by Nigel Atkinson

Protecting long-term income from property investment

In the wake of the emergency budget, private residential landlords are more likely to be looking to their let properties for long-term investment income rather than shorter-term capital gain. Nigel Atkinson, National Business Development Manager of let-property insurance specialists PropertyRisks explains why private landlords need to take a long-term view on protecting that investment income.

ith higher Capital Gains

wTax (CGT), investors who entered the market in the buy-to-let mortgage boom will need to re-think their strategy if their intention was to capitalise on a rise in property prices. professional investors too, who are generally committed to staying in the sector long-term will be less likely to sell and buy within their portfolio. This puts the emphasis far more firmly on rental income and the need to protect it.

In particular, anyone who relies on rental properties to generate a pension with weekly rental income equating to pension income or contributions needs an uninterrupted flow of rental payments. If you view rental income as investment income, the financial loss when a tenant defaults has the same impact as a dramatic fall in interest rates.

The CGT impact is not the only postemergency budget measure that has the potential to impact on rental income. With public spending cuts inevitably raising the threat of redundancies, the risk of tenant defaults is unlikely to diminish.

Tenant default is, however, a risk that landlords are able to cover with a combination of legal expenses and rent guarantee insurance. The legal expenses element is designed to cover the legal costs incurred when it becomes necessary to take action to regain possession of a property if a tenancy agreement is broken. Without insurance, the legal costs involved can amount to an average of between £1000 and £2000, rising to around £5000 if a court hearing is involved. Rent guarantee compensates for the rental payments that are lost in the process: the average time for the eviction process to run its course is 6 months and on average results in the loss of 5 months’ rent.

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Void spaCe

in their scope. Ideally, cover for loss of rent should extend to cover a void period after vacant possession is obtained to give the landlord breathing space to find a suitable new tenant – or rectify any damage that may have been the cause of the eviction. The financial impact of tenants unable to meet their monthly payments, refusing to vacate after becoming unable to pay or in some other way breaking their tenancy agreement can have a major impact on a landlord’s investment income. At the same time, the landlord as a leaseholder will have ongoing obligations such as maintenance and service charges to meet. While some may be reluctant to add a further cost, there are two factors to consider. Firstly, the insurance premiums involved can be set against the taxable income from the property. Secondly, the premiums can help manage cash flow as the cost of insurance can be identified and budgeted for at the outset of the tenancy, whilst an uninsured loss cannot.