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Please note that articles on this site & any other 'planning-approval' related web site does not constitute professional advice. All articles are intended to provide a general view of many subjects. We suggest you to consult a solicitor before making any important decisions.  The author is not an expert in any given field.

Property Auctions
Types of Tenancies
by Howard Goodie

I was provoked only the other day by a notice which we have in our brochure month by month about domestic tenancies which reads:

"Intending purchasers are advised to check documentation and take advice upon the exact nature of domestic tenancies in which they are interested. Tenants who occupy on assured or regulated tenancies almost undoubtedly have their security of tenure protected. Others on Assured Shorthold Tenancies will only have limited protection"

My provocation was increased when Peter told me of three recent letters which he had received from readers asking for an item on the difference between regulated, assured and shorthold tenancies in domestic accommodation, and the nuances of the market in relation to them.

The original regulation of domestic rents started in 1914 when the government felt that they needed to protect the security of tenure and the level of rents of wartime workers. Before the First World War, landlords had been able to terminate domestic tenancies with appropriate notice. I have been told how my grandfather, who was an entrepreneur like so many of us, used to buy rows of tenanted property at auction. He was in a consortium of four people during the period up to 1914. His consortium would empty the properties, redecorate and refurbish them, and then re-let them - it was said - at sixpence a week more. (To those of you now inured to metric currency, that is less than 3p today). Having increased the rent roll, hopefully improved the quality of the covenants of the tenants, and certainly having improved the quality of the properties, the consortium would then hope to sell them on at profit - not generally by auction. The quality of the tenancies and of their relations and relatives that are still in occupation today is a testament to his skill at choosing his tenants. One of my early memories is of going rent-collecting on a bicycle, calling on some of those streets that my grandfather - much more comfortably - took in his pony and trap! The old (badly) written, leather-bound ledger detailing his transactions still occupies a treasured place in my office drawer. That, above all, survived the fire without damage.

But I digress. My article approximately twelve months ago provided one paragraph about regulated, assured and assured shorthold tenancies, and in view of all the queries we have been getting at PAN I felt I ought to cover these in more detail and bring you up to date on the position buyers at auction appear to be taking at the moment on the different categories of the investment.

All my comments this month refer to tenancies of domestic properties. The oldest category is that of regulated tenancies, which are also known as protected tenancies, and they are a successor to controlled tenancies. They only apply to a dwelling house let as a separate dwelling, and the premises must not be part of a building in which the landlord resides other than in a purpose-built block of flats. They must not be part of a larger holding of land, and they must not be part of an agricultural holding.

The length of the tenancy is not material. The Rent Act 1977 provides for certain categories of exempt landlord and indicates that the dwelling has to be occupied personally as a residence by the tenant. A company cannot acquire rights.

This type of tenancy is the oldest, and it can normally only have been created before 15th January 1989 or it was granted after that date to someone who was a protected tenant or a statutory tenant on that date. The position of statutory tenants is very important to a property investor. A statutory tenant is one who occupied on a regulated tenancy which has expired, or where a notice to quit has been issued at some time in the past. On the death of a statutory tenant the tenancy can be passed on to another relative on two separate occasions where the original person died before 15th January 1989. The person to whom the tenancy is transmitted must have been either (a) a spouse or (b) a member of the tenant's close family residing with the tenant at the time of his or her death and for the previous six months. Where the tenant or the first successor died after 15th January 1989 the tenancy can only be transmitted once and the successor then holds an assured tenancy, which I shall detail later.

Regulated tenancies can arise if they are created after 15th January 1989, if they are a tenancy granted as "suitable alternative accommodation" after a possession order, and if the court considers a regulated tenancy more suitable than an assured tenancy of the alternative accommodation provided. There are other factors: a regulated tenancy cannot exist if the rent includes payment of board and attendance; the premises must be let as a separate accommodation with no living accommodation shared; it must not be a business tenancy, even where dwelling accommodation is involved; and the property must not have an on-licence for liquor. There are certain grounds for obtaining possession, but a court order is always needed and both the mandatory and discretionary grounds are very stringently treated in the courts.

The rent of properties on regulated tenancies cannot be increased, other than by an application to and a decision by the Rent Officer. This is the "fair rents" procedure, whereby the landlord can apply to have the registered rent increased every two years. The government endeavoured to cap these increases to 10% of the existing rent, but in a recent court case it has been decided that Parliament exceeded its powers in so doing. It is understood they are currently considering an appeal.

Fair rents" are anything but fair to landlords. The Rent Officer has to assume that the demand for properties in the district is exactly equal to the number of properties that are available, and has to have regard to the level of existing rents in the area before reducing the rental figure to eliminate any "scarcity value". Many registered rents are currently settled at between 60% and 80% of open market rental value. There is an opportunity to appeal to a Rent Assessment Committee.

