All you need to know about letting a property
More and more people are looking into becoming residential landlords as interest rates in bank and building societies continue to offer a poor return. The new pension freedoms also offer the opportunity to have access to a cash lump sum which can be used as a deposit on a buy-to-let property.
In this guide, we attempt to answer some of the questions and concerns you may have as a first-time landlord.
Do you have a plan?
The first step to any successful business – letting a property is a business – is to have a plan of what you are trying to achieve and how you are going to set about it. Investing in property is generally a longer term investment i.e. 5 years minimum 10 years plus. If you are looking for short-term investment then property is not the thing for you.
What are you trying to achieve by buying a rental property?
Any one of the following could be your reason for investing in a property to let or maybe your reason is not on our list;
- An alternative form of pension provision as you have plans to retire before state pension age.
- Provide an income now to help with paying household bills or general living expenses.
- To help your children get a step onto the property ladder in later life.
- An investment to help pay for university or college fees for when your children reach that age.
- Generate a better potential return that money invested in a Building Society or bank.
Whatever your reason you need to be clear what your objectives are as this can affect how you go about things.
Who should own the property?
If you are married or have a partner you may wish to consider in whose name the property should be owned. Any income you receive will be liable to income tax at the individual’s personal tax rates after offsetting any costs You should also bear in mind that when you come to sell the property in the future, current taxation laws mean you will need to pay Capital Gains Tax on any profit in excess of your personal capital gains tax allowance.
Should you set up a limited company to own your Buy to Let properties? There are reasons for this and also reasons against this. Taxation of rental income and sale proceeds is a key area when considering whether to set up a limited company and you should talk to your accountant about the pros and cons. If you don’t have an accountant we can put you in touch with one.
What sort of tenants should I be looking for?
There are a few different types of tenants to consider when looking to buy your first property to let. The type of tenants will also depend on what you are trying to achieve, for example;
This where a number of tenants share a property. It could be a student household or a rent a room facility for professional people who are working in
the vicinity for a period and just want somewhere to stay during the working week. Total rental incomes for the property as a whole tend to be higher as you could use a 3 bedroom house and have 4 rooms to let i.e. turn the lounge into a bedroom. These sorts of properties need to be furnished and the cost of this needs to be taken into account.
If 5 or more unrelated people share such a property then additional regulations apply and you will need a licence from the local authority as this becomes a regulated house of multiple occupancy and again additional costs will be incurred.
Generalising, and I know you shouldn’t really generalise, these types of household tend to stay in a property for a limited period. They may meet partners, want a bigger property for growing children or if retired want to move closer to family as they get older.
Dual income- No Kids
A typical scenario is a young couple setting up their first home together or a retired couple. Again this generally tend to be for a limited period as a change in circumstances provides the stimulus for them to move. Could be they want to buy their own house, rent a larger property as children arrive on the scene.
This tends to be, in my view, the best sort of let as families tend to stay longer in a property. Once the children are settled at a school and have friends locally it is more difficult to move. As a landlord you want tenants to stay as long as possible to avoid the property being empty.
What sort of property should I be buying?
The choice of property is vital to getting your investment decision right. It is the price you buy at and not the price you sell at that determines your profit.
Once you know the type of tenants you are looking for then the type of property follows almost automatically. If you decide on a family let because you have more stable tenants which avoids periods where the property is empty and cuts down on tenant find fees then I suggest a 3-bed property is what you are looking for. Another important factor is the Rent Yield.
In order to make a rental property financially successful the rent yield (annual rent divided by the purchase price) should be 6% or more.
What condition should the property be in? Some landlords are happy to buy a property that needs a little TLC and others want one that is finished and ready to rent. Whatever your preference please remember to take into account the cost of any improvements when calculating the rent yield above. Please also remember that time is money and if you intend to do any improvements yourself these should be completed in as short a timescale as possible to allow us to get the property rented and an income coming in.
Should I use an agent to manage the property?
If you are a first-time landlord or even if you are not I recommend that you use a properly registered letting agent to manage your property- but as a letting agent myself I would say that wouldn’t I?
Seriously though- being a landlord carries with it certain legal responsibilities that if you fail to observe them can and will come back to bite you! I speak to many landlords and it never ceases to surprise me how many feel they can save some money by managing a property themselves but who fail to observe the basic of rules.
· Holding the deposit in one of 3 recognised schemes
· Ensuring the correct documentation is handed to the tenant at the start of the tenancy
· Rent increases are carried out in line with legal requirements
· Keeping up with changes in the law
· Ensuring ongoing legal requirements are met such as EICR, Gas safety, EPC
When things go wrong it can cost a considerable amount of money to put things right. In the worst of cases it can also involve a landlord going to court. The law on lettings constantly changes as the government tries to force the bad landlords to provide houses of a liveable standard. Many landlords don’t keep up with these changes and quite rightly rely on their managing agent.
What Happens if I get a bad tenant?
This is a question I get regularly. In my experience as a landlord bad tenants are few and far between and there are ways of dealing with them provided you have managed the property properly.
Hancock’s wont put any tenant into a property. We will always fully reference a tenant and to ensure as far as possible that the tenant is sound and will look after the property and has the means to pay the rent.
If a tenant stops paying the rent then we have a process set up to ensure we contact them quickly to get to know any issues or concerns.
You can also take out Rant Guarantee Insurance which provides up to £100,000 of legal costs to evict the tenant and also makes up for any rent lost during the time it takes to get vacant possession of your property,
I hope the above has been useful but if you have any questions please give Hancock’s a call and ask to speak to Emma or Chris. Remember we manage properties, our sister company, Oaktree Mortgages Ltd can finance them and we are landlords in our own right so we have first hand experience of what being a landlord really means