Being a residential landlord can be very rewarding and it represents an attractive investment option against other asset classes.
Here are five things to consider before investing in buy-to-let property.
1. Consider situations that you might face as a landlord which could stretch your budget
The Government's Money Advice Service website gives lots of helpful financial advice and prompts considerations you should consider when taking the first steps towards becoming a landlord. Buying a buy-to-let property is much the same as buying a private home – you'll need to factor in elements like mortgage costs, deposit, legal fees and stamp duty.
Becoming a landlord is an investment, which does have some associated risks. It's important to consider some of the possibilities when working out what you can afford after making the initial investment. You'll need to consider being able to budget for situations where you might be without rental income, for example, during void periods between tenancies.
You might face a situation where the tenant can't or won't pay the rent, resulting in associated legal costs for you. It's worth considering insurance, such as Landlord Rent Guarantee, that can help mitigate risk by covering missed rental payments and legal fees.
Other things to consider are unexpected costs, such as necessary repairs and renovations (before, during and after a tenancy) and the expected expenses, such as letting agents' fees and property maintenance.
2. Research and understand your legal responsibilities as a landlord
Becoming a landlord means taking on certain responsibilities from a legal perspective and the well-being of your tenants. You'll need to remember that renting out a property is like having your own business – you must declare income for tax purposes.
You'll also have to comply with other legalities, some of which could need assessments or certifications. It's important to check whether the local authority has any specific schemes or programmes for residential landlords that you might need to comply with, so it's always worth contacting them. Current regulations include, but are not limited to, some of the below:
- Gas safety certificates
- Energy performance certificates
- Protecting the tenant's deposit
- Serving prescribed information
- Landlord license (certain areas only
- Fire resistant furniture
- Legionnaires disease checks
- Right to rent checks
- Compliant plugs and sockets
- Safe electrical appliances
Not complying with legislation can lead to legal proceedings and fines. It's essential to ensure that you're prepared to invest the time, energy, and money to ensure you're always legally compliant. If you're unsure, it's also worth considering a conversion with a letting or managing agent.
When considering your Landlords Insurance, factor in elements like legal liability cover, such as property owners' liability, public liability and employers' liability. Without landlord liability insurance, you could be liable for personal injury, damage to possessions, the resulting legal costs and damages associated with any claims against you as a landlord.
3. Understand your rights if things go wrong
It's worth researching legal matters, such as eviction notices, your rights and responsibilities, tenancy agreements, and deposit schemes. There are several resources available for you, including:
- The Citizens Advice Bureau
- Gov.uk being a landlord
- National Landlord Association
- Landlord and tenant obligations
- HomeLet' Landlord Tips' and Landlords Blog
Consider appropriate Landlords Buildings Insurance, Landlords Contents Insurance and Landlord Rent Guarantee Insurance to protect yourself and mitigate some of the risks you could face. Don't forget Tenant Referencing, too. You'll want to be safe knowing that your tenants are who they say they are and won't have any problems paying their rent.
Our 2017 survey of over 3,700 landlords found that 51.7% had dealt with a problem tenant in the past. If you can, try talking to other landlords and getting their tips and advice on dealing with problematic situations.
4. Who do you want to rent your investment property to?
An important decision during the buying process is who you want to rent your prospective property to and how much rent you will charge. To understand this, you'll need to do some research on your chosen area, the types of people renting properties there and how much they're paying.
Whether you'll end up targeting families, students or professionals, for example, can determine what type of property you'll need to invest in, what the rent might be and subsequently, the rental yield for the investment.
When looking at the broader market, data from the HomeLet Rental Index provides insight to the market at a regional level. A local letting agent will know how a market is performing and where you might want to consider as an investment.
5. What's the best location to invest in?
Before you set your heart on somewhere, it's essential to consider where you're going to buy the property carefully. Will it be in the town you live in, a nearby city or even somewhere further afield?
Ultimately this is an investment, so you need to consider the yield and rental return. How you plan to manage the property can be a significant factor - if you're planning on using a managing agent, it opens up the possibility of looking further afield.
While you may have what seems like an obvious choice in mind, you'll need to think carefully about the pros and cons of your chosen location and how well a rented property would perform in that area.
Have a look around and do some research into the local market. Put yourself in the shoes of your target tenants and try to understand what they'll be looking for from the area they live in. This could include transport links to major cities, vibrant nightlife, local sports clubs, good schools and neighbouring families or a large population of students – and remember, while the area may be to your taste, it won't be you living in the property.