Attracting the best tenants

As the global economic crisis continues, getting the right tenants for your buy to let home is more crucial than ever. But how do you go about it?

If yesteryear's buy to let property landlords ever needed proof there was no such thing as 'easy money', they won't need to look very far. Property investors will have seen as much as 20% knocked off the value of their properties over the past couple of years, and with prices stagnating, there's not a lot of hope for capital appreciation in the near future.

And, while many landlords might benefit from the cost of falling mortgage rates, they will simultaneously find themselves faced with new problems as a result of the deepening downturn. As public sector cuts bite and the cost of living increases, many landlords are expecting to see an increase in the numbers of tenants in arrears.

Tough times

Especially for small landlords with mortgaged properties, the consequences of not receiving a steady rental income stream could spell a devastating shortcut to mortgage arrears and even repossession according to Richard Price, director of operations at the NLA. He said, "For portfolio landlords with, say 20 properties, if one tenant fails to pay it will be absorbed by the rest. But for smaller landlords with say just two buy to let properties, if one doesn't cough up, that's half of your rental income."

Small landlords relying on an income from tenants that does not materialise could be prime candidates for repossession at the hands of already nervous buy to let mortgage lenders. While interest rates have remained at a historic low, the predicted increase in repossessions has not really materialised - but landlords who can't rent their property, or who have difficulties with their tenants, are prime candidates for getting into trouble with their lenders.

This prospect, alongside the lack of opportunity to sell is why it has become even more crucial for landlords to ensure that their tenants are reliable, trustworthy and, ultimately, happy. Here, we take a look at the top nine measures to achieve this goal:

1. Set your home apart from the competition

Even though mortgage rates are low and house prices have fallen, the numbers of first time buyers is at an all time low. This is good news for the private rented sector in terms of its reputation. There is no stigma attached to renting at all now and as house prices fall and lenders require greater levels of deposits, renting makes sense for more and more people.

However, a more buoyant sector also means stiffer competition among landlords, so they will need to make sure their buy to let properties come up to scratch. These days, buy to let homes will not only need to be clean and freshly decorated, they will need new white goods such as dishwashers, microwaves and all the mod cons.

The experts will tell you to appeal to the broadest possible tastes. Magnolia walls aren't going to move people to the extent they sink to their knees sobbing and bellow: "I have to live here!" but they aren't going to put anyone off. Chintz on the other hand is something people either love or hate.

2. Cast your net wide

If you are using a letting agency to find tenants on your behalf, make sure you select a company that has signed up to one of the big property websites like Rightmove.co.uk. If you just rely on the local newspaper, people moving to your area from further away are unlikely to even see your advert so you will be limiting your potential market.

3. Be flexible on rent

Appallingly low numbers of house sales in the current property market has left vendors taking huge hits on the price in order to shift their home - and unfortunately things are no different for landlords. So although you may be reluctant to drop to 470 a month in rent from your planned 500, if the dispute results in the property standing empty for a month that's 500 down the drain anyway - more than the 360 discount you would have given over the course of a year. What's more, being flexible will mean you fall into favour with your tenants from the outset which can only be a good thing.

4. Vet your tenants

But it's once you think you've found tenants that the hard work actually starts. If you are using a letting agent, part of it's responsibility will be to screen tenants - but otherwise you will have to do it yourself, says Tom Entwistle, managing director at information website, Landlordzone.co.uk.

"Landlords should always seek references, which should incorporate a previous landlord and current employer, and carry out individual credit checks to find out if potential tenants are reliable payers." A comprehensive credit search, which includes references, is available from TenantVertify.co.uk at a cost of 30.55, while a more basic search will cost 15.88.

5. Draw up a legal contract

Once you are happy with your tenants, you will need to draw up an Assured Shorthold Tenancy (AST) agreement. If you are not using a letting agent, these standard documents can easily be purchased from a high street stationer or downloaded from websites like Landlordzone.co.uk or Arla.co.uk.

The main benefit of an AST is to set down reasonable behaviour and expectations, state what rent is payable and when, as well as an agreed notice period that the tenant must provide should they want to move on - usually long enough to afford you enough time to find a replacement.

However, bear in mind that this notice period works both ways and, under the 1988 Hounsing Act, even if your tenant fails to pay the rent, you can't simply throw them out on the street as the stated notice period still applies. "To evict a tenant involves a lengthy and costly court process known in the trade as 'section 8' under which you can apply for a possession order," says Entwistle. "Many landlords don't consider the process worthwhile and prefer to wait for the AST to expire. That's why it's sensible to start off with a six month contract and renew it if things are going well."

Another factor to consider is that, since 6 April 2007, any landlord that has issued an AST to his or her tenants will have to abide by the Tenancy Deposit Protection Scheme, which requires that funds are held in a government-backed account. Find out more about this at www.direct.gov.uk.

6. Use a deposit scheme

It's now the law that tenant deposits have to be protected. There are two ways of doing this. The first is to simply pay the deposit into an approved scheme, which will look after the money until the tenant leaves the property. If there are no problems, the cash is simply transferred back to the tenant. If you need to repair some damage, then the correct proportion goes to you, with the remainder to the tenant.

Alternatively, you can keep hold of the deposit and buy an insurance bond that guarantees the tenant will get their money back at the end of the tenancy - again, provided they have looked after the property.

If there is a dispute, the companies managing the deposit can arbitrate between the landlord and tenant. Be sure to use only approved schemes; at the moment there are three: The Deposit Protection Service, Tenancy Deposit Solutions Limited and the Tenancy Deposit Scheme. If you use anyone else, you're breaking the law.

7. Keep on friendly terms

But as well as 'dotting the i's and crossing the t's' with an AST agreement, forging a good relationship with your tenant is also crucial, says Price at the NLA. "This way, if there is a potential problem, your tenant will come to you first about it and you can work through things together. For example, there may be some solutions such as benefits your tenant didn't know they could qualify for."

8. Consider rent guarantee insurance

But with all the best preparation and will in the world, things can still go wrong, which is when rent guarantee insurance can come in very useful. Rent guarantee insurance pays out in the event that your tenant does not. It will continue paying until either the AST agreement expires or a tenant has been successfully evicted. Policies are typically capped at between 10,000 and 15,000 of rental cover and there is usually an excess of one month's rent to pay, which becomes 90 days if you take out the policy once the tenancy has started.

It's a sign of the times that, especially among smaller landlords, rent guarantee insurance is becoming more popular. Suzanne Whittingham at insurer Endsleigh, said: "We have already seen a marked growth in the number of landlords enquiring about rental insurance and expect it to become more popular as the downturn continues."

9. Have a contingency fund

But in this case, it is crucial to have a financial buffer if and when you find yourself without tenants - known in the industry as a void period. According to ARLA, the average void period for a buy to let home is 27 days a year, so at the very least, this is what you will need in the bank in cash.

Lastly, keep in mind that a property is just like any other investment - it's worth can go down as well as up. So, while it might feel like a roller coaster now, at least you boarded it in the first place.

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