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The dangers of cutting costs
This could prove to be a pivotal year for the lettings industry. With mortgage rates and the rate of inflation rising, landlords’ rental yields are already under pressure. Later in the year we will see the impact of HIPS and the tenancy deposit scheme. Some private landlords may already be considering selling up – others will undoubtedly looking for ways to maximise their margins.
According to research carried out by ARLA, almost half of buy-to-let investors bought their rental property with a view to combine yield from rental income with capital appreciation. UK rental yields hit a five -year low of 6.5% in 2006 already in 2007 mortgage rates taken a surprise hike, with financial experts predicting another rise to come. Those private investors who decide to stick with their investment will almost certainly be considering ways that they can ensure that they retain as much of their rental income as possible and this could well include options to take cost out.
Landlords should be advised, however, that in a tough market they should be looking at ways of protecting their investment as well as containing their costs. Now more than ever, rent protection insurance should be considered an essential, not an optional extra. The advice should be to balance the cost of good rent protection insurance against how much they might stand to lose if a tenant refuses to pay or if an event renders the property uninhabitable for a period.
Buildings and contents insurance should cover loss of rent following incidents such as fire or flood rendering the property uninhabitable. A separate rent protection policy will pay the rent if a tenant does not. Comprehensive cover can be purchased for a typical monthly cost of 3 to 3.5% of the monthly rent – cheaper policies are available, but landlords should be made aware that as with most things in life, you only get what you pay for.
Some of the best policies will provide cover for malicious damage and theft by the tenant in addition to accidental damage and will also cover student and DSS tenancies and properties that are unoccupied prior to the start of a tenancy or between lets. When comparing rent protection policies, the points to consider include level of excess (cheaper policies may carry higher excesses) and factors such as definition of vacant possession and multiple tenants. Some insurers define a vacant property as one with vacant possession but situations can arise where a tenant abandons the property which does not automatically give the landlord the legal right to take it back. Some policies too, will cover only one tenant and the landlord is expected to take out a separate policy for each individual tenant.
Small property portfolios
Landlords with small property portfolios, and some 85% of investors own between one and five properties, may decide to look to reduce their costs by taking on more of their own property management and maintenance. The DIY approach may in the short term save money, but there are some areas of management and maintenance that are subject to legal requirements. If a landlord, even inadvertently, steps outside of the law, insurance cover could be compromised. Extreme cases could also see not only the imposition of penalties but also legal action being taken by the tenant.
Many of the legal requirements relate to the safety of such items as gas, electricity and furnishings, as well as repairs to the structure and exterior of the property. Those who have purchased new-build, which carries the 10-year NHBC warranty and will also have the short-term benefit of manufacturers’ guarantees for any built-in appliances and items such as central heating boilers. This does not, though, give them room for complacency.
Essential services regulations
The Gas Safety (Installation and Use) Regulations 1998 apply in England, Scotland, Wales and Northern Ireland. Many of the provisions relate to all types of property, but there are some specifics that apply to rented property. For example, it is the duty of the landlord to ensure that all gas appliances, flues and associated pipework are maintained in a safe condition at all times. There is also a requirement that gas appliances and flues in rented accommodation must be checked for safety within 12 months of being installed and then at least every 12 months thereafter. This check has to be carried out by a competent engineer, if not British Gas, a registered CORGI installer. A copy of the safety check record or certificate has to be given to any new tenant before they occupy the property and existing tenants must be given a copy within 28 days of the annual check. Under law, the landlord cannot opt out of this responsibility either by making an agreement with the tenant, or by stipulating in the lease, that this become their responsibility.
Electrical equipment is covered by the Electrical Equipment (Safety) Regulations 1994 and the Plugs and Sockets (Safety) Regulations. All electrical appliances and installations should be checked regularly and wiring should be checked and certified by an engineer registered with the National Institute of Electrical Engineering Contractors (NICEIC). Plugs, sockets and adaptors need to comply with the appropriate current standards, which now include the requirement that live and neutral pins on plugs are part insulated so as to prevent shocks when removing plugs from sockets.
Where landlords are looking to reduce their costs by equipping their rental properties to a budget they still need to consider possible insurance implications if their cost cutting puts them outside of the law. Buying second hand or using old or inherited furniture may seem like a good idea, but since 1 January 1997 all furniture in residential rented property has had to comply with the requirements of the Furniture and Furnishings Regulations which lay down standards for fire resistance. These apply to all upholstered furniture, including beds and mattresses, sofas, armchairs and pillows. Upholstered furniture has to carry the ‘carelessness causes fire’ label, usually found on the underside of the item. Older furniture may not meet the standards and in any case will not carry this label and therefore cannot be used to equip a rental property.
It goes without saying that if a landlord is in breach of any of the statutory requirements regarding the equipment provided in a rented property insurance cover will be invalid if an incident occurs. So, what may seem like a bargain buy or a cheap alternative, whether it is the insurance product itself or the fittings in the property, could prove long-term to be a completely false economy that jeopardises rental income rather than protects it and increases the potential liability of landlords.