Becoming a landlord is exciting. But owning an investment property comes with much responsibility - and cost.
The good news is that demand in the rental market is strong, and one in five UK households today are privately rented.
The prospect of a rising income is good too. According to the latest Hamptons International Lettings Index, rents are rising twice as fast as they did in 2018.
And in its most recent survey, the Royal Institution of Chartered Surveyors said that rents would increase by 2.5% in 2020.
Being a landlord comes with lots of obligations and financial pitfalls to consider. To help struggling first-time buyers get on the ladder, the government has been making concerted efforts to stem the growth of landlords by introducing extra tax charges and reducing tax breaks.
However, there is still money to be made.
Here are 10 things every buy-to-let investor should know before taking the plunge:
1. Do the maths
Make sure you crunch all the necessary numbers. Working out your expected profits is an important guide for calculating if the investment is worth your while. Factor in stamp duty, solicitors fees, mortgage payments, agency fees and maintenance when you crunch the numbers. You must also be prepared for times when a rental property is empty. Flats are likely to have shorter void periods as the turnover is typically quicker than, say, a family home.
The net yield is calculated after all costs have been deducted - upfront expenses such as transaction charges and stamp duty, and ongoing costs including everything from mortgage repayments on the property to the income tax due on rental income. You can do some number crunching using a BTL calculator.
2. Understand the tax
Rental income is added to any other relevant income you earn during the financial tax year. You must declare this income on a Self Assessment tax return each year. Certain expenses can be claimed to offset against your rental income and reduce your tax bill. Though landlords will only be able to claim basic rate tax relief on mortgage interest at 20% from April - previously it could be claimed at a higher or additional rate. The property income allowance means property owners can earn up to £1,000 rental income tax free each.
A 3% additional rate of Stamp Duty Land Tax (SDLT) is now payable on purchases of additional properties such as buy-to-lets.
3. Location, location, location
Making sure your investment property is in a desirable area will help ensure demand – and a consistent rental income. You shouldn’t buy in an area just because you like it.
4. Choose your rental wisely
Purchase something that performs well in the chosen market. Having plenty of space is an important feature listed by tenants. Space is important so a tenant does not feel they are outgrowing the property and choose to move on elsewhere. Having decent storage will mean tenants enjoy a less cluttered home – and hopefully they will stay longer. Having equal sized bedrooms will be very important to sharers, while a decent garden is crucial for families.
5. Find buy-to-let mortgage advice
When it comes to finding a buy-to-let mortgage, the benefits of using a broker is a no-brainer. While many UK brokers charge a fee, there are a number of brokers that offer services completely free. So don’t pay hefty costs, which run into hundreds of pounds, when you don’t need to.
6. Tenancy deposit scheme
Landlords are legally required to keep a deposit in an approved deposit scheme which offers security for both tenant and landlord. There are three approved schemes to choose from and you must supply a tenant with a host of information, such as the name of the authorised scheme you are using, how they will apply to get the deposit back at the end of the tenancy, an explanation of the purpose of the deposit and what to do if there is a dispute. If you don’t comply you can face legal proceedings and a fine of up to three times the amount of the deposit in question.
7. Extra obligations
You must pay for an energy-performance certificate, when marketing a property for rent.
By law, you must also ensure you have gas and electrical equipment installed (and then checked annually) by a registered engineer.
Landlords must now give new tenants a copy of the latest version of the Government’s official How To Rent Guide. If the tenant does not receive this guide, it may be difficult to evict the tenant should it be necessary.
8. Using a letting agent
Finding the right tenants is crucial. As well as affordability checks, there are requirements for a landlord to obtain proof of identity and nationality. The 'right to rent' checks are designed to deter those who are illegally residing in the UK from staying in the country.
You can choose to appoint a letting agent to find tenants and take care of the paperwork on your behalf.
To find a tenant typically costs 6-8% of the period’s rent. Tenant find and rent collection fees will typically cost landlords around 8-12% of the monthly rent. Full property management fees will typically cost landlords around 10-20% of the monthly rent collected.
Choosing the right agent is important. Read the reviews that they’ve got from other landlords as well as tenants and make sure they are members of National Approved Letting Scheme (NALS), Royal Institution of Chartered Surveyors (RICS) or the Association of Residential Letting Agents (ARLA).
Landlords now have to pay for services that were previously charged to the tenant.
The Tenants Fee Bill which came into force last year banned agencies from charging tenants for credit checks and tenancy agreements. Now these costs must be paid for by the landlord.
ARLA Propertymark estimates this adds around £275 of additional costs to landlords.
9. Going it alone
Should you wish to take care of all this yourself you can advertise the property on websites such as spareroom.co.uk for free.
You will need to do a credit check on potential tenants, get proof of income and ask for references. Make sure you check their social media profiles too.
A template Assured Shorthold Tenancy (AST) agreement - the most common kind of contract between a tenant and landlord - the official Government website provides a free suggested model agreement for an AST on their website.
The National Landlords Association also provides templates for ASTs and other tenancy documents to paying members at https://landlords.org.uk/landlords-forms.
10. Get covered
Standard home buildings insurance will not usually cover homes that are tenanted. Make sure you tell your insurer that you have tenants, and consider other types of insurance, such as landlords’ liability and loss of rent cover.
Find out about Saga Landlord Insurance