Getting into the property market can be daunting, but also very lucrative. If you're thinking about becoming a landlord, we've got you covered. Here are our top tips on the best ways to get started.
This is an obvious one: you can't just decide you want to be a landlord and be up and running within a few days. So you need to be aware of the following costs:
Firstly, you need to find out whether you need to obtain a license and adhere to a code of practice. This is not a UK-wide thing yet, but councils can decide whether they feel it is necessary. Make sure you check your local council's website to see if you might need one. This will give you all the information on how to obtain a license, should you need one.
2. Mortgage Repayments.
Next, if you are buying a property to let, the mortgage repayments will arguably be your biggest regular outgoing, so you need to make sure you can cover this and still make a profit. The larger the deposit, the better the rates.
3. Stamp Duty.
Speaking of buy-to-let, make sure you factor in the 3% stamp duty tax that needs to be paid upfront when buying the property. So if the value is £300k, you should expect to pay an extra £9k.
4. Contingency Funds.
Don't forget to have a contingency fund in place just in case initial costs are greater than expected.
There will, of course, be ongoing costs whilst you are renting out the property. So make sure you have funds in place for things like:
1. General Property Maintenance.
Most landlords recommend the 'little and often' approach so that you don't end up paying out huge lump sums. By keeping on top of general maintenance, you're effectively keeping this cost down. Redecorating or refurbishment should happen roughly every 3 years to keep your property fresh up to date. For these costs, you should keep a minimum of roughly £600 aside each year, per property. Even if you don't use it all, it's a nice fund to have in case anything unexpected goes wrong.
2. Letting Agents.
If you choose to go through a letting agent, budget for them to take a minimum of 10% of the monthly rental cost. If you want them to manage the property fully (rent/deposit payments, complaints, maintenance, etc) it's closer to 15-20%.
3. Landlord Insurance.
This is a must, especially if you have a mortgage on the property. Most insurance companies have different levels or insurance dependent on what you need. For example, if you are renting the property fully furnished, you'll need contents insurance as well as buildings insurance.
4. Void Periods.
Don't forget, there may be some periods of time where the property is empty. You might be between tenancies or doing refurbishments. Make sure you factor this in when you think about the profit you'll be making each month/year.
Depending on how much you earn, you will probably need to pay some form of income tax. You only get roughly £12.5k a year tax-free, which if you already have a job will be where that goes. Anything earned on top of this is considered taxable.
Your monthly/yearly earnings are what you have left after deducting 'allowable expenses', such as the ongoing costs detailed above. This is what you'll be taxed on.
2. Deducting Mortgage Interest.
You can deduct mortgage interest from your income when filing your taxes, although this percentage has is variable. In 2019-20, you could offset 24% of your mortgage interest. However, in the 2020-2021 tax year, this has been replaced by a flat 20% tax credit.
3. Claiming Back Replacements.
You can also claim back for replaced furnishings, however, this is now only the actual cost of the replacement. It used to be 10% of the rent!
Once you are set up and ready to go, don't forget about your regular responsibilities unless you have outsourced this to a letting agent. Your main responsibility is keeping the property safe.
To read more about his, have a look at our blog 7 Essential Safety Tips for Landlords.
You must make sure you have the following up to date:
Energy Performance Certificate (EPC) - updated yearly and make sure there is a copy available for your tenant
Tenancy Agreement - this is where you will set out your dos and don'ts, highlighting both yours and your tenant's rights
Inventory - If you are renting the property furnished, you'll need to know what you have so that you know what might need regular maintenance or replacing.
Gas Certificate - updated yearly and make sure there is a copy available for your tenant
Written permission from your mortgage lender - most mortgage lenders offer a mortgage based on you living there. You must make it clear if you are buying to let.
HMP Licence - you need this if you are renting to three or more unrelated people. E.g. university students
As we said above, venturing into property rental is a lucrative business, but it's not for the faint hearted. Make sure you ask yourself what you are willing to accept when renting out your property. For example:
Will I let out my property furnished or unfurnished?
Will I allow pets?
Will I allow tenants to decorate?
Will I allow tenants to smoke?
Will I hire a letting agency or do it myself?
Don't forget, we're here to help and we can make the process a lot easier for you if you are looking to get your foot in the door.
Contact us to see how we might be able to help you!
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Normette Homes specialises in property investment and tenant sourcing.