Renting your property

If you cannot sell your property, is renting the answer?

The residential housing market remains weak and little growth is forecast during 2011, with one major exception – lettings.  Whilst sale transactions continue to be broadly flat, the rental sector remains buoyant with properties being let very quickly and at increased rents.  If you are unable to or can’t sell, then should you rent your property out instead?

Due to a buoyant rental market, many homeowners are seeing renting their property as an option.  However, a recent survey carried out by RICS Residential Lettings Survey in December 2010 suggests that availability in the rental sector is slowing.  Nevertheless, demand remains high which is due in large part to the scarcity of available mortgage finance for prospective buyers, and this means that the lettings market theoretically offers a potentially attractive option.

If you are considering renting your property, you should consider your needs and objectives carefully, take sensible financial and legal advice and be aware of the potential pitfalls.

Your needs and objectives

It is important not to be blinded by the practicalities of the promise of a rental income to alleviate ongoing mortgage payments if you are compelled to move house.  Whilst letting your house may be a solution to stretched finances, nevertheless it is not a simple option and can prove to be restrictive.  For example how far in advance can you predict your requirements and will putting a tenancy in place impede your own priorities? 

If you really would prefer to sell, can you reconcile this with offering privacy to tenants and/or having access and a presentable property to show to prospective buyers?  Consideration must also be given as to whether or not you are in a  position to manage a tenancy yourself or would you be better advised to appoint managing agents and will the likely rental actually be sufficient to meet your financing needs, particularly when associated costs are netted out?

Sensible financial and legal advice

There are three vital areas to consider when looking at the issue of financing.  These are:

1. Unless you already have a buy to let mortgage, letting your home is likely to be a breach of your original mortgage conditions.  You must inform your lender of your intentions.  Most lenders will not insist on switching to a  buy-to-let product, but some will change your existing interest rate to reflect their perceived higher risk.
2. Any rental income received will almost certainly attract a tax liability.
3. It is a known fact that market buoyancy is a generalisation.  A buoyant rental market will not guarantee that your property will be let easily and consistently, without costly vacant periods or rental discounts.  You should ensure that you can financially cope with any gaps in periods of rental.

The area of residential property letting is complex and therefore legal advice should be sought before proceeding further, because if a tenancy agreement fails to comply with necessary legislation, it may not be legally binding which could result in serious consequences for you and your property.  By taking advice from qualified professionals you can avoid this pitfall, and it will also help you decide what the terms of the tenancy will be and build on these terms, which are to be included in the written tenancy agreement thereby tailoring the agreement to your needs. 

Areas to be considered are the length and type of tenancy, restrictions such as pets, DSS tenants etc; setting the rent and associated conditions, handling of deposits, furnishings, if any, and inventory, service charges and repairs, access for you and/or your agents, provision for dispute settlement, and when the tenancy should end.

It is therefore necessary to plan in advance in order to prevent problems with renting your property arising later on, thus avoiding expensive remedial costs.

Potential pitfalls to avoid when renting your property

Allowing a stranger to move into your home has emotional connotations as well as significant legal and financial risks.  Whilst you can plan to minimise these, there will be downsides which will remain and you should be fully aware of these at the outset.

When planning, you should account for possible tenant shortfalls such as:

• a tenant's failure to pay or delay in paying their rent;
• damage to the property;
• antisocial behaviour in the neighbourhood;
• refusal to leave at the end of the tenancy;
• unauthorised sub-letting or additional tenants and
• claims against you as a landlord.

To avoid such pitfalls, you should ensure you research and appoint your managing agents carefully or if you are taking on this role yourself, do your homework and get references in respect of prospective tenants; take out appropriate landlord insurance against necessary risks and ensure your written tenancy agreement complies with legislation and provides for these risks.

In summary

The lettings market may not be an ideal solution for all, but could be appropriate if you cannot sell your  home or you need to move. 

The market remains attractive, particularly in the South East, as mortgage availability and the requirement for substantial deposits seem set to underpin continued demand in the lettings sector. 

However, changes in the Housing Benefit system come into force in April 2011, and how this will affect the market remains to be seen given that the rents payable to private landlords from this source will be reduced and could therefore impact the overall market!