What does the investor look for in properties let on regulated rents? They are generally readily saleable, and it is very seldom in any sale room that a property let on a regulated tenancy does not sell. In recent years, the demand has diminished a little, mainly because the rate of inflation has been stabilised at a relatively low figure and the vacant possession values of houses have not been escalating as quickly as they were, say, ten years ago. The average rate at which houses let on regulated tenancies come empty is about one-in-six per year, and investors relied on this for capital gains (particularly in the years when they were not taxable) once vacant possession was obtained. A lucky buyer might be able to buy at between 50% and 55% of vacant possession value, where a property is occupied by a regulated tenancy, but as the stock of houses reduces, the rents increase, the stock tends to be a little more modern than it was, and the tenants grow older, so the prices paid in the sale room have crept up to between 60% and 80% of vacant possession value. In my view, the investor is unwise to buy at the top of that range, since it is inevitable that the houses need modernisation before they can be re-sold, and much of the potential profit can be absorbed. In my office, when we are offering properties on this type of tenancy, we frequently have potential bidders asking us the age of the tenants. Often we do not know (and are far too polite to ask aged women tenants!) but particularly it seems to be our experience that Murphy's Law and actuarial theories still support our views that older tenants frequently give up possession far less early than the younger ones.

Assured tenancies are those which are at open market rent, but where the security of tenure and rights for succession still exist. The Rent Officer's sway still has some effect on the rent that might become payable, since Housing Benefit levels - if they apply - are limited by his decision as to what is an appropriate rental level. He has to assume that the size of the premises is limited to what is appropriate for the tenant and occupiers of the house, but he does not need to deduct any "scarcity value". An assured tenancy may have come into existence on a succession of tenancy following the death of a tenant on a regulated tenancy, or where inappropriate notices were served at the beginning of a tenancy which the landlord intended to be an assured shorthold. The important result of such a failure is that the tenant has the security of tenure which he would have had if he had been a regulated tenant.

The market for properties on assured tenancies seems to be very similar to that for properties let on regulated tenancies, and the same parameters of value in relation to the vacant possession figure seem to apply. In my view, logically, such properties should be worth more since the rent on an assured tenancy is going to be higher, but in practice I suspect that many buyers are not really aware of the difference between an assured tenancy and a regulated one, and only work out their figures by looking at the potential capital gain at the time the tenant leaves. Net income return from the property does not seem to be a consideration.

Assured shorthold tenancies provide our remaining category of residential tenancies, and broadly cover the remaining spectrum of tenancies which have been more recently created over recent years. At one time there were strict requirements for the form of notices issued to tenants at the start of assured shorthold tenancies, but these have now been removed. Any letting (unless specifically expressed to be otherwise) of a dwelling house as a separate dwelling for a term of not less than six months without power for the landlord to terminate within six months of commencement is an assured shorthold tenancy. We find therefore a greater and greater number of domestic properties that are let have been done so on assured shorthold tenancies. They are the "bread and butter" purchases of the "buy-to-let" investor who prefers to purchase with a tenant in occupation rather than buy with vacant possession and look for a tenant. Once an assured shorthold tenancy has expired, it can be terminated by two months' notice, but should the tenant resist that notice it may still be necessary to obtain a court order for possession. An assured periodic shorthold tenancy can pass to the tenant's spouse or common law spouse who survives after a death, but there are no other security rights such as those of a regulated tenancy.

In theory, therefore, any buyer should be able to look at the period remaining of any tenancy and then calculate his price based on the figure he might get for vacant possession plus any expected appreciation. However, the buyer must allow for what might be a limited yield during the period whilst he is waiting for possession, loss of rent towards the end of the lease, any costs of restoration before the sale, and the actual costs of sale. Strictly speaking, valuation theory would suggest therefore that one should not bid more than 80% of the expected vacant possession value of the property in the auction room when there is an assured shorthold tenancy.

It is, however, at this point that yields appear to matter to investors. Generally they do not appear to be looking for vacant possession and a capital gain but buying for investment. I can point to many instances in my sale room where properties of this kind can, in the poorer areas, sell for four times the gross annual income, going up as far as seven times that gross income where the property is modern and in superlative condition. In practice, many owners of properties let on assured shorthold tenancies will frequently be unwilling to sell at these sorts of figures, and the reserves tend to be higher. For some reason, most buyers seem to prefer buying properties with vacant possession, carry out their own improvements and then let houses to their choice of tenants. In my view the resulting yield is frequently likely to be less than that which could be obtained by buying a property with the tenant in situ. Presumably investors prefer to have tenants of a mould which they choose and see that the property is brought up to letting standard in their own image rather than that of others.

