Becoming a landlord for the first time is an exciting business - literally, and figuratively speaking. It can be a deeply rewarding venture, one which can get the blood pumping and turbocharge your finances, especially in the UK, where accruing bricks and mortar (i.e. property) is considered the soundest and most reliable investment you can make.
Rental incomes have risen consistently in recent years. With UK property prices rising steadily in recent years, by and large, capital growth from the value of the property is probable - especially in desirable and populous areas. As with any serious foray into new revenue streams, you need your eyes open. The property market can fluctuate, so a medium to long term commitment is advised. Upfront and ongoing costs need to be considered at length, as with various legal obligations and one’s overall duty to the tenant. But getting it right - and especially building up a productive portfolio of rental properties - takes some strategic planning with a far-sighted approach. Here is our succinct guide to confidently renting out a property for the first time.
Costs Vs Returns
The main aim of renting out a property is to make a healthy and regular return on your investment. If you’re looking to buy a property for the specific intention of letting, and need to do so using a buy-to-let mortgage, then there are higher interest rates to consider. But if you can purchase outright then this is not an issue. Risk can rear its head in different ways - if property value goes down, if your outgoings exceed rental income, or if the property is vacant for a period of time, earnings will be affected. But a longer term commitment should head this off and smooth out financial bumps in the road. What rent to charge - settling on monthly fees that the tenant(s) must pay - is important to get right, and this is dictated by a range of factors: the size of the property, the facilities it has access to, and the desirability of the area. The latter can be influential: letting in a sought-after location can bring about fine returns, as the income of prospective tenants is likely to be relatively high.
Specific Expenses
When making initial calculations, whether on one rental property or across a burgeoning portfolio, it’s crucial to have a good understanding and awareness of the day to day running costs. The main areas are as follows: letting agent’s fees; landlord's insurance; annual safety checks (gas boilers, etc); redecorating and maintenance costs; rent insurance (designed to protect against tenants falling into arrears or failing to vacate your property); and, if using a buy-to-let mortgage to make a purchase, then the higher mortgage interest costs. Fees that are associated with buying a property must also be considered. These include: stamp duty; valuation; property survey, and legal costs. If you already own a property that has a standard mortgage on it, you will need to seek the lender’s permission to rent it out, and there may be extra mortgage arrangement fees. Income tax and Class 2 National Insurance are also payable on your rental income, as it is effectively running a business - although day to day running costs can be taken out of the equation. Take note: there are also specific rules for overseas landlords: if your usual home is outside of the UK, then you need to comply with the Non-Resident Landlords (NRL) scheme, which sets rules around how you pay tax to HMRC.
Landlord Responsibilities
These are ‘must do’ elements to put in place ahead of renting out a property for the first time. Doing so properly takes a bit of time and care but, once established, these will stand both parties - landlord and tenant(s) - in good stead for a mutually beneficial and issue-free relationship. They are as follows: a Tenancy Agreement (most likely an ‘assured shorthold tenancy’ agreement); a Ground 2 Mortgage Notice (only required if you have a mortgage on the property, it notifies the tenant that possession may be sought in the future by the lender); an Energy Performance Certificate; smoke and carbon monoxide alarms (the landlord must provide these alarms, thought it is generally the tenant’s responsibility to check them at regular intervals throughout the year); safety equipment, such as fire extinguishers, and/ or blankets; an Inventory (a comprehensive document listing all items, with corresponding photos to show their condition at the start of the rental, and signed by both parties). If you are looking to use your rental property for a House of Multiple Occupation (HMO) - whereby numerous tenants share the property at the same time - there is a mandatory licensing scheme to sign up to. Designed to improve standards of property management in the UK, it is now illegal to let out a HMO in England without a license (which costs a small annual fee).
Going the Extra Mile - Additional Considerations
Letting through an agency is highly efficient; there is a cost, but they will take on a lot of the responsibility. Going the extra mile as a landlord, though, can bring about a truly fruitful venture: tenants enjoy the personal touch, and feel more obliged to take care of the property, and be more invested in it for the long term, when they know its owner. So don’t be afraid to say hello and perhaps even leave a ‘welcome hamper’ on day one. A little can go a long way.
Strategy and long-term thinking will be key to making a success of your journey as a landlord. It is always advisable to begin with one property and review the lessons learned to apply across future ventures for a stable and prosperous portfolio. Implementing good habits and processes at the beginning of this venture will always pay off in the long term for efficiency, cash flow and portfolio-building status.
