Are you considering letting out a property? Letting can be a good source of passive income and, if done correctly, it can be a great long-term investment to help you protect your assets.
Your buy-to-let property can generate two different potential income streams: rental income and capital growth, which is achieved by the property value increasing over time.
However, being a landlord isn’t all plain sailing, as setting up a rental property can be quite complex. You will need to be aware of a range of financial, legal, and logistical issues before you begin your rental endeavour.
It’s essential to have a comprehensive understanding of the costs associated with becoming a landlord before you take the jump into investing in a property. Whether you’re an aspiring landlord, or an accidental one, it’s advisable to weigh the costs against potential returns before you take your next steps.
If you are purchasing a property to let, this is considered an investment property and will therefore be ineligible for a typical residential mortgage. Instead, you will need to have a buy-to-let mortgage. If you already have a standard mortgage on the property, you may need permission from your mortgage lender to rent it out.
A buy-to-let mortgage generally requires a higher deposit than a standard mortgage and the amount you can borrow is typically dependant on the expected rental income from the property.
Many buy-to-let lenders stipulate that your rental income needs to be 25%- 45% higher than your mortgage payment. We recommend that you speak to a financial adviser to help you decide on how much money you should invest and to guide you through what returns on investment you should be expecting.
Before you take the plunge in purchasing your rental property, it is important to ensure you’re not sinking your funds into a money pit. Having a home survey will allow you to proceed with your purchase with confidence, as arranging a survey with a RICS-qualified surveyor will provide you with an in-depth report detailing the condition of the property and any areas of concern.
A survey is not the same as a mortgage valuation. A mortgage valuation is based on a limited visual inspection of a property and is intended for lender purposes only.
Get a quote for a home survey from SDL Surveying here.
Stamp Duty Land Tax (SDLT) is a tax charged in property transactions across England and Northern Ireland. As a landlord the amount of Stamp Duty you pay will be higher than if you were to have a standard mortgage. In 2016, the government added a 3% surcharge in stamp duty for additional properties such as a second homes and buy-to-let properties.
Landlord insurance is specifically designed to cover rental properties. It provides financial protection for you as the property owner and covers damage to the dwelling itself (e.g., from fire, flood etc.) as well as potentially covering the contents of the rental. Additionally, landlords’ insurance helps protect the property owner against liability risk.
Rent guarantee insurance protects landlords against the loss of rental income should a tenant default on their rental payments. It can also help cover the legal costs of regaining possession of the property for things such as property sections notices, evictions, and legal advice.
As a landlord, you’ll need to pay income tax on the net rental income you receive from your properties (this is the total income minus any allowable expenses) which may push you into a higher tax bracket and mean a higher tax bill to pay. If you earn above a certain amount, and your property portfolio counts as running a business, you may also be required to pay Class 2 National Insurance.
A lot of landlords manage their properties successfully on their own, but it can be quite complex and time consuming especially for a first-time landlord. It may therefore be more convenient to use a letting agent. If you are not fully aware of the legal requirements and obligations that come with being a landlord, or if you already have a busy schedule, allowing a letting agent to fully manage the property might be the best option for you.
While this will be another expense, using a letting agent can provide a safety net for your rental investment. A letting agent will ensure that you are compliant with current regulations and legislation that effects rental properties. Additionally, a letting agent can help you with the handling of tenant queries and problems that may arise.
Nothing lasts forever and that includes tenancy agreements. In between tenancies you may experience a period where the rental property is left unoccupied. How long will be dependent on the market at that time.
Not only will you be out of pocket for any rental income during this time, but there will be other costs that may need to be covered such as council tax and utility bills. Therefore, if you are depending on the rental income to cover any costs such as the mortgage on the property, it’s advisable to have some savings set aside to cover any void periods.
If you’ve bought or inherited a property that you’re intending to let (particularly an older property) then it might need some maintenance or refurbishment before it’s ready to be let.
It’s important to ensure that your property is in the best state of repair possible before letting, as any small issues have the potential to worsen and will become more costly and time consuming to repair later down the line when you have limited access to the property with a tenant in residence.
As the landlord you are responsible for any repairs or ongoing work to the property and, therefore, you may want to set aside a contingency budget for any potential costs or maintenance work that may arise. You should also factor in the cost of continued compliance and safety checks which may require annual renewals.
As a landlord, there are many compliance and safety requirements that you need to be compliant with before letting out a property. These compliance and safety regulations are updated regularly, and it is important to keep abreast of continued changes and updates to government legislation that may affect you. One way to do so is to keep on top of any updates found in the latest issue of the government’s ‘How to let’ guide here: https://www.gov.uk/government/publications/how-to-let
As a landlord, you are required to have an annual gas safety inspection at your rental property. This will involve a registered gas safety engineer doing a check on all gas appliances within the property to ensure they are safe and in full working order.
Following the inspection, you will be issued a gas safety certificate, you will need to keep one for your own record. Plus, you are also required to provide a copy of the certificate to your tenants.
For more information on gas safety, or to find a registered gas engineer, visit: https://www.gassaferegister.co.uk/
Landlords are legally required to install working fire alarms on each floor of their rental property. These should be checked with the tenants at the start of their agreement and be confirmed with a dated signature.