I wonder how these markets might move? I have referred already to the increase in values we have seen of properties let on regulated tenancies in the last two or three years. Presumably Rent Officers are likely to bring rents closer and closer to open market values as the scarcity factor diminishes.

Perhaps by then investors will be buying on the basis of yield, rather than on their view of the capital gains that can be made when they obtain vacant possession. Hopefully the whole market will move towards considering purchasing every type of residential investment on a yield basis, despite the government's recent attempt to "cap" increases of fair rents. I would hope that the housing market is now such that there will not be many political moves to revert to the "old days" of the four "r's" - registered, regulated and restricted rents. Only by moving away from the old-fashioned political ideas on protecting tenants can we expect to see the continuing increase in flexibility and expansion of the residential investment market.

Plan4 Group - Consolidating information on the web

Home letting, buy to let, property investing, buy to sell, refurbishment, income from property, business opportunities, getting started, business finance, mortgages, Solicitors, working from home, liability & all other home home letting matters.

Please use our carefully selected featured links below to obtain information & quotes for all types of home letting. This Article is FREE for anyone to use.


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 types of tenancies I property yeilds

Where to start with buy to let property investing

Property investor information is available for free with Plan4group.

There are many paths in property, and all are exciting and interesting. For a start, some of the paths in property you could choose from are in the menu.

These of course are not all of the routes you can take.

Plan4group information is mainly focused on residential and in the UK only. Once you have reviewed each path, you have lots of planning to do to make sure you are maximising the benefits of each route. It is best to try to be focused, pick a path and learn as much about it as you can. Once you have enough experience, then if you want to expand you will have a good base to start from. I have found that most people in property who have not been successful, have been so because they tried to do a bit of everything, and bit off more than they could chew. They also had unrealistic low budgets for any refurbishments or upgrades (just look at the twee tv programme property ladder). No one can tell you what is the right path for you. This is something you have to decide yourself. Research this site to find out more about buy to let and property investing in the UK.


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Buy To Let

Unravelling the different aspects of but to let and property investing.

Buy To Let can be great fun, but it can also be very hard work. You are looking at an option where you are responsible for property that people live in. This is not a responsibility you should take lightly, and you should take as many precautions as possible to make sure your tenant is safe.

When you are looking for your first buy to let property you should push out of your mind that you are buying it for you to live in. It is easy to get carried away and not buy a property because you think you would not live in it, yet it could be a good investment. I always adopt a clinical approach.

Researching an area is simple. I call up several local agents and ask them what is in demand. There is no point in buying a 2 bed flat in Birmingham if there are 20 on the books, and they are not rented - if you do buy one, you may end up forcing the rental prices down in the area, making other investors suffer. You need to take responsibility for what you invest in, and respect other investors in the market.

Look closely at what is needed, and aim for that. If it is out of you price bracket, look further a field - the Internet is a fantastic source of information for you to find area that may suit your budget. In your research, it is good to look at deeper issues of demand - are tenants requesting furniture? What level of furnishing? Do they demand car parking? What levels of involvement can you manage in letting? Using a letting agent to manage your property.

By far the less hassle route of buy to let. You need to find a good letting agent. Once you have bought your property a good letting agent will help you prepare it for the market. They will require an inventory of items to remain in the property and of the overall condition, gas certificate and most now expect an electrical test.

The letting agent should vet your tenant and prepare the tenancy agreement. The agent should manage any calls regarding your property, and chase any overdue rent, depending on the level of service you have agreed with them. Different agents charge different management fees ranging from 5% for multiple property to about 15% for a single property.

Managing your own property

Some people like a hands on approach. I would suggest if you are new to the market that you use a letting agent for the first on and monitor the process. This should give you a guide of what to do yourself once you go it alone. There is a chance that this option can be very time consuming and demanding. You need to decide if you have time to spare for this. Use a company to source and manage your property.

The easy way out maybe? Well not always. If you find a good company who do what they promise, you could be set for life with a fantastic portfolio. It saves you time and energy - and though you may have to pay a premium for the property, it lets you have a hands off and feet up approach. Beware there are many companies that do not do what they say. You should research all companies very carefully. I suggest that taking a personal recommendation is a good approach - but make sure its not a set up - and it’s someone from the company. This is just a taster of buy to let - to get you mind focused on possibilities and options. There are many more options in this area of investment that you will discover, the more you read and network.

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Buy To Let Services

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There are lots of things to concider when buying to let, including landlords insurance, services to evict bad tenants, property search facilities. All of the companies here are independent of Plan4group, we have found their information to be useful for landlords, this is not a page of recommendations, just information.

