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It shouldn&#39t happen to a let

The growth of the buy-to-let market has been phenomenal. During the first six months of 2001, 50,000 people took out a buy-to-let mortgage. Anecdotal evidence suggests this trend has continued and that the events of September 11 simply strengthened views that property is one of the safer options available to investors.

Psychologically, people like owning a tangible asset, especially one which is capable of producing an annual return of between 8 and 10 per cent. But recently news emerged which suggests that some investors may not get the returns expected.

First, the FSA warned that investors entering the buy-to-let market are in danger of overextending themselves. The FSA is concerned that if interest rates rise, borrowers could find their rental income is insufficient to cover repayments. This is most likely to occur where the loan represents 85 per cent or more of the purchase price.

Separately, the Council of Mortgage Lenders issued a warning that new landlords are entering the market without being fully aware of the risks involved. CML research indicates that these people experience longer periods when their properties are empty, have fewer alternative sources of income and less security to fall back on. History shows that the last people to climb on an investment bandwagon are the ones most likely to lose out.

Inexperienced landlords need the high-quality, objective advice which an IFA can provide to navigate their way through a market which evidence suggests they are not really equipped to be part of.

One area where all landlords need careful guidance is insurance. The two principal policies that IFAs should be advising on are household and legal expenses cover.

Specialist insurance policies have been devised for the buy-to-let market as normal buildings and contents policies are not appropriate. For most rented properties, insurers require the landlord to specify the type of tenancy they have, whether it is professional, student, multi-tenant or DSS (unemployed tenant in their own name or one where the DSS pays the rent direct to the landlord). The type of tenant will affect the premium the landlord has to pay. What is important is that the appropriate policy is in place and that landlords understand how such policies can be nullified.

If the status of a tenant changes, for example, a professional person is made redundant, this may nullify the cover. Some policies do not allow properties to be let to people claiming benefits, who insurers perceive to be a higher risk. If this situation occurs, the landlord must immediately contact the insurer and inform it of the change. The likely outcome will be that cover will continue to be provided, albeit at a hig-her rate.

Buy-to-let household policies do not normally cover accidental damage. Contents policies will cover the landlord&#39s possessions if the property is part or fully furnished but will not cover the tenant&#39s possessions. In the event of a claim being made, possessions are not usually replaced on a new-for-old basis. Instead, the payout is adjusted to take wear and tear into account.

Finding a tenant may be relatively easy but experience suggests that finding a good one who is honest and reliable may be harder. Letting agents usually pride themselves on screening out bad tenants.

However, according to credit information company Experian, not all agents conduct credit checks on prospective tenants. It claims that landlords who fail to carry out checks are four times more likely to have tenants who default.

It is estimated that the average cost of removing and cleaning up after a bad tenant is more than £1,500, not including any unpaid rents. For a landlord whose finances are close to the edge, this could be disastrous.

Legal expenses policies cost around £25 and normally provide up to £25,000 of cover. They enable the landlord to take action against tenants who breach conditions of their tenancy agreement, for example, when the rent is not paid or a tenant refuses to leave a property. Some policies may also provide cover for loss of up to three months&#39 rent if a legal dispute prevents a property being let.

Buy-to-let insurance is not normally provided by mainstream insurers but by specialist companies such as Folgate, IGI and Ocasso, which are unlikely to grant agency status to brokers who will only generate small volumes of business. However, products can be sourced through the major general insurance networks.

As the buy-to-let market grows, there will be more opportunities to sell allied insurance products alongside mortgages. This is a niche which IFAs have not yet fully exploited.


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