Becoming a buy-to-let landlord was traditionally the preserve of the post war baby boom generation as a way of providing a nice income stream for retirement. Having seen huge price appreciation throughout their lifetimes, this generation could really put their trust in property.
Many of these landlords of late have used cash drawn down from traditional pensions to invest in rental property, and the more savvy ones have used a limited company as they built their portfolios to try to avoid paying some of the tax grab introduced over the last few years.
However, studies have shown that the tax changes which have been particularly hard on high earners have resulted in a sell-off by some older investors, while a younger generation still see the benefits and are jumping on the band wagon. The average age of buy-to-let investors has actually come down, according to an analysis of the demographics of first time investors, by an average of 10 years since 2014.
Healthy tenant demand, record house prices and low interest rates are factors which are now making buy-to-let an attractive proposition to the younger investor. A generational shift could be underway as more young people realise that rental property ownership and the income you get from it can still be a relatively tax efficient way to provide income, if it’s done correctly.
But as the world famous investor explains about investing generally: it’s simple, but not necessarily easy. There’s lots to learn and it can be a steep learning curve, and that’s the case whether you use an agent or do-it-yourself.
Having the right knowledge and putting the right plan in place is important. Here, the Private and Commercial Bank, Arbuthnot Latham has provided some tips, and as they say, “some simple steps to help landlords save time, stress, and ultimately money, in the months and years ahead. The best approach is to work through a check list of considerations, things not to forget to undertake before investing.”
Minding your own business
Whether you are doing it for the first time or you are a portfolio landlord, it is important you keep on top of your record keeping.
Good record keeping not only helps you keep track of income and outgoings, but it is also important for staying on top of administrative tasks, like when insurance renewals are due. It can also be a lifesaver if you are unfortunate enough to face a tenant dispute.
Planning for periods with no rent
It is fair to say you will experience periods when your property is vacant; generally this is after one tenancy has ended and you are advertising the property for new tenants. If you manage it well, you may have a new tenant lined up to move in soon after the previous tenant leaves, but you cannot assume this will happen. On average, a house will be vacant for up to 4 weeks a year.
You need to allow for this either by holding a contingency sum in your bank account or by retaining the surplus rent, after mortgage and other costs, in the account to cover you when no rent is coming in. As a minimum, it is worth holding the equivalent of three month’s rent to help you through these periods.
Thinking ahead, allowing for unforeseen costs
You need to think about the costs associated with a rental property. Not just the mortgage, but insurance, maintenance and the costs involved with keeping up-to-date with legislation; such as current energy efficiency requirements and gas safety certification.
Have your contingency fund available to cover this, and as with vacant periods, think about keeping it topped up by retaining surplus rent in your bank account.
Dealing with the tenant deposit correctly
If you do not deal with the tenant deposit correctly you open yourself up to being fined. Legislation is quite strict around this area, so it is important you are familiar with procedures and the paperwork you need to provide to your tenant.
Make sure you have thoroughly checked the property before handing it over to your new tenant. Draw up a detailed inventory (take photographs) of the property and any contents included in the rental agreement. Provide a copy to your tenant before they move in.
Carrying out regular inspections of the property
By undertaking a regular inspection, you have the opportunity to check the property to ensure it is being looked after, but this can also give you the opportunity to catch up with your tenant.
Not only does this allow them to draw any issues to your attention, so you can deal with them before they become a major problem, but also gives you the chance to check on them, find out about their work situation and any plans for the future. You may come away with a view that they are planning to stay longer term or may be struggling financially.
Allowing for buy to let tax changes
You should be aware of tax changes brought in over the last few years and how this may impact your income or ability to raise the level of mortgage you are seeking.
Taking advice from a specialist tax accountant before you commit to buying a property is crucial. Not only will this help you understand your allowances and liabilities but may also help you decide how you buy the property (in personal names or a limited company vehicle) and any potential implications on your other income.
Low Rental Yields
Rental yield is a percentage figure calculated by taking the annual rental income and dividing this by the amount you have invested in a property. It is worth doing your homework to get an idea of the level of yield you can expect to achieve on the property type and area you are looking to invest in.
For instance, two smaller properties (e.g. two or three-bed terraced houses) may provide a better yield than if you invest the same amount in one larger four + bed house. This will also drive the amount of borrowing that you can have on the property as this is assessed on the income the asset produces rather than a loan-to-value (LTV) request.
Choosing the right location
Location, location, location – it’s a fact that you need to think about the location when purchasing a property to rent. Get to know the area and its reputation. Think about your future tenant and if the property is right for renting in that area.
If you choose an area with a poor reputation or poor transport links, you may struggle to achieve the rent you are aiming for.
Another consideration: Is the property type right for the location? For instance, an HMO (House of Multiple Occupancy) in an area with little need for this type of property is less likely to provide you with a good return on your investment than if it were in close proximity to a university.
Meeting the tenants or vetting them properly
You have invested a large sum of money in your property and are about to entrust it to a stranger. If you are using an agent, do your research. Are they reputable? Yes, you want to make sure your relationship with them is good, but do they treat tenants properly as well? If the tenants are happy, they’re likely to take better care of your property. Similarly, it is good practice to make sure potential tenants are vetted properly, ideally you should meet them yourself before you commit to the tenancy.
It is worth finding out a little about them and their reasons for the move. Also, if you can begin to build a relationship with them it will help for the future.
Choosing the right insurance cover
Insurers look at a buy-to-let property differently to owner-occupied homes. You will need specialist landlord cover, as standard household insurance is unlikely to cover your rental property.
Insurance cover not only considers the building (and contents if you are letting a furnished property) but other risks such as periods when it will be vacant or if serious damage is caused by your tenant. Having the right cover in place now, could save you from substantial cost in the future.
Arbuthnot Latham & Co was established in 1833, a London-based private banking, commercial banking and wealth management arm of the Arbuthnot Banking Group PLC, with regional offices in Manchester, Bristol and Exeter and an international branch in Dubai.