Home Let - Set up your own Homelet account here. Manage it all online, your Landlords Insurance, Tenant Credit checks and Referencing, not forgetting the Furnishing Service.

Letsure - Letsure help you with landlords household insurance, tenants contents insurance, legal protection, tenant assessment & tenant referencing, home emergency call out, gas and safty checks and more!

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Life Insurance - Most landlords forget, while they are gaining more property, that they need to increase their life cover to cover the mortgages. Just fill out this simple form to get a no obligation quote.

Landlord Action - Do you have problem Tenants? Do you want to pay to have them removed, but want to avoid solicitors?

Property Tax with Tax Cafe -   Learn how to avoid property tax, use a company to buy property, property tax calculater,

Association Of Residential Letting Agents - Read official information from ARLA, the people who know about letting!

Buy To Let Mortgage Rates from UKmortgagesonline - Check out uptodate mortgage rates here for Buy To Let.

Housing Association Act 1988 - Browse the housing rules using the governments own site.

Landlord Tax - How often have you felt that you just do not have the time, the inclination or the patience to plough your way through a tax return and all its associated jargon? Try Landlord Tax for a quote.

Bust the jargon code!

Assignment : The sale of a tenant’s entire lease to another person.
Adverse Credit
: A poor credit record.
APR : APR stands for Annualised Percentage Rate. A lender is always required to quote the APR rate when advertising a loan / borrowing rate. The lender will usually also quote the headline rate, and the APR next to it. The headline rate states the rate of interest you pay per month or per year on the mortgage, but the APR calculates the total amount of interest that will be paid over the whole term of the loan. It should also take into account any charges, which the borrower has to pay during the loan period. The APR is therefore always higher than the headline rate, and is a realistic representation of the cost of the mortgage over time.
Arrangement Fee
: The charge some lenders make for providing a loan.
ASU : Accident Sickness & Unemployment Insurance.
Base Rate
: The UK's core interest rate, set by the Bank of England. The lender’s Standard Variable Rate (SVR) is higher than the Base Rate, but is often adjusted by reference to it.
Bonding Scheme
: An agreement by members of a profession or trade to establish a central compensation fund which consumers can draw on in cases of fraud or insolvency.
Booking Fee
: The charge paid on application to secure funds, usually required for special deals such as capped or discounted rates.
: A person that advises on a mortgage or loan that will suit your needs. They usually work from a restricted range of deals.
BSA : Building Society Association, the trade body for building societies.
BTL : Buy To Let.
Building Insurance
: Insurance cover which protects the holder against damage to the property itself (although it can be linked with contents insurance in a combined policy). The amount insured may vary from the purchase price/valuation of the property depending on the type of location of the property. The valuer will usually provide a rebuild cost for insurance purposes.
Building Survey : A detailed survey of the property you are planning to buy. Also known as a full structural survey.
Buy To Let
: The practice of buying a house or flat for investment purposes. Income is provided by the tenants' rent, and capital growth (if any) by the property's increasing resale value.
Buy To Let Mortgage : A loan to buy an investment property.

