Ways for buy to let investors to avoid being crunched by the credit squeeze

*Purchased a buy to let investment lately and now wishing you had put your money under the mattress instead?*

Just like owner-occupiers, some landlords are also feeling the effects of the credit squeeze, particularly later entrants to the market who have not yet had the comfort of seeing their properties rise substantially in value.

Nevertheless, selling up should be considered only as a last resort because over time, the sector can still provide substantial overall returns. David Alexander of D J Alexander gives his top ten tips to landlords on how to make it through the credit crunch.

1. *Rental uplift*. Thanks to the squeeze on mortgages, properties in the most popular rental areas have seen rents go up by 20 per cent since Christmas, with the prospect of even more rises to follow. Therefore, any landlord facing the impending departure of a tenant should be able, within reason, to raise the level of rent.

2. *Loyalty pays dividends*. When a valued tenant wishes to renew his or her lease, do weigh up carefully how much more to charge in rent. If the current occupier has been a “model tenant”, it may be wise to limit any rental increase to keep this person in place

3. *First impressions*. Even in the current landlord market, properties should be welcoming to potential tenants, so make necessary redecoration and professional cleaning “must dos” before going to the market.

4. *Stay well equipped*. Internal items that were once considered add-on luxuries are taken for granted by tenants today – a power shower in the bathroom being a prime example. As for buying cheap beds at a discount store – don’t even think about it; today’s tenant works hard and plays hard and will insist on a regular good night’s sleep.

5. *Don’t sell up*. Once the recovery comes, many rental properties will again start to show a rate of capital growth well beyond inflation (and by that I mean ‘real inflation’, not the government’s dubious figures) so selling now is likely to be a false economy.

6. *Equity release*. Anyone who owns a “blue chip” rental property and needs to raise cash (say, to fund improvements or give themselves some liquidity) might consider taking a manageable loan based on some of the available equity. The rise in value of the property, post-recovery, will almost certainly outstrip the rate of interest on the money borrowed. If this is not an option, consider securing money on your main home – say 10 per cent of its equity. Like the good buy to let investment, a good family home will rise in value beyond any manageable amount borrowed on it.

7. *Re-mortgaging*. Not nearly as easy as it once was. However, do shop around if you are seeking a low LTV (loan to value ratio). In today’s climate lenders will look most favourably on properties whose market value is substantially higher than the sum borrowed on it. The lower the LTV, the cheaper the mortgage tends to be.

8. *Savings*. While there is a lot to be said for putting by a sum of money for the proverbial “rainy day” it does seem perverse to have too much tied up in this way, when returns from bank or building society accounts may be below the ‘real’ rate of inflation (i.e. the one NOT quoted by Alistair Darling). Putting at least some of that money to retaining or improving a basically sound rental investment makes more sense.

9. *Stay insured*. Anyone who is not buying with a mortgage needs to make their own arrangements regarding buildings insurance and, therefore, should ensure this is up to date. If you do have a mortgage and insurance was taken out when the property was used for owner-occupation, inform the lender of the change – otherwise the policy may be declared void.

10. *Should all else fail*. Every situation is unique and there are, unfortunately, people who will need to withdraw from buy to let if an unsuccessful property investment is haemorrhaging their entire financial situation. In this scenario selling to sitting tenants would prevent an income void (i.e. between the departure of the tenants and finding a buyer), and also save agency and advertising costs. If this is not possible, another buy to let investor may offer the best price, especially if the vendor can produce proof that the property has secured regular rental income over a sustained period.

The Scotsman