Property Red Tape Ties Up Landlords ; New Regulations to Protect Tenants Are Reducing Buy-to-Let Returns, Says David Prosser

Article excerpt

Buy-to-let investment is supposed to be simple - it's one of property's major selling points. Investors buy a property, rent it out at a rate high enough to cover their mortgage costs, and then wait for capital gains over the longer term.

However, there is a complication that is worrying increasing numbers of landlords: the need to comply with a series of new laws designed to protect people who rent properties. The latest of these regulations takes effect next week.

From Friday, all new tenancy agreements where the landlord asks for a deposit will have to be covered by the Tenancy Deposit Protection scheme. Within 14 days of taking the deposit, landlords will be required to tell their tenants which of three national arrangements they are registered with.

The three schemes are set up slightly differently, but work in a broadly similar way. Tenants' deposits are safeguarded by the schemes and, when they move out, the schemes will arbitrate in the event of a dispute over how much money should be retained by the landlord.

In theory, the initiative is good news for everyone. One of the most regular complaints among tenants is that landlords unfairly retain deposits when they move out. Equally, landlords have little protection from rogue tenants who move out having damaged the property, or without paying rent.

However, many landlords are concerned about the costs of administering the scheme. Some research suggests that many plan to stop asking for deposits so that they don't have to worry about the schemes' requirements.

Nicola Severn of the Mortgage Trust, a specialist lender to buy- to-let investors, says: "There is a wide divergence of opinion on whether the scheme is a good idea or not - many people think this regulation is a step too far."

On its own, the Tenancy Deposit Protection scheme is not a major contributor to landlords' costs. But David Salusbury, chairman of the National Landlords Association (NLA), points out that it is just the latest piece of regulation. "We are becoming concerned about the amount of regulation landlords face," he says. "There is a balance to be struck between protecting vulnerable tenants and supporting landlords, and I'm concerned about how well that balance is being managed."

Other new regulations include higher health and safety standards, rules on rent disputes, a crackdown on empty properties, and especially challenging legislation on houses in multiple occupation (HMOs). An HMO is a property that has three or more storeys and is occupied by at least two or more families - so a great deal of student accommodation, and properties let out to young professionals sharing a house, come within the definition. Following reforms introduced by the Government last July, landlords must have a licence from their local authority if they wish to let out an HMO.

To get a local authority licence, your property must meet certain standards. Some are routine, but others may be more costly - each bedroom in an HMO is expected to have a washbasin with plumbed-in hot and cold water, for example. In addition, you have to pay a fee for the licences. Councils aren't supposed to charge more than it costs them to process your application, but licence fees vary enormously. In some parts of the country, landlords pay nothing. In others - Newcastle, for example - the cost is as much as [pound]1,500.

The costs of HMO licences can therefore substantially reduce the yield - the income you are earning on a property relative to its value. Moreover, the licences aren't transferable, so each time you purchase an HMO you'll have to apply for new paperwork, even if the existing owner had already done so.

"The huge variation in the cost of a licence between local authorities means location is now an even more important factor when purchasing a buy-to-let property," says Ray Boulger, of independent mortgage adviser John Charcol. …