Capital : The amount of money borrowed to buy your property.
Capital & Interest
: In the context of mortgages, a capital and interest mortgage is also known as a repayment mortgage. It involves paying all of the interest plus repayment of a little of the capital each month; an interest only mortgage involves only paying off the interest.
Capped Rate : A mortgage which allows your interest rate to climb or drop no higher or lower than a specified level, usually for the first few years of the loan.
Cash Back
: A mortgage that provides a borrower with an immediate lump sum payout on top of the sum borrowed to buy the property. This has to be paid for one way or the other, so cash back mortgages will typically be at a higher rate than other mortgages and will usually have redemption penalties for several years.
CAM : Current Account Mortgage.
CML : The Council of Mortgage Lenders, which has devised the Mortgage Code to ensure lenders treat customers fairly.
: This is shorthand for compulsory insurances. Some lenders, at least for certain mortgages, insist that you take out their buildings insurance – which needn’t necessarily be the most cost effective on the market. Our Mortgage Wizards allow you to select out these products if you wish to (although sometimes of course, the mortgages can be so good that it outweighs the potential disadvantage of taking the compulsory insurance).
Completion : The final stage of the house-buying process, which comes after exchange of contracts. The sale must proceed after Exchange, but Completion occurs when the property's agreed sale price (less any deposit already paid) safely reaches the seller's bank account.
Contents Insurance
: Insurance covers which protects the personal belongings your home contains. In the case of rented accommodation, the landlord is responsible for insuring those contents, which he owns, but not those owned by his tenants.
: Can refer to a property that was once a house but has been converted to a flat. Also could refer to a loft that has been converted to a room. Changing from one use to another.
: Normally carried out by a solicitor or licensed conveyancer on the buyer's behalf, conveyancing includes proving the property is really owned by its seller, making sure that all the loans secured on it are discharged, establishing its legal boundaries and searching local planning information for upcoming developments which could affect the property's value.
Council Tax
: A local authority charge, which replaced the Community Charge in 1993/94. Generally speaking, the more valuable your property is, the higher your Council Tax bill will be, although the amount for an identical property can vary considerably between different local authorities. In rented or buy to let accommodation, the tenants are usually responsible for the Council tax.
: County Court Judgment. If a County Court rules against you for defaulting on a debt, that ruling is listed on your credit record. Having such a judgment listed against you may mean you are turned down for future loans, or be expected to pay a higher rate than other customers. The Scottish equivalent of an English CCJ is a Decree.
Credit Reference Agency
: When assessing your application, a mortgage lender will study your credit records. These records are held centrally by credit reference agencies, and contain information from many different aspects of your life.
Current Account
: A bank account linked to a cheque book and/or debit card. In exchange for instant access and the ability use cheque or debit facilities, most pay little or no interest on the balance they contain.
Deeds : The formal written document, which lists exactly who owns a property and enables transfer of a property's ownership from seller to buyer. A mortgage lender will record details of their mortgage on these deeds (which means they can take ownership of the property if you default on the loan payments).
: In the context of mortgages, the deposit is the initial lump sum payment, which the buyer must contribute to the property's total purchase price.
Disbursements : The costs of the legal process that your solicitor or conveyancer will have to pay for on your behalf and which are added to their bill. (i.e. land registry searches).
Discharge Fee
: A fee charged by a lender for releasing its charge over a property once you have paid off your loan. You may incur this fee if you move to another lender.
Discounted Rate
: A mortgage which has an interest rate below the lender's standard variable rate (SVR), Bank Base Rate or Libor rate, typically for the first few months or years of the loan. The rate payable may move up and down, but the discount on SVR remains constant.
: The principle that wise investors should spread their risk among many different types of investment. A properly balanced portfolio will contain elements of share, deposit-based and property investments. Fund performance and objective achievement are not guaranteed.
Drawdown Facility
: The ability to borrow extra money through your mortgage later on, possibly after you have paid some off. You can be issued with a cheque book for this.
Early Redemption Penalties
: Fixed-rate, capped-rate, cash back and discount rate mortgages commonly carry early redemption penalties which can in some cases persist long after the initial special rate itself has expired. This can make it prohibitively expensive to move to a rival lender in the first few years of the loan. The Charcol online web site shows you the size of any redemption penalty and how it changes over time.
Employment Status
: A term used by lenders to describe potential borrowers' working arrangements. Self-employed applicants are sometimes seen as a greater risk than employees are. But many specialist lenders and mortgages have emerged in recent years designed specially for different types of employment status, and the Charcol online website has a wide variety of these in its database.
Endowment Mortgage
: A mortgage funded by an insurance-based savings plan, which may give you a bonus payment or additional returns by the end of the loan's term if it performs well.
Equities : Another name for ordinary shares.
Equity : The difference between the value of your property, and the amount of loan secured on it.
Exchange Of Contracts
: The terms of a property's purchase become legally binding for both parties when contracts are exchanged. The buyer is then committed to buying, and the seller to selling. As a buyer, you should normally ensure that building insurance from this date covers you, because even if the property were damaged badly, you would still have to buy it.
: A service, which offers no advice, but merely carries out the customer's orders.

Feuhold : A form of legal title applicable only in Scotland.
First Charge
: The legal charge a lender has over your property. They have first call on funds available from the sale of a property.
Fixed Rate
: A mortgage, which fixes your interest rate at a specified level, typically for the first few years of the loan.
Flexible Mortgage
 : A mortgage, which allows borrowers to make overpayments when they have spare cash. Other features could include the option to reduce or miss payments altogether when times are tight, and to re-borrow any overpayments. Not all flexible mortgages offer all of these features. Often useful for self-employed people, whose income varies from one month to the next. The most flexible form of mortgage is a Current Account Mortgage (CAM), which can potentially save you money by linking your current account and mortgage together.
: Ownership of the land on which a property stands.
Full Status Loan
: A loan where complete checks are made on your credit history and income.
: Using lenders funds to fuel your investment growth. Remortgage to buy more, realising equity and keeping it moving.
: Before tax.
: A growth strategy is one, which seeks to maximise the capital value of your investment without the requirement to generate any minimum level of income. Any income may be reinvested.
Ground Rent
: Annual rent paid by the owner of a leasehold property to the person who owns the freehold.
: Someone who agrees to guarantee your loan or payments should you default.

