Everybody is thinking of ways to get extra money right now. With the housing market slowly taking a nosedive but with properties still at a high price, a lot of people are considering renting out their properties. The rental market is booming because of the costs but also the race for space, so becoming a landlord might sound like an ideal option, but you’ve got to weigh up everything. Let’s show you exactly what you have to consider financially, practically, and personally.
Property Maintenance Costs
If you already own a property, you should have an idea of what the types of maintenance would be. However, you’ve got to bear in mind that maintenance is a completely different kettle of fish depending on the person inhabiting the property, which is where working with the right estate agents can make a big difference.
Many estate agents are able to help landlords manage the property but this is for a nominal fee. It all depends on the type of landlord you are. You will need to redecorate and refurbish parts of the property every so often, and this can be approximately £2,000 over a 5-year period.
In addition, if you are opting for an estate agent or letting agent to do the tenant finding and rent collecting, the budget should be approximately 10% of the monthly rent at least. But if you are hoping for the letting agent to completely manage the property for you, you are looking at paying at least 20% in this current climate.
The Costs of a Buy-To-Let Mortgage
If you are looking for a buy-to-let mortgage, your monthly repayments will be the biggest outgoings. If you are purchasing a property for the first time, the larger the deposit you have, the better your deal will be. However, the knock-on effect of COVID-19 has meant there are fewer mortgages on the market. Having a deposit of at least 20% is going to guarantee you a far better deal.
Also, from the perspective of property investors, cash buyers are the ones that are going to be able to get in on the ground floor. If you are successful in getting a mortgage, you may find it more difficult to take on additional finance, especially based on the Bank of England’s rules. Landlords that have large portfolios are at the mercy of banks because they require more evidence of profit from people that have more than 4 properties. While this is a very small fraction of the landlord market, it is certainly something that you should bear in mind, especially if there’s going to be an impact on your day-to-day life.
If you go for a mortgage with a variable rate rather than a fixed one, the base rates in this climate may increase further so your mortgage payments are going to shoot up.
The Buy-To-Let Taxes
You may need to pay income tax on the property you are earning from letting your property out. Therefore, as a landlord, you’ve got to do the maths and decide if these taxes are worth paying. However, the profits can be more, depending on the allowable expenses. Allowable expenses are a number of deductions that can make things a lot easier. Some allowable expenses include landlord’s insurance, letting agent fees, legal fees, and maintenance and repair costs.
Understanding Your Responsibilities as a Landlord
We don’t want to go into being a landlord purely for profit. This is kowtowing to the cliche that all landlords are after one thing. If you really want to become a good landlord, you’ve got to understand the variety of rules and regulations that you are personally responsible for. These include some of the following:
Gas Safety, Electrical Safety, and Fire Safety
These three components will involve equipment that is maintained and installed by registered professionals. These three components are so important, not just to comply with rules and regulations, but for the safety of your tenants.
When you let out the property to a new tenant, you have to get an Energy Performance Certificate, which will show the lodgers how energy efficient the property is, but also give you recommendations for how to improve energy efficiency. A lot of people overlook this, but if you don’t have an EPC for prospective tenants to look at, you might run the risk of getting fined. The only exception to this rule is when there are Houses in Multiple Occupation (HMO) because they usually need to abide by stricter rules. A House in Multiple Occupation is a property that is rented by at least 3 individuals from more than one household and shares facilities like a kitchen and a bathroom. Renting out a property means that you’ve got to achieve a minimum EPC rating of E, and if you provide false information, you could run the risk of being fined up to £5,000.
Understanding the Profit You Can Make From Your Property
Also known as a rental yield, it will vary depending on the value of the property, the area you are in, as well as the wider property market. To calculate your rental yield, the simplest method is to take the annual rental income and divide it by the value of your property. You are looking for a yield of over 5%, which can help you make an income while also considering the overall routine costs.
How Do You Choose a Buy-To-Let Property?
The market is a very competitive field right now. Cheaper homes are being snapped up by property investors before the market takes a downturn so they can flip them and rent them out. If you are looking for the right property, here are a few things to bear in mind:
Deciding on an Old Build or New Build
The differences between the two are many. When you opt for an old build, you’ve got to invest in upgrading it to make it more energy efficient, but new builds might seem like a better investment in the long term because they are more popular and you may be able to get a better deal on an old build.
Do Your Calculations
It sounds obvious, however, property investors can make very small margins that can break the bank. You need to set a budget after calculating your rents and be immovable from your position.
Choosing the Ideal Tenants
A lot of landlords look in the short-term when thinking about a property and purely focus on the property, but you’ve also got to choose the right tenants. If you are choosing a property by a school, you are going to be appealing to families more, which means that if you don’t want to appeal to families because of the potential for more wear and tear, think twice about your location. Additionally, if you’re choosing a property for young professionals to share you’ve got to consider the layout. For example, if there is somebody’s bedroom in the way of the garden, having people walk through it to get there is not going to be suitable.
Think Long and Hard
A lot of people set their sights on one property, but you’ve got to be shrewd. This is why you’ve got to consider the long run. Many people are struggling with debt, which is why there may not be a massive uptick of potential renters. But now might be the best time to get into buy-to-let quickly before the recession hits. It is certainly not an easy thing to get into, recession or not, but there are a lot of things that you need to consider. It can be an amazing way to make extra money, but it can also be a financial headache, so choose wisely.