Where your rental property has a solid fuel appliance such as a wood burning stove, you will be required to install carbon monoxide alarm in each room that contains such an appliance. If you are renting out the property as furnished, all furnishing must be labelled fire safe.
You should also be aware that there are additional regulations for HMO properties, such as a fire risk assessment.
As a landlord, you are legally required to carry out a risk assessment of the property to check for any exposure to legionella. Legionella is a form of bacteria that can cause severe health conditions. It is recommended that a legionella risk assessment should be carried out every two years, or before a new tenancy begins.
An Electrical Safety Report is legally required to be carried out by a qualified and competent person every 5 years. This will involve an assessment of the electrical appliances, wiring, and outlets within the property. A report of the assessment must then be issued to the tenants at the property within 28 days of the inspection and at the start of each tenancy agreement.
An EPC (Energy Performance Certificate) provides a rating of the property’s energy efficiency on a scale from A-G with “A” being the highest efficiency band. This will be determined based on a scoring system assessing the key energy performance areas within the property. The better rating a property receives the more energy efficient it is, reducing excess CO2 emissions and potentially saving money.
The Minimum Energy Efficiency Standard introduced in 2018 demands that all rental properties within the UK meet a minimum rating of E. Landlords that fail to meet this will incur a fine.
However, the government are proposing legislative changes which will mandate that all newly rented properties in England and Wales have an EPC rating of at least “C” by 2025, and existing tenancies must comply by 2028.
In order to rent a property out, you are legally required to carry out ‘right to rent’ checks on your prospective tenants to assure that the tenant is over the age of 18 and legally allowed to rent in England. These checks require the tenant to supply a valid form of identification such as a passport, driving licence or VISA.
There are two types of checks: one conducted via the Home Office online checking service, and one which is a manual document-based check.
Find out more about ‘right to rent’ checks here: https://www.gov.uk/government/collections/landlords-immigration-right-to-rent-checks
As a landlord, it is your responsibility to protect the tenancy deposit with a UK government-approved deposit protection scheme. The deposit must be registered and to be protected within 30 days of the deposit being received and the details concerning how the deposit has been protected should be provided to the tenant.
The amount of deposit allowed to be taken for new tenants is capped at 5 weeks’ worth of the property rent or 6 weeks where the annual rent exceeds £50,000.
A property is considered small HMO (Houses in Multiple Occupation) where three or more unrelated people share facilities such as a kitchen or bathroom. It is considered a large HMO where there are 5 unrelated people, or two or more households sharing facilities.
If you are renting out your property as an HMO then you may need to apply for special licensing. This differs depending on which local authority the property is within. Renting as an HMO requires additional legal responsibilities and requirements. Failure to license a relevant HMO property is a criminal offence.
Check if your property needs to be licensed here: https://www.gov.uk/find-local-council
For more information regarding HMO’s visit the gov website: https://www.gov.uk/renting-out-a-property/houses-in-multiple-occupation-hmo
Legally you will need provide your tenants with the below information and documentation on or before the tenancy start date:
It is recommended that you have a signed and dated checklist, or a date and signature, on each document from the tenants for record keeping purposes. If you have any additional relevant documentation such as an inventory, it is advised these also be provided on or before the tenancy start date.
While not always legally required, there are some measures that may prove to be beneficial when moving forward with your tenants. Find some useful advice on best practice below.
To give you confidence as you move forward with the tenancy it is advised that you carry out reference checks on your prospective tenants. Your letting agent may carry out these services on your behalf or you may use a specialist referencing company.
This will allow you to receive references from former landlords or agents to determine whether they are a reliable tenant. A further credit check will also allow you to confirm the tenant’s financial responsibility.
However, it is important to be aware that landlords and letting agents are no longer able to charge for reference or credit checks.
Conducting an inventory directly before and after a new tenant leases the property could help protect your investment at the end of tenancy.
An inventory can be performed by the landlord, letting agent, or an independent specialist and should provide a document detailing the state and condition of every element of the property. This includes the walls, floors, ceilings, appliances, fixtures, and fittings with photographic evidence. These should be presented for the tenant to sign to confirm or dispute at move in and as soon as possible after moving out.
This will allow both parties to compare the documents to see if anything has changed over the duration of the property and provide evidence should there be any damage or dispute at the end of tenancy that could affect the deposit.
It is the tenant’s responsibility to pay for the property’s utility bills and council tax during their tenancy agreement. However, as the property owner, you will be responsible for these payments ahead of the tenancy and in-between tenancies. Therefore, it is important to stay on top of tenancy start and end dates to ensure you aren’t overlapping payments.
Your letting agent may do this for you, but if you are fully managing your own rental property, be sure to keep track of these dates and take dated recordings (ideally photographs) of any meter readings at the property to send to your utility providers.
For best practice, give the tenant as much notice as reasonably possible before attending the property.
Once the tenants begin their tenancy you no longer have the right to access the property at will. The tenants have the right to quiet enjoyment and, therefore, you must give at least 24 hours’ notice before visiting the property for things like repairs.
You are not allowed to enter a property even when the tenant is absent unless you have received explicit permission from the tenant.
Book a home survey with SDL Surveying and we’ll help highlight if there are any issues with the property that may not be immediately obvious when viewing a property.
