The Complete Guide to Becoming a Landlord
On the face of it, becoming a private landlord is an attractive proposition. Owning a property which is likely to increase in value while generating a significant income from it seems like a win-win situation. But nothing in life is ever that simple.
There are many potential pitfalls to avoid along the road to the financial security which could be yours with a successful buy-to-let. Your property and your tenants may deliver big trouble to your door if you don’t do your homework before you take the plunge.
As a landlord, you have several legal responsibilities and a veritable minefield of tax laws to negotiate. You might also incur substantial upfront costs before you are able to start to make money from your investment. It is vital that you understand the implications of what you are getting yourself into before you make any decisions.
Why Become a Landlord?
Unless you are terribly bored or simply need a new challenge, you will be interested in becoming a landlord because you want to make money. With interest rates currently so low, any spare capital that you have isn’t going to yield you much of an income sitting in the bank. Putting your money into property will give you a good chance of a sensible return on your capital and you can then generate monthly income from renting it out.
On the flip side, your rental business will swallow up some of your valuable time. There will inevitably be paperwork to tackle and your tenants could call you at any time because a pipe has burst or the oven has malfunctioned. Unless you engage an agent to manage the property for you. In which case, their fees will eat into your profits.
Source the Right Property
The UK has seen an increasing demand for rental accommodation in recent years. But that doesn’t mean that it will be easy to find tenants for every property or that you will be able to achieve the rent you need to make a profit.
You should certainly think about which market you would like to target – families, young professionals or students? The nature of your preferred tenants will dictate what you should buy and where. For instance, commuters will want to be close to transport links, and students look for accommodation near the university campus. Families value quiet roads and gardens, whereas young professionals may prefer to be in the heart of the action.
Letting agents are the people in the know, so seek their advice as to which type of property will rent quickly in your chosen area and what income you can expect to achieve. Pay close attention to your potential yield (income versus capital investment), sometimes comparatively modest properties deliver more impressive yields that swish apartments in upmarket locations.
Assess Your Potential Costs
Buy-to-lets are now more expensive propositions than they used to be due to the recent changes to the Stamp Duty payable on second properties. In addition, landlords are no longer able to claim mortgage interest tax relief on any money borrowed to purchase a rental property.
If you do require a mortgage, it is vital that you thoroughly research the rental income that it is possible to achieve and that you understand your ongoing costs, including the interest on your mortgage. Lenders are unlikely to approve your mortgage application unless you can demonstrate that your rental income will be substantially higher than your monthly repayments. Mortgage interest rates are currently low and so are likely to rise in the coming years, substantially increasing your costs.
If you invest in a property to let out, you will pay an additional 3% Stamp Duty plus all of the usual costs associated with buying a house. Renovation work may be required to bring the apartment or house up to a reasonable standard, and you will then have to furnish it.
There will be ongoing maintenance costs to budget for, the letting agent’s fees to pay, should you choose to use one, and you will need to arrange and pay for the appropriate insurance cover. Costs for landlord insurance will vary depending on the location, the nature of the property and the extent of the cover. You are obliged to join a government approved scheme to protect your tenants’ deposits and you will incur a fee for this.
When assessing your potential returns, you should allow for the fact that void periods – times when your property is unoccupied – are inevitable. It is wise to presume that your property will be unoccupied for at least 8% of the year. This could be because you need to carry out repairs or because you are between tenants.
Your Responsibilities as a Landlord
As a landlord, you have extensive responsibilities including:
- The maintenance of and repairs to the structure and exterior of the property
- The maintenance of the water and heating systems
- The maintenance of bathrooms
- Safety checks of all gas appliances (by a Gas Safe-registered engineer)
- Ensuring that electrical systems and electrical appliances are safe
- Carrying out a condition check at the start of each tenancy
- The provision of an Energy Performance Certificate
- Fitting smoke alarms and having them tested
- Ensuring that furniture meets fire safety regulations
- Fitting carbon monoxide detectors in any room with a coal fire or wood-burning stove
- Checking that your tenants have the right to rent in the UK
- Protecting your tenants’ deposits via one of three government-approved deposit schemes and advising your tenants which scheme you are using.
Your Rights as a Landlord
Most tenants will be responsible people who will respect your property. Sadly, it is possible that you will be unlucky and find yourself having to deal with tenants who fail to pay their rent or who damage your property.
It is essential to choose your tenants carefully. Your due diligence should include checking their credit rating, employment status and references. If you engage the services of a letting agent, they should do this for you. It is essential to make an inventory of the condition of the buy-to-let and its contents. It is best to engage an independent party to carry out an inspection and the subsequent report should include dated photographs.
A written tenancy agreement is also vital. The most common form of tenancy agreement is an Assured Shorthold Tenancy (AST). Despite its name, the agreement doesn’t have to be a short-term one and can continue for as long as both parties are happy. The tenant will have the right to occupy the property for at least six months. If the fixed term is for three years or more, a deed must be drawn up by a solicitor. You will normally be obliged to provide the tenant with two months’ notice if you wish to terminate the agreement.
The good news is that you do have rights as a landlord and they are as follows:
- If your tenant fails to pay their rent, you have the right to serve them with an eviction notice.
- You can also attempt to recover any unpaid rent.
- The rent you charge must be justifiable but can be increased when appropriate according to the terms laid out in the tenancy agreement.
- Tenants are responsible for keeping your property clean, in good condition and smoke-free unless the agreement says otherwise. You are entitled to seek recompense for any damage they cause excluding fair wear and tear.
- You have the right to reasonable access to your property to carry out repairs but you need the permission of the tenant.
If you are forced to evict your tenant you must give them notice to vacate the property. If they do not leave by the specified date, you should apply to the courts for a possession order. If the tenant still doesn’t comply, the court will arrange to send the bailiffs to evict them.
Rental Income and Taxation
Before investing in a buy-to-let or considering letting a property that you already own, you must establish the rent that you are able to charge. Having worked out your costs, you will then be in a good position to assess if the property is viable as a buy-to-let and that the commitment you are making is justified by the profit you are able to achieve.
Any profit that you make could be taxable, depending on your total income. Your profit is what you have left after you have deducted ‘allowable expenses’. These include letting agent fees, maintenance and repair costs, legal fees, the cost of replacement furniture and insurance. Tax laws are complex and you may benefit from the advice of a specialist.
Is Becoming a Landlord Right for You?
Rental income could make all the difference to your lifestyle and financial future. But becoming a landlord brings with it responsibility, demands on your time and quite possibly problem tenants. It is vital that you weight up the potential gains against all the factors involved to see if renting a property is really the right move for you now or in the future.