How to become a first-time landlord
If you have owned your own property, you may have considered renting it out at some point.
Most homeowners have, at one point or another, looked on enviously at landlords making money from property investment.
As you’ve now sold your home and, hopefully, made money through its value increasing while owning it, you may now be considering property as an income source.
There are lots of factors to consider before deciding to enter the landlord market, both legal and personal, but Martin & Co’s guide to becoming a first-time landlord can help.
Why invest in property?
Technically, if you have recently sold your home then you have already invested in property. But property as an income source is different.
Yes, you can make money through selling property for a profit, as you may have done with your home. But in order to generate an income, you would need to rent out your investment property.
The good news about investing in a buy-to-let property is you can make money from rent while also watching the capital growth of the property rise.
What are the risks?
Becoming a landlord carries with it a degree of risk. Property prices can go down as well as rise and the demand for rental homes can also fluctuate.
When your buy-to-let property is empty, you are still responsible for the mortgage payments so a slow housing and rental market can have a big effect on your investment and the income generated from it.
Of course, you can sit tight and ride out the storm, hoping for an improving market, but if you become a portfolio landlord and have most of your wealth tied up in buy-to-let investments, a slow market can be devastating.
Moreover, rises in interest rates could mean the rent from your investment fail to cover the mortgage payments, resulting in a loss.
What are the costs of property investment?
An investment property purchase is subject to the same kind of costs as buying a home to live in.
You would be facing estate agent fees, survey costs, solicitors’ bills and stamp duty. Landlords also have to pay an extra 3% on each stamp duty band when buying additional homes or residential buy-to-let properties.
If you are earning an income from your buy-to-let investment, you will be subject to income tax.
Up until 2017, landlords could deduct the cost of their mortgage interest from their pre-tax profit, meaning a lower tax bill.
However, new rules being phased in between 2017 and 2020 will see landlords only able to deduct a decreasing percentage of their mortgage interest. In 2020, once the new rules are in place completely, 100% of landlords’ finance costs will be subjected to basic rate tax.
Don't forget running costs
If you’ve decided that a buy-to-let investment is definitely for you, you’ll need to work out your projected rental yield to ensure the numbers stack up. And that means working in day-to-day costs for your calculations.
Some of the main costs you could be facing include:
- Mortgage interest
- Managing agent fees
- Decoration costs
- Landlord insurance
- Safety check costs
- General maintenance
What would my legal responsibilities be?
The majority of legal requirements landlords must meet surround the safety of tenants.
- Smoke alarms must be installed on all floors
- Carbon monoxide detectors should be used in rooms with coal fires or wood-burning stoves
- Each gas appliance must have its own safety certificate and these must be available inside the home
- Electrical devices should be PAT tested for compliance
- Furniture must be fire safe and all labels on display
- The water supply must be safe to protect tenants from Legionella bacteria
As a landlord, you must also supply an Energy Performance Certificate (EPC). Since April, all rental properties must have a rating of at least E on the EPC in order to be let.
Tenant deposits must be protected under a government-approved deposit protection scheme for all assured shorthold tenancies and deposits must be returned to the tenant at the end of the agreement unless there is a dispute over damage or unpaid rent.
What are my responsibilities as a landlord?
You are responsible for repairing the exterior of the property, so should issues with the roof, chimney, walls or guttering occur, it would be down to you as the landlord to fix them.
Water, gas and electric supplies are also the responsibility of you as a landlord and these must be kept in safe working order.
Can I check the property?
Of course. But you must not put yourself in a position where you could be accused of lessening your tenant’s ‘quiet enjoyment’ of their rental home.
Give at least 24 hours’ notice if you wish to visit the property. Some tenancy agreements will stipulate the amount of notice required.
I've heard about HMOs - what are they?
Houses in Multiple Occupation (HMO) can be a sound way to ensure multiple income streams for your buy-to-let.
An HMO is a property with at least three individual tenants, who share toilet, kitchen and bathroom facilities.
Because you rent rooms on an individual basis, HMOs can be lucrative properties to invest in.
Moreover, if one tenant moves out, you will still have other tenants in place while you look for someone to replace the departed tenant.
Does letting an HMO have different rules?
If you are considering purchasing and renting a ‘large HMO’ – a property that is at least three storeys high and with at least five people individually renting rooms and – you will need a licence.
As well as the legal responsibilities associated with letting any property, HMO landlords must ensure the property’s electrics are checked every five years, the property is not overcrowded and there are suitable cooking and cleaning facilities.
If you have any questions about letting your property, you can speak to your local Martin & Co office who will be happy to help.