Illustration : In the context of mortgages, a lender's estimate of the monthly payments you would have to make under a particular loan arrangement, together with the costs to set it up.
Impaired Credit
: Impaired credit mortgages are specialist loans for customers whose credit problems disqualify them from using mainstream lenders' standard products. Some lenders specialise in loans like these, which are also known as adverse credit loans.
IFA : Independent Financial Adviser.
Income Multiplier : How a mortgage lender works out how much you can borrow usually by multiplying your income.
: The premium, which a borrower must pay a lender in return for use of the lender's money.
Interest-only Mortgage : With a mortgage like this, your monthly repayments cover only the interest element of the loan. You will normally need a repayment vehicle, such as an ISA, endowment or a personal pension, to repay the capital.
ISA Mortgage
: A mortgage loan funded by contributions to an Individual Savings Account. ISAs provide tax-free growth, generated mainly by stock market investment. The ISA aims to repay the loan's capital at the end of its term, but the interest element must be paid separately as you go along. It's important to remember that past performance is not necessarily a guide to future performance.
: Symbol for a thousand when added to the end of a sum of money ie £13k is £13,000.
Land Registry
: The official body responsible for maintaining records of property ownership.
: Ownership of a property, but not the land on which it stands. When the lease expires, the property reverts to the freeholder.
Lenders Reference : An endorsement from a previous or current lender to say if you have maintained your payments.
Letting Agent
: A property agent who can help landlords locate suitable properties for purchase, and who finds tenants to occupy those properties and can manages the rental process which follows.
LIBOR : London Interbank Offered Rate, the rate at which banks notionally buy and sell money to each other. LIBOR-Linked mortgages are susceptible to a change in interest rate every three months.
LTV : Loan To Value This is the amount you want to borrow divided by the purchase price. In other words, it reflects the size of your deposit. Generally, the lower the loan to value, the safer the lender will view the loan.
Missives : Scottish equivalent of exchanging contract. No deposit is required but it is legally binding.
MIG : Mortgage Indemnity Guarantee This is an insurance premium which you have to pay for some mortgages, usually when the Loan To Value is higher than a certain figure. It protects the lender to some extent if you default on the mortgage for any reason. It is important to understand that although you have to pay the premium, the lender benefits from any payout, and that if the payout doesn’t cover their costs they may seek further money from you. With many mortgages you can add the MIG to the loan, unless this takes your Loan To Value over a certain figure. The insurer may pursue the defaulter for reimbursement of any monies which have been paid out in respect of lenders claim.

Negative Equity : Where the size of your property loan is greater than the market value.
: After tax has been deducted.
No money down deal
: Using Finance to place a deposit, or finding finance that covers whole purchase. Some lenders offer Loan To Value and so if you buy a reduced price property, you may not have to put money down.
: Open Market Value The price a property fetches when there is a willing buyer and willing seller.
PPR : Primary Place of Residence, also known as Primary Domicile.
Repayment Mortgage
: A mortgage loan funded by simple monthly repayments, calculated to repay capital and interest usually over a term of 25 years (less if preferred).
: Holding back part of a loan until repairs to a property are complete.
Reversionary Interest
: This is a contractual ownership where people sell their house but they are allowed to remain living in it until some future date, usually until they die.
: Return on Investment.
: Registered Social Landlord. (Housing Association).

Sealing Fee : See Discharge Fee.
Search : A local authority search is an examination of local planning records to uncover details of any upcoming developments near the property which could affect its future value or existing restrictions on the site.
SHEP : Second-Hand Endowment Policy Endowment policies part-way through their term can sometimes be sold on the open market. Disposing of an unwanted policy in this way often produces a better price than the traditional route of early surrender. Also known as Traded Endowment Policies (TEPS).
Secured (loan)
: If you should default on your mortgage, the lender can ultimately repossess your property to recover their money. The loan is hence said to be "secured" on the property.
Self Build
: Where you design, manage and build your own property.
Self-certification : Where no proof is available, prospective borrowers are sometimes allowed to vouch for their own income. Self-employed applicants who lack the two years' record of accounts that lenders would normally require most commonly use this process, known as self-certification. Many lenders charge a small premium on self-certificate business to reflect the extra risk involved.
Sitting Tenant : Someone who has a legal right of occupation, even if the property is sold to someone else, and can apply to the local authority to have a fair rent set.
: Standard Variable Rate. A mortgage lender's main interest rate. Fixed-rate and discount loans usually switch to SVR when the special offer period expires. Conversely, tracker mortgages switch to a fixed percentage above Bank Of England Base rate (or LIBOR).
Status : A shorthand term for the borrower's credit record and employment situation. See "Non-Status Loan".
Stamp Duty
: A government tax on property purchase. Some property is exempt from this.
Sub-Prime : Borrower with adverse credit.
: The process of cashing in an unwanted endowment policy with the insurer who sold it to you. Doing this often produces a poor return for the money invested to date in the policy's early years.
: An expert examination of the property you are considering buying, aimed at discovering any structural flaws or repairs needed which you may have failed to notice yourself.
: The period of time over which your mortgage will run. Typically 25 Years or to expected retirement date if that comes first.
Title Deed
: Legal document assigning ownership of a property or land.
Tracker : Tracker mortgages link your interest rate to a benchmark, such as Bank of England base rate. The rate you pay moves up and down in line with the benchmark selected.
: Traded Endowment Policy (TEP) Another name for Second-Hand Endowment Policy (SHEP).
Under Offer : A term used when a seller of a property has provisionally accepted a buyers offer.
: A very basic survey of a property to determine its value. Mortgage lenders insist on this before lending on a property.
Variable Base Rate
: The basic rate of interest charged on a mortgage. This may change in reaction to market conditions, so your monthly payments can go up or down.
Vendor : Seller.
: Profit or return on investment.

