Top ten: Forget about property prices and home in on the rental income

Published on Friday 6 November 2009 19:19

EACH week The Scotsman gives you a Top Ten Guide to pertinent financial issues. In recent years, capital growth has attracted investors to residential property, but now rental income has taken on an importance that it never had before. David Alexander, proprietor of residential letting company DJ Alexander, suggests ways to maximise rental income.

1 PRODUCT DEMAND Because the lending institutions have tightened their restrictions on borrowing, younger people will have to wait longer to make the jump into owner-occupation, meaning demand for rental property is likely to be fairly healthy for the foreseeable future.

2 GOOD PROSPECTS Given the right choice of property, rental income should provide a net return on capital that is superior to most savings accounts at current rates of interest. For people whose wellbeing largely depends on their reserves of capital, an overall improvement of just 1 or 2 per cent a year can make a substantial difference.

3 TRIED AND TESTED Most letting investments are currently being offered with a tenant in situ, which for the new investor has obvious advantages in that it obviates any hassle in finding suitable occupants and money is coming in from day one. However, whether currently occupied or not, it is important to try to ascertain that the property has a history of achieving regular rental income.

4 SETTING RENTAL INCOME Obviously, the larger the accommodation, the more a landlord can charge in rent. However, no matter where you are in Scotland the basic rental "tone" is always determined by location. For example, a one-bedroom flat in Edinburgh's New Town is likely to secure more in rent than a two-bedroom equivalent in Leith. Other factors determining rental levels are proximity to a university, large hospital or popular retail area.

5 RENTAL VOIDS Given the right location and a good standard of accommodation, a rental property should not be unoccupied (and effectively losing money) for any more than around two weeks in any year. However, extended voids, when they occur, can really eat into rental returns, so landlords should ensure that properties are made ready for marketing in as short a time as possible whenever a lease comes to an end.

6 TAX POSITION All rental income has to be declared on a landlord's tax return. HM Revenue & Customs used to give landlords 10 per cent tax relief on rental income for the cost of repairs or maintenance whether or not these had been carried out. Now the cost of all repairs, maintenance and management, and legal and other ancillary fees qualify for tax relief. However, documentary proof is required before this is granted.

7 GROSS AND NET RENTAL A proportion of rent should be kept in reserve to cover costs related to repairs, redecoration, renewal of furniture, buildings insurance, management (if using a bona fide agent) and statutory fees such as the landlord registration certificate. As a rule of thumb, landlords should set aside 10 per cent of rental income for such expenses (less for new properties still under builder's warranty).

8 DON'T FIX WHAT AIN'T BROKE A property with a positive rental history should not become subject to unnecessary changes.

Some landlords have been unable to resist the urge to alter the interior to their own taste when the most successful rental properties are ones that appeal to as wide a clientele as possible, even if the price is a certain "sameness" in design. Added fripperies may add to a property's marketability but not any net increase in rental income.

9 A HOME FOR RENTAL INCOME Property investment is not without its drawbacks, and landlords may need quick access to fairly large sums because there is always the possibility that a boiler will need replaced or a roof repaired.

For the owner of a single property, perhaps the best home for income from rent is a tax-free cash Individual Savings Account, preferably one that can be accessed with little or no notice.

Joint husband-and-wife property owners (if both are over 50) can now invest a total of 10,200 a year between their respective cash Isas, with under-50s benefiting from the new allowance from April next year.

10 SELLING ON Unless someone requires access to substantial funds, or has simply tired of letting property, there is little point in selling an investment at present because of the favourable comparison between returns from rental income and cash.

Another reason for holding out is that tantalising prospect of a return to capital growth – but that's something to think about for the future.