The Accidental Landlord's Handbook - what to know if you're renting out your home

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Not every landlord makes a business decision to invest in rental property. For some individuals, known as ‘accidental landlords’, it can be due to circumstances beyond their control.

It might be because you’re in negative equity and unable to sell, or maybe you’ve inherited a property or have a ‘spare’ home after moving in with a partner. Whatever the case, letting out a property is about far more than simply finding some tenants and making money!

If you are an accidental landlord, this five-step guide will cover the basics you need to get started letting out your property.

Step one: Funding

First things first: is your property mortgaged? If so, you will need a buy-to-let remortgage.

Mortgage conditions prohibit letting out a home you own and occupy to paying tenants. Instead, you need a specific type of business loan called a ‘buy-to-let mortgage’. The most you can borrow for a buy-to-let mortgage is 85% of the property value, meaning you need at least 15% equity; anything less than this and you will either need to ask your lender for consent to let, or make up the shortfall from elsewhere.

Interest rates on buy-to-let mortgages also tend to be slightly higher than residential mortgages, and they come with other conditions. For instance, your new lender will have a rental valuation carried out to ensure that the rent will cover the mortgage repayments by a certain amount. This is usually set at 125% of the interest repayments at around 5% per year (or your actual interest rate, if it is higher). So if your property is not suitable for letting, or is in an area with low tenant demand, you may have trouble financing the switch.

Another important distinction between buy-to-let and residential mortgages is regulation. Residential mortgages are regulated by the Financial Conduct Authority, which on the one hand affords consumers additional protection, but on the other subjects them to stricter affordability tests that mean they may not be able to borrow as much as they need.

NOTE: The Treasury recently announced that, because of new Europe-wide legislation, certain buy-to-let mortgages will need to be regulated by March 2016. This includes loans that aren’t taken out expressly for business purposes; for example, those granted to accidental landlords. This means that, within the next two years, your mortgage might be regulated.

Your home may be repossessed if you do not keep up-to-date with repayments on your mortgage.

Step two: Management

Landlords have a duty of care to their tenants, and a great many legalities surround this relationship. These include rules governing how you select tenants, how you manage property repairs, when and how you can enter the property, how you handle and return deposits, when and how you can evict tenants, and so on.

If you want to manage your property yourself, you absolutely must learn the ropes. Many a first-time landlord has found out the hard way that ignorance isn’t an excuse as far as a county court judge is concerned! Thankfully, the internet is an excellent resource for information, and there are dozens of communities of experienced landlords – property professionals and learned amateurs alike – willing to give their advice. I also strongly recommend joining a landlord’s association such as the Residential Landlords Association, who provide resources and helplines.

If you don’t want to, or can’t, self-manage, then you can hire a letting agent on a full management basis. They will find tenants for you, and take care of the day-to-day running of the business.

This service will cost you either a percentage of your rental income, regular flat fees, or both. Also be aware that, even though an agent is running the property, the responsibility for fulfilling your obligations as a landlord lies with you. This means that you should always:

  1. Make sure your agent is accredited with an official body, such as ARLA, NAEA or RICS
  2. Make sure your agent has professional indemnity insurance (which will protect you should your tenant make a claim against you for the agent’s negligence)

We looked at the differences between hiring a letting agent and self-managing in one of our previous articles for TDS: Is it possible for a property investment to be completely hands-off?

Step three: Ongoing costs

Your new mortgage is in place, and you’ve probably already incurred several start-up expenses. It doesn’t end there, though – you’ll have several ongoing costs to consider. Some are required by law or as part of your contract, such as:

  • Buy-to-let mortgage repayments
  • Buildings insurance (plus contents insurance for any contents you provide as part of the tenancy)
  • Energy performance certificates and gas safety checks
  • Certain legally required repairs

Other costs are not mandatory, but you are likely to incur at least some of them on a regular basis:

  • Minor repairs and refurbishments
  • Accountant’s and solicitor’s fees
  • Electrical safety inspections
  • Tenant referencing checks
  • Other business expenses such as travel and stationery

Furthermore, if your property is empty at any point, you’ll need to pay for:

  • Marketing the property to tenants
  • Cleaning, redecoration and gardening
  • Council tax and utilities

The truth is that you never know when a boiler’s going to break or a tenant’s going to leave. Running a property is not without pitfalls, and research suggests that more than a quarter of landlords with only one property either break even or run at a loss 1. You will need to ensure that you have the funds elsewhere to account for potential shortfalls.

Keep as detailed an account of your ongoing costs as possible so that you can keep track of your profits (this is also useful for tax purposes – more on this in a moment). Many landlords prefer to reinvest their profits into their property in the form of ongoing maintenance, in order to keep the place in good order and maximise the rent it can achieve.

Step four: Tax

As a landlord, the profits you make from renting your property will be subject to income tax. If you sell your property at a profit, you would also be liable to pay capital gains tax (CGT).

Tax on rental income is in addition to money you make from any other employment, and your personal allowance is only applied once. You will need to declare everything you earn; however, it is possible to offset certain business expenses against your rental income only (not income from any other source) before tax is deducted.

Similarly, costs incurred in the purchase, sale and improvement of your property can be offset against the profit from the sale when calculating CGT, as can losses made in previous tax years. Furthermore, you can claim some forms of relief, including a special ‘private residence relief’ if you’ve ever lived in the property yourself.

As tax is a complex matter, particularly for anyone who has never self-assessed before, you might want to hire an accountant. This will add more to your day-to-day running costs – but as the accountant will tell you, this is at least tax-deductible!

Step five: Tenant relations

Finally, establishing a working relationship with your tenants is crucial to a happy and prosperous career as a landlord. Both parties have obligations and rights, and clear communication is the key to ensuring that the obligations are met and rights upheld.

Failing to maintain properties or fix problems quickly enough might be big bugbears tenants have with their landlords. However, another regular complaint is accidental landlords being too ‘precious’ about their former homes (see the Upad survey of tenants). You might have an emotional attachment to the property, or even intend to move back in, but remember your tenants are not your guests and you must observe what’s called the ‘covenant of quiet enjoyment’ for what is now their home.

This doesn’t mean keeping the noise down, but respecting a tenant’s right to live in the property undisturbed, with their privacy respected and without your actions adversely affecting their occupation. This means only entering the property with the tenant’s permission and with at least 24 hours’ notice. It’s a common misunderstanding that 24 hours’ notice gives you the right to enter – this is not the case. You cannot enter without permission unless it’s an emergency. The covenant also means that you need to maintain the property sufficiently; failing to do so could also encroach upon the right to quiet enjoyment.

You can read more about dealing professionally and fairly with your tenants in our first article for TDS: Five easy ways to foster a good relationship with your tenants.

Written by Ben Gosling at Commercial Trust




Posted by Ben Gosling, Commercial Trust on 30 September 2014

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