Three truths aspiring landlords don't always consider

Every day, more landlords are making their first foray into the world of property investment – but research shows that they don’t always consider the implications..

In a recent poll conducted by the Bank of Ireland, one in four respondents said that they were planning to use a lump sum from their pension to invest in buy-to-let property when they retire. In fact, almost half of the homeowners surveyed expressed interest in becoming landlords within the next two years 1.

Because of the potential to earn from both growing property price and rental income, buy-to-let is one of the nation’s most popular forms of investment. But there are more things to consider than just income, and figures suggest that aspiring landlords aren’t always fully aware of the implications.

Property tax

The Bank of Ireland also asked respondents whether they felt they fully understood the tax implications of buy-to-let. The results are surprising: only 42% felt confident that they fully understood capital gains tax, whilst just 36% believed the same about inheritance tax.

Landlords need to disclose all of their earnings to HM Revenue and Customs – whether those earnings come from rent (which is liable for income tax) or asset growth (which is liable for capital gains tax). Usually, landlords declare income as if they were self-employed. HMRC takes a dim view of tax avoidance among landlords, and has implemented the Let Property Campaign to tackle it.

If you aren’t fully aware of your tax obligations as a landlord – or the various reliefs and offsets available to you to reduce your tax – then you should strongly consider hiring a qualified accountancy professional.

The cost of property management

According to Platinum Property Partners, the average annual cost of running a property is around £8,359 2. To break even, a landlord would need to take in around £700 per month in rental income – not an unrealistic figure, but remember that this is the average cost.

In PPP’s projection the single biggest expense – mortgage interest – is just 16% of the overall cost. At a 5% interest rate, this assumes a mortgage of just £26,860. The reality, though, is that most new landlords will not have the up-front capital needed to take out such small loans.

In February, the average (mean) buy-to-let loan advance was £138,365 3. This would accrue significantly higher interest – nearly £7,000 per year at 5% – which would push the overall average cost to almost £14,000, and necessitate a far larger monthly rent of £1,160 to break even.

This means, then, that many landlords won’t start making a profit right away – and some may even make a loss. A successful buy-to-let investment takes time to fully come into its own.

Landlord’s obligations

Among the top ten costs that PPP discovered landlords to not be taking into account, three related to the repair and upkeep of the property. Despite the overwhelming majority (90%) incurring them, little more than half of landlords included the cost of repairs in their profitability calculations.

Repairs are more than just an inevitable expense; they are also a legal obligation. In fact, landlords have a number of duties to their tenants that they risk legal sanction for neglecting, and many new landlords are not fully aware of what is expected of them.

Landlords must (among other things):

– Ensure that the property is safe and in a good state of repair at all times

– Allow their tenant to enjoy the property without interruption, including giving 24 hours’ notice before visits and not entering without their tenant’s permission

– Not evict their tenant without going through the proper legal channels

– Make sure their tenants have certain details about the property and the tenancy, and are able to contact either their landlord or a representative, such as a letting agent, when they need to

– Protect any rental deposit they take in an approved deposit protection scheme

Memorising decades (even centuries!) of property law before becoming a landlord would be impossible. But a grasp of the basics – and a willingness to learn more – is essential. If you wish to keep up-to-date with landlord law, and have ready access to advice and assistance when you need it, strongly consider becoming a member of a local or national landlords association.

Written by Ben Gosling at Commercial Trust


[1]     Williams, N. “Pension changes will create more landlords”. Mortgage Introducer. 24 Apr 2015.

[2]     “UK landlords are failing to take running costs into account when measuring buy-to-let returns”. Platinum Property Partners. 28 Apr 2015.

[3]     “House purchase lending fall in February”. Council of Mortgage Lenders. 14 Apr 2015.

Posted by on 11 May 2015

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