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Schedule of Articles

property investing
property refurbishment
buying overseas property
moving house
home letting
buy to let
home improvements

top 10 celebrity areas
6 up & comming areas
5 signs that an area is up & comming
city types yearn for the country in town
your place in the sun
equity release
planning permissions & extensions
estate agents
rent or buy
buy to let
mortgage overpayment
mortgage endowments
mortgage protection
stamp duty
self build your home
electrical surveys
the cost of moving in
the perfect neighbourhood
council tax
house price league
good neighbours
stamp duty land tax
top 20 towns 2003
cut the cost of moving
interest rates
buying in scotland
dream homes
first time buyers
the worth of uk homes
bad estate agents
keeping up appearances
home improvements

Property Auctions
YPS & property Yeilds
by Howard Goodie

I thought I might take a step or two away from the rostrum today and ruminate, as a chartered valuation surveyor and estate agent as well as an auctioneer, on interest rates, market values and yields. Be warned, as a different subject is likely to bring me to one of my hobby horses: investing in properties other than residential! So, what do I think of as yield and how does the valuer express it? A yield from an orchard is in tons of fruit (or is it tonnes these days – I’m too old fashioned to know?) and from shares is net cash. That’s easy. Equally easy in property, as it’s the amount of income we receive compared to market value. Almost invariably, it is the gross amount receivable before expenses and before tax. To add to the equation in valuation jargon we often talk about YP, just to confuse the issue! YP, dare I say, of course, stands for Years Purchase. That is the figure by which you divide the value of the property to produce the gross amount of rent. Conversely, it is also the figure by which you multiply the gross rent to give you value. Let me give you an example: A property sells at £50,000; assume this represents market value. The gross rent is £7,500 pa; thus, our Years Purchase is 6.667 and the yield is 15%. £7,500 pa produced by the investment of £50,000 (15% represents 7,500 divided by 50,000 times 100). If I then apply this approach to one of the houses I have in my next auction (which will have been sold by the time you read this article - sorry you missed the chance to buy it. It was a bargain!) we can see how the calculations work out in practice. Lot 18, 39 Laburnum Road, Gorton, in east Manchester, is a typical end-terrace built about the turn of the 19th Century, with three bedrooms, combined bathroom, two entertaining rooms, and let on a normal assured shorthold tenancy for twelve months at £60 per week (£3,120 per year) – very much a “run of the mill” residential investment for that part of Manchester. The guidelines are £12,000 to £16,000 and I would think it will have sold at £15,000. In round terms, this is just under 5 Years purchase (YP). Therefore, as you will already have calculated, it will be showing a yield of just under 21%; the sort of gross yield that many would-be-buyers tell me they are looking for in this sort of property. But, as I have stressed before in PAN, when you are buying residential investments gross yield is not net even when we are ignoring the taxman’s cut! When you have reached completion and coughed up the balance of your £15,000, what sort of income might you expect? Let me remind you of the expenditure you should allow for. Are you going to use an agent, who is likely to charge you 12% or 10% of the rent he collects, plus, probably, letting fees and costs on top? With this type of property you will be likely to find that your tenants, on average, move every 2 years. Even if you decide to manage the property yourself, you should still allow for your expenses at about the same sort of level. You should budget for annual repairs of about 10% per annum of the rent. Immediately after you have bought, you can be pretty sure that the tenant produces a long ‘wish list’ of repairs that his previous landlord has bequeathed to you with the purchase; but, I have not allowed for this in my calculations below. You should also consider the longer term needs of redecoration; outside every three to four years and, quite possibly, partially inside every time the tenancy changes. In the Manchester area you can expect to find a liability for a small rent charge and don’t forget that insurance premium that could be £75 or so per annum. I talked about gross yield for the value calculation but your net yield is coming down and down. The only consolation you can have is that all these expenses reduce your tax liability so the taxman is bearing some of your burden. On this subject, incidentally, PAN is hoping to cover this item in an article shortly. It is also likely to be dealt with, hopefully, by the same contributor in a presentation at our next PAN Conference to be held in London towards the end of May 2002. Register for full details early in the new year with Sue Burgess at 4 Crossgate Avenue, Manchester M22 8AW or by sending an e-mail of your postal address to me at Now, after that digression, back to our true net yield on 39 Laburnum Road. I have still not pointed out that you also need to make allowances for empty periods between lettings (“empties” in estate agents parlance). Where’s all your income disappearing! Lets look at the true net result. Gross Income pa - £3,120

