Letting Factsheets Factsheet 30 - Investing in Residential Property
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 Investing in Residential Property
The Market:At the start of the Century, nearly 90% of the population lived in rented accommodation. By 1987, this figure had dropped to around 7%, partly as a result of shortage of accommodation brought about by two World wars, but mainly due to tenant protection legislation in the form of Rent Acts, which froze rents and gave the tenant security of tenure. Combined with high inflation, which diminished value of rent, tax incentives given to those who wished to purchase their own property and the 'right to buy', the private rented sector continued to retract. Letting was viewed as a bad investment. With owner occupation levelling off at 72%, but 40,000 new homes required each year, future demand for rented property in the private sector is bound to increase. Instability in employment with more short term contracts, student loans and tuition fees having to be re-paid prior to house purchase and fewer 'right to buy' sales to existing tenants of council houses, means that there will be an increasing demand.
The Housing Acts:The Housing Act of 1980 gave tenants in the public sector the right to buy, but introduced the concept of private landlords being able to regain possession at the end of short term leases through the protected shorthold tenancy and the assured tenancy. Landlords of newly built homes would be unfettered by the Rent Acts in relation to rent, provided they contracted to adhere to strict conditions. Neither scheme was successful. The 1988 Housing Act brought about incentives for private landlords to let, free of Rent Act restraints as to a 'fair rent'. The 'assured shorthold' was born, allowing a 'market rent', subject to one appeal to the Rent Assessment Committee during the term of the shorthold. The 1996 Housing Act reduced this right of appeal against the agreed rent to once during the first six months of the tenancy, abolished the minimum six month rental and shortened the period of possession for rent arrears from three months' to two months'. The Housing Acts of 1988 and 1996 allowed letting to be again considered as an investment. In 1990 only 15% of tenancies were assured shortholds. By 1994, the figure was 40%. Since 28 February, 1997, unless otherwise stated, all short leases will automatically be assured shortholds and the percentage should increase substantially.
Types of Letting:Nearly all residential tenancies are now assured or assured shortholds. The advantage of the assured tenancy, as opposed to an assured shorthold, is that the tenant is not able to challenge the agreed rent before the Rent Assessment Committee as he is able to do in the first six months of an assured shorthold.
Resident Landlord:However, where the landlord shares the accommodation with the tenant, or even lives in the same building, the tenant is a lodger. An assured or assured shorthold tenancy cannot be created with a resident landlord.
Rent a Room Scheme:A tax incentive was introduced on 6 April, 1992 in order to encourage owners, with surplus furnished accommodation available, to let to individuals. The Rent-a-Room scheme allows income earned gross from renting a furnished room to be free of tax if it amounts to £4,250 per annum, or less. That amount includes any other services, such as laundry, meals or cleaning charges. Holiday Lets:Premises let for holiday purposes cannot be an assured (or assured shorthold) letting - see Schedule I, paragraph 9 of the Housing Art 1988. Nor does the Act define what is a 'holiday'', but the courts have held it to be 'a period of cessation of work' or a 'period of recreation'. Tax law requires the furnished premises must be available to the public on a commercial basis for 140 days or more, let commercially for 70 days or more and not occupied for more than 31 days by the same person in any period of seven months. The premises may be let 'out of season by using Ground 3 (out of season holiday accommodations) provided by Schedule 1 of the Housing Act 1988. The landlord must grant a fixed term, not exceeding eight months and give notice to the tenant, before commencement the tenancy, that possession may be recovered under this Ground.
Retirement:Ground 1 of the Housing Act allows the owner, who wishes to obtain possession for personal occupation, to re-gain possession if he has previously occupied the dwelling, or intends to at some future time and gives written notice to the tenant, no later than the beginning of the tenancy that possession will be sought on this ground.
Company Let:A company let cannot be an assured letting as the property is not, to an individual. The company then allows a person, normally an employee, to occupy the premises while the company is liable for the rent and compliance with the covenants. The occupier is a licensee. The purpose and popularity of the 'company let' has fallen away as the need to circumvent the strictures of the Rent Acts no longer applies.
Finance:Apart from inheritance, investors are looking for some tax incentive, or financial funding in order to invest in residential property. The main sources are:
(i) Buy to Let Schemes This route has proved very popular with landlords in recent years and there are now many 'Buy-to-let' schemes available through the various lenders. Typically, these schemes allow landlords to borrow a substantial part (usually 75%) of the purchase price of a property they intend to let on either variable or fixed interest rates. (see table on back page for contact telephone numbers).
(ii) Housing Investment Trusts The tax breaks enjoyed by HIT's are less attractive than residential property companies enjoyed under the Business Expansion Scheme and will generally only suit the institutional investor. In contrast to BES companies, though, HIT's will be listed on the stock exchange and should offer a more liquid investment.
(iii) Business Expansion Scheme The I988 budget extended the Business Expansion Scheme for individuals investing in new business, by giving investors up-front tax relief for the investment in companies letting residential properties on assured (not assured shorthold) tenancies, so long as the shares were retained for five years. The scheme was only given a five year life (ending in 1993) although many of the BES portfolios continue to be held by investors.
Where to Buy:Both the type and location of the investment property can be very important considerations for the investment landlord. Prospective landlords need to gain a good knowledge of the local market, or employ an agent with similar knowledge of the residential property investment market in order the maximise the returns. Essentially, properties in areas of high demand for rented accommodation generally give the best return on investment (ROI). Thus, for example, areas near colleges and universities can be good locations because of the requirement for student accommodation. Conversely, properties in rural areas tend to given lower ROIs since there is less demand.
Sources of Income:While rent is generally stable and a reasonable return on investment, it is the capital growth in the value of the property which is the main attraction.
Pros and Cons of other Investments:Compared with investment in shares, the rent equates to dividend and the growth to the capital value. While equities can go up and down, rent and capital value in property both go up in line, or ahead of, inflation. Investment in bricks and mortar is therefore very sound, not beset with the cyclical vicissitudes of the stock market. Disadvantages are bad tenants, high maintenance and management charges, which can be mitigated by purchasing a modern property in a good area, managed by professional agents who attract responsible tenants.
Sources for Further Information:
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