- There’s a lot to know and learn about renting out your residential property, so be prepared to do you homework if you want to make a success of your landlording!
- Letting out residential property is a great way to make money, and help your tenants and your community at the same time – it’s as good a way as any to provide extra income and a pension nest egg, and better that some.
- As with all investments, residential property letting has risks. However, unlike stock market investments, these are risks you can control and manage yourself. You can reduce your risks to an absolute minimum if you go about it the right way.
- There’s lots of advice out there to help the novice investor: beware, because not all of it is good unbiased advice. If you are clued up on what you are doing you are likely to spot bad advice early on!
Renting out property has become very popular indeed in recent years. “We’re all landlords now”, it would seem, judging by the plethora of TV programmes devoted to property and the interest generated in residential property investment, property development and in renting out, both at home and abroad.
Take problems with pensions, a volatile stock market since the Dot Com crash of 2000, the advent of the buy-to-let mortgage just 10 years ago. Add to this more landlord friendly letting laws, societal changes which have boosted the demand for renting and you have a recipe that has transformed property (real estate) into the investment medium of the early 21st Century.
Consequently, a wall of money flowing into property has increased it’s value, encouraging more and more investment as capital values have grown steadily. Unfortunately for 1st time buyers it’s now much more difficult to get onto the property ladder, though growing student numbers, job mobility, short-term contracts and job insecurity, high student debt and marriages coming later in life have all conspired to explode the demand for rentals and hence encourage more investment in rental property – it’s been a virtuous circle for the property investor.
Remember though: the property market is cyclical in nature – that means it goes through a series of price rises and price falls over time, usually following 10 to 20 year peaks and troughs. There’s always the possibility of a slow down in price rises, price falls, or even a violent property price crash if we hit troubled economic times. However, if you trace the long-term trend in property prices, averaged out over time, this has always shown a steady growth above the rate of general price inflation over hundreds of years.
Although we’ve had a long period of property price rises in the UK, there are no major signs of a serious crash as yet (September 2006). Those that got in early on this world-wide real estate “bull market” have done extremely well and now the debate centres around whether there will be a sudden fall in prices (a hard landing) or a gentle decline (a soft landing), followed as usual, eventually by another steady rise.
Whether you let out just one property, or many 10s of properties, being a landlord carries a fair degree of responsibility. This applies whether or not you use a letting agent, and if you let house
Ask any experienced landlord, what is the most important aspect of letting? and he or she will almost certainly say: Selecting Tenants. Saddle yourself with a bad tenant – no rent and perhaps a trashed property – when you have a portfolio of properties and you have a small problem. Do the same when you have just one property, mortgaged up to the hilt, and you have a disaster on your hands.
Perhaps the biggest risk you take when letting property, and not may people consider this, is being sued for negligence. We all know what a litigious society we live in nowadays and people will sue for damages at the drop of a hat, encouraged to do so by a certain type of lawyer – had an accident in the last three years?.
A visitor to your tenant’s flat trips over a loose stair tread and breaks a leg, or even worse, and the claim for damages against you the landlord will make a 6 months rent arrears problem seem pocket money. You MUST have adequate landlord’s insurance cover – ordinary household insurance will not do.
Your Letting Choices:
- Doing it Yourself: If you let your property directly to tenants these are the issues you will need to consider including: preparing your property, marketing and finding tenants, dealing with tenant selection, the inventory and the letting agreement. Repairing the property when needed and seeing to all the regulatory responsibilities you have as landlord: tenant safety in the home, gas safety, electrical safety, fire safety and furniture requirements. This website can help you with all of this – in fact if you read these pages you won’t need to look any further, though we do recommend some excellent books on the subject.
- Letting your property through an agent: Some landlords prefer to use a letting agent either to market and let the property only, or to do full management. If you live along way from your property or even abroad, then you pretty much have no choice – you will need an agent. However, if you live within reasonable travelling distance of the property it is perfectly possible to manage your own lettings, with relatively little time of you are organised, even when you have a full time career – I know, I’ve done it for over 25 years. Be prepared to pay out between 5% and 15% of your rental income, depending on what level of service your agents provide. You will need to sign a management agreement with your agent and the contract will spell out exactly what fee the agent will be charging, what services they will provide, how the deposits will be handled and how the rent payments will be made to you. Make sure you read their contract carefully before you agree to it. Not all agents are members of a professional association like RICS, NAEA, ARLA, NALS etc.
- Letting your property to a housing association: Housing associations often work closely with local councils to provide housing for people in need. They are experienced in managing property and usually give guarantees as to the condition they will hand back your property in. If you decide to let your property to a housing association they can usually give you a lease for a minimum of three years with management and the internal maintenance included, plus guaranteed rent, even if the property is unoccupied.
- Letting your property to your local Council: Councils often rent properties to house people in need on a similar basis to housing associations. Contact you local Council to check if there is any demand for this.
- Student Lets
- Holiday Homes
- Letting Abroad: For many people the idea of letting out their property abroad is attractive. It can help cover your costs but be sure that you are aware of the local regulations and have the necessary safeguards in place. Here are a few points to remember;Always ensure that there is a valid, written agreement between you the landlord and the tenants. It is advisable to have a local legal representative draw up the agreement for you. The agreement should make it clear that the tenants should look after the property for you and that they will be responsible for any damage to the contents and/or property. In addition, clearly state who is responsible for payments for electricity, gas and telephone etc.If possible, always check the credibility of the prospective tenant by running a credit check and requesting references.
Remember at the end of the day you are letting your home to a perfect stranger and you could be many thousands of miles away. Make sure that you keep copies of all bills paid on the property and copies of agreements along with any other relevant paperwork.Leases of urban properties in Spain are regulated by the new Urban Leases Act of 1994 which has brought about several important changes to the old system under the 1964 act.
The new act applies not only to commercial and domestic dwellings but also to holiday and seasonal lets. One of the important items governed by the act, and relating to long-term leases is the tenants rights to an early resolution of the contract with very low penalties and the benefits of the statutory automatic extension of the duration of the lease. If you intend to let your property you should seek a copy of this act and ensure you have legal advice.
For properties let in the Canary Islands as tourist accommodation, there is a special act (of 1995) that states a professional property agent has to be used. The agent must hold an official licence. Owners failing to comply are subjected to heavy fines
The tax rate on rental income is either 25% or 35% depending on whether or not you are deemed to be a permanent resident in Spain. What may appear strange to us is that the tax is paid by the tenant, a deduction for the tax is made from the rental before the net amount is passed on to the owner. Insist on proof that the tax payment has been made on your behalf.
Any income from rent received in Spain by non-residents is subject to a payment of a flat rate of 25%. Even if the property is not rented, owners are still liable for the income tax, calculated on deemed letting income at the rate of 2% of 20% of the official property value.
Arrange for the tenancy agreement to be drawn up by a gestor (a Spanish legal representative). Any interest payable on a loan is not allowable against the rental income, even though UK tax is due on the income if you are a UK resident. There is a treaty with Spain that any Spanish taxes paid to be offset against UK tax.
When the property is sold and the proceeds are invested in another principal and habitual home then no Spanish Capital Gains Tax is payable (as long as the repurchase is within 2 years of the disposal). Alternatively if the property is owned for more than 10 years, then the CGT liability disappears. This does not mean however, that your liability to UK tax also disappears.