Expenditure pa
Insurance - £75
Repairs - £312
Long term repairs - £150
Rent charge - £8
Empties with costs - £300
Agent’s fees - £375
Total Expenses - £1,220
Net income - £1,900
Net yield - 12.7%

Still, not so bad with interest rates at the level they are today and, of course, we have only looked at the income position. You will, no doubt, wish to take the future growth of income and capital value into your equation as well. For that, you will have to start coming to conclusions for yourself as to the future. They do issue crystal balls to all chartered valuation surveyors when they qualify, but our professional negligence insurers don’t allow us to use them to come to public conclusions!

But, have you thought about the possibility of gearing your finances, particularly when buy-to-let loans are so cheap at the moment? You will see various brokers mentioned in the back of PAN and they are also frequently represented, and make presentations, at our conferences. Let’s look at the consequences of gearing your purchase with a loan of £12,000 at 5%.

Capital cost - £15,000
Costs of loan, say - £500
Total investment - £15,500
Less loan - £12,000
Personal investment - £3,500
Net income - £1,900
Less interest on £12,000 @ 5% - £600
Resultant final income - £1,300
Resultant net yield 37+% £1,300 pa from a £3,500 investment

Apart from increasing your yield considerably let me also, gently, remind you that you have also “kept much of your powder dry” for the next purchases: £11,500 to be precise. Maybe that will help your portfolio to grow almost instantly with two or three more purchases at this level before you even start thinking of your existing holdings increasing in value and remortgaging to give yourself an even greater yield. I’ll let you develop the figures. Before we get too carried away with enthusiasm, may I now dig deep into my years of experience an issue a caveat or two. This story is not allegorical. Once upon a time when people never really thought of inflation, when mortgages were even cheaper than today, there was a man in Manchester named Steel who found he could buy rent charges at between 18 and 20 YP and that garages could be built and let to produce 12% gross return. In contrast, today rent charges sell at less than 10YP and the last garages I sold produced a 26% gross yield.

Steel was a big buyer and an even bigger “gearer”, but he became complacent and did not watch the market and economy movements. By the time I was instructed to sell his assets by his liquidator, mortgage loans were at 20% to 22% interest (if you could get them) and annual inflation was close to that figure. Yes, I am that old! I sold his rent charges at between 3 and 4 YP and his garages – where they hadn’t been vandalised or destroyed – sold at a 33% yield. This is not, dear readers, meant to be an encouragement to buy garages, but it is a warning that times do change and with them values, interest rates, rental levels and inflation: not necessarily to our advantage.

Furthermore it is only those investors who constantly watch their market place, who buy in the right areas and who maintain their properties well that are going to prosper. Thinking briefly of buying, and on a different “hobby horse” of mine, why is it that in almost all our articles in PAN and, I fear, in your thinking, are we always talking about residential investment? Is it because you feel more at home with domestic properties? Much of my professional career has been in dealing with commercial properties in the shopping, industrial and warehousing fields. You have may well read this plea from me before. Shops are rather specialised but, nevertheless, don’t you experience and come to know the month by month development of the secondary shopping pattern in your area? Have you thought about combining domestic with shopping investment by looking at shops with flats above? Have you never thought that well-chosen commercial tenants are much less likely to move than carefully selected house occupiers? Very frequently, commercial and shop leases are for longer periods and generally with rent reviews. Almost invariably the tenants take responsibility for repairs and insurance premiums. Rent is paid by the tenants as a business expenditure and before tax. We’ve got the taxman helping again! Almost invariably you can arrange payment of the rent by standing order. The whole management is easier, so that you may even be able to dispense with a managing agent altogether or, at least, pay him a smaller commission. I know how you all hate paying estate agents’ fees! Incidentally, before you ask, most of my family investments are in shops and commercial properties! Good luck with your purchasing in the new year and may all of your investments in 2002 be strong, firm, lasting and rewarding deals.

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