Do your homework
All investing is risky. Don’t let anyone tell you otherwise. And the same is true for buy to let investing. In fact, even though many people look at buy to let as a safer form of investment than, say, buying shares or putting money into an insurance policy, there are some ways in which buy to let is far riskier. If you were to invest in a diversified portfolio of shares and bonds then you have little reason to worry about any one of them going bust. Most big funds or ETFs will invest in a basket of at least 50 companies. There is always the risk that one of them will be the next Enron with a crook in charge, but even if it is you will have lost no more than 1/50 (or 2%) of your investment. Now you clearly don’t want that to happen, but if it were to happen you would not be financially wiped out.
The big difference with buy to let investing is that unless you have a huge empire of properties then you will end up putting a very large portion of your wealth into one basket. If you owned just one or two properties, as most small landlords do, and one was to run into trouble then you really could see yourself wipe out.
These risks also have their rewards. And if bought at the right time and in the right place, the returns that can be earned from property can be higher than from shares in the market. That said you need to be aware of the risks and need to take what steps you can to mitigate them.
One of the biggest risks you will face is that your tenants won’t pay their rent on time, if at all. A couple of months of missed payments can cause serious financial harm, especially if you have a mortgage on the property that has to be paid every month. There are a couple of steps you can take. The first is to check your tenants carefully. If you have hired a letting agent, then you should ensure that they do this as part of their service. You can also double check yourself. The National Landlords’ Association (NLA) offers a cheap tenant check service to its members that costs just £8 (non-members can get it for £12). This will include checks on their identity, whether there are any court judgements against them and whether they have filed for bankruptcy or insolvency. It doesn’t cost much and gives some peace of mind.
A more comprehensive test can also be done that costs £23 (£28 for non-members) that will also include references from their employers and previous landlords or letting agents. It is a simple step that can be done online so that at least you have a better chance of weeding out the real no-hope tenants.
You also want to be sure you have proper landlords insurance cover over the property. This needs to cover your liability (if a tenant was to be hurt, for instance, through some fault of your own) as well as damage that tenants might cause. You don’t want to be caught short here.
Beyond that you might want to consider rental insurance or rent guarantees as well as legal expenses insurance that will cover your costs and lost income if a tenant stops paying rent and has to be evicted. This process can take a couple of months and run up large legal bills, so you really want to have at least a minimum level of cover. If you have a large portfolio of properties, say 10 or more, then you can opt to give this a miss and rely instead on self-insurance. After all, with 10 properties the odds are slim that tenants will be defaulting on their rent in more than 1 property at a time. So you can probably take a chance knowing you can still keep up with mortgage payments from the other properties. But for a small landlord, tenant checks and some forms of landlord insurance are essential to reducing the risks in buy to let investments.
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