What Should I Do to Prepare for Becoming a Landlord in the UK? A Guide
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by Robert Jones, Founder of Property Investments UK
With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
It’s fair to say that being a landlord has become tougher in recent times. So proper planning and preparation is essential if you’re to make a success of it. Here are some things you need to do to help you prepare to become a landlord in the UK.
Contents
- Approach Being a Landlord in a Business-Like Way
- Think About How Property Fits Into Your Investments
- Prepare Your Finances
- Very Important – Take Advice on Tax
- Know the Latest Rules and Regulations
- Research – Find Which Types of Lettings Offer the Best Potential
- Research – Find Which Areas Make Most Sense for Landlords
- Know What Tenants Expect
- Understand the Downsides of Being a Landlord
- Finally, Decide if Being a Landlord is Really For You!
Approach Being a Landlord in a Business-Like Way
Some landlords are accidental landlords. Accidental landlords become landlords unintentionally, perhaps because they need to rent out their own house or perhaps because they inherit one. But this isn’t the ideal way to become a landlord.
Becoming a landlord is just like starting a business – but a property business. Like any business, it needs to be approached professionally. Becoming a landlord involves income and expenditure, and risks and rewards. It’s important to approach your property business professionally, have a business plan and budget, and take expert advice where you need it.
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Think About How Property Fits Into Your Investments
Being a landlord is best thought of as part of a diversified portfolio of investments. So think about how a property fits into this alongside, for example, stocks and shares, cash, your own home or perhaps crypto amongst other things. It’s usually sensible to diversify your investment portfolio across different investments, each over different terms and with different risk profiles.
Think about whether you want to invest in property for income or growth or both. Think about whether you want to invest for the long term, the short term or both. Property usually works best as a long-term investment.
Prepare Your Finances
Know what money you have to invest in becoming a landlord. Know what cash you have or what assets you might sell and reinvest them into property. Know what money you can raise from loans and mortgages.
Work out an investment budget. As well as the purchase price of, or deposit on, a property. Allow for purchase fees and taxes and any renovation costs.
Know what income you’ll need to make from property each week/year to cover mortgage repayments and maintenance etc. Remember to allow for expenses like insurance, letting agency fees (if you plan on using an agent) and maintenance/repair costs.
Very Important – Take Advice on Tax
Operating your buy-to-let in a tax-efficient way can make a very big difference to how profitable it will be. So a very important part of preparing for becoming a landlord in the UK is to take expert advice on tax. (It’s best to find out how to invest in property tax efficiently before you buy rather than after.)
Things to check:
- How will becoming a landlord affect your personal income tax liability?
- How much should you set aside from your rental income in order to meet your tax bill?
- How will becoming a landlord affect your Capital Gains Tax liability in the future?
- How can you invest in a way that is efficient for Inheritance Tax?
- Is investing through a limited company a good option for you or not?
If you’re resident outside the UK think about how becoming a landlord will affect your tax liability in your own country as well as the UK.
Know the Latest Rules and Regulations
Letting property requires you to comply with many rules and regulations. These are updated and added to from time to time. So before you become a landlord update yourself on the latest rules:
Fitness for Human Habitation
A property that you let out must comply with certain standards. The Homes (Fitness for Human Habitation) Act 2018 provides more information about the minimum standards.
Domestic Minimum Energy Efficiency Standards
Any property you let out must have an EPC rating of between A and E. Properties in bands F or G may not be let out unless they are upgraded.
Read: Domestic private rented property: minimum energy efficiency standard - landlord guidance
Tenancy Deposits
Tenants’ deposits must be protected under a recognised tenancy deposit scheme.
Read: Deposit Protection: Safeguarding Rental Deposits and Avoiding Disputes
Gas and Electrical Safety
Rental properties must have valid gas and electrical safety certificates. They must be fitted with smoke and carbon monoxide alarms.
Tenancy Agreements
Tenants must be given a tenancy agreement, normally an assured shorthold tenancy or AST.
Read: An Introduction to Assured Shorthold Tenancy Agreements
Right-to-Rent
Landlords must carry out right-to-rent checks on tenants. This is designed to establish that they are entitled to live in the UK.
Licences
You will need a licence to let an HMO or house in multiple occupation in many (but not all) cases, or if your property is in a selective licensing area. Check with your local authority.
Important. These rules and regulations apply in England. Letting rules and regulations are different in Northern Ireland, Scotland and Wales. All landlords need a licence in these countries.
Research – Find Which Types of Lettings Offer the Best Potential
The lettings market comprises many different types of property. There are single-family properties, properties for sharers, HMOs or houses in multiple occupation, short-term lets, holiday lets, serviced lets and student lets amongst others.
Different types of lets have different levels of demand and offer different rental returns. It’s important to do your research on what’s currently most in demand and will earn the highest rents to find the best types of property in which to invest your money.
Local letting agents can advise on local lettings demand.
Research – Find Which Areas Make Most Sense for Landlords
The property market isn’t homogenous. Different areas have different property prices and different rents. Different areas have different prospects for property price and rent growth. It’s sensible to aim to invest your money in locations that offer the best prospects for rental income and/or price growth.
When preparing to become a landlord it’s important to understand yield. Yield is the return you make on the money you put into a rental property expressed as a percentage.
Gross yield = Annual rent divided by the purchase price of a property x 100
Gross yield is only a very simple calculation. However, yield allows you to see what return you can get on your money and compare different property investment (and other investment) opportunities back to back to help identify the best.
Property.xyz can provide information on prices, rents and yields in any postcode area. Local letting agents can also provide information on rents and yields.
Know What Tenants Expect
Before becoming a landlord it’s important to prepare by thinking about what sort of tenant you plan on attracting and what they will expect from your accommodation.
Different tenant groups have different expectations in terms of type of property, space, amenities, fixtures and fittings and quality. Tenant expectations will govern what you have to invest in buying, refurbishing and equipping your property.
Different tenant groups each with different expectations include families, sharers, students, professionals, housing benefits tenants, contractors and holidaymakers.
Understand the Downsides of Being a Landlord
Why should I not become a landlord? There are several downsides to being a landlord. So an important part of preparing to become a landlord is to know about these downsides and understand how you can address and/or minimise them.
- Landlords are at risk of falling foul of the many rules and regulations that affect letting property and being penalised or fined – or even imprisoned in some serious cases.
- Landlords are at risk of letting and property laws being changed in future, which could make being a landlord less attractive. (Or could make being a landlord more attractive.)
- Rogue tenants are one of the risks of becoming a landlord. This includes tenants who don’t or can’t pay their rent, tenants who damage (or even trash) your property and tenants who are difficult and expensive to evict.
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Landlords are at risk of fluctuations in the property market. Prices and/or rents could fall in future. (Although they are more likely to rise over the long term.)
Read: Choppy Waters: Where Are UK Property Prices Heading in the Near Term?
- Landlords with mortgages are at risk of higher mortgage rates in future. (But they could also fall.)
- Void periods are a risk that all landlords must consider. Void periods are when your property is empty and is not earning rent but when you still have to pay the mortgage and other overheads.
Finally, Decide if Being a Landlord is Really For You!
The most important part of preparing to become a landlord is deciding whether it is really for you. Being a landlord involves risks and rewards. It can be very rewarding but it can also be very demanding. It can be very profitable but it can also be a way to lose money. Decide whether you’re willing to accept the risks, to achieve the rewards.