask tenants for a deposit, often equal to one or two months' rent. Since April 6, 2007, landlords taking deposits have to join a tenancy deposit scheme to protect the money and ensure that a fair amount is returned to the tenant at the end of the tenancy. There are two types of protection scheme: insurance-based and custodial. All schemes provide a free dispute resolution service.

Energy performance certificates

Energy performance certificates (EPCs) will be required for all new residential tenancies created on or after October 1, 2008, and landlords are being advised to buy early to beat the September rush.

EPCs cost about £85 for a one or two-bedroom property, £100 for three bedrooms and £115 for four bedrooms. The certificate is valid for ten years.

Five news stories

Banks pull the plug on buy-to-let landlords

Buy-to-let landlords fear they may have to sell as sub-prime mortgage deals dry up

Abbey pulls out of buy-to-let mortgages

Woolwich boosts rates and fees for buy-to-let landlords

Buy-to-let Paragon resorts to crisis funding

Five features

The party's over for buy-to-let investors

A survivor’s guide to buy to let

Buy-to-let investors hold the key to predicting how far house prices will fall

Buy to let: the crackdown begins

Beat buy-to-let payments shock

Five useful websites

National Federation of Residential Landlords

National Landlords Association

Association of Residential Letting Agents

My Deposits

Council of Mortgage Lenders