A Complete Guide To Letting Your Property
Preparing to let a property takes considerable planning and effort, and there are a great number of issues to consider before you rush into making any decisions.
The most important decision you’ll probably need to make is choosing the right property to buy – if you are unable to find a tenant because it doesn’t meet their needs, then your investment will lose you money.
You’ll also need to think about the risks involved in becoming a landlord – and the tax implications.
- Property Letting Issues
- The Risks of Letting Property
- Buying to Let
- Buy To Let Mortgages
- Finding the Right Property
- Renting Out a Room
- Finding Tenants
- Tax Implications of Letting
Property Letting Issues
Before you sign up with an agent, or start looking for a tenant, there are a number of important factors you will have to bear in mind.
1. Consent of Mortgage Lender
Consent to let will be required as a term of your mortgage. The lender will be concerned that the existence of a tenant could reduce the value of the house should they need to sell it to recover their loan.
It is possible that the lender may charge a higher rate of interest as a condition of giving their consent. In any event, there is likely to be a fee to cover the lender’s administration costs in deciding whether or not to give consent.
2. Consent of Insurer
Whether you are letting the house furnished or unfurnished, you will need to contact your house insurance (and your contents insurer if letting furnished) to discuss your plans to let with them.
It is likely that the insurer would see this as an increased risk and would wish to vary the terms of the policy, often by increasing the amount of the excess and/or charging a higher premium.
Failure to get the insurer’s consent could result in them refusing to meet any claim you make on the policy.
3. Length of Tenancy
You need to decide for how long you want to let the property.
Is the let intended to be a semi-permanent arrangement (a buy to let arrangement probably will be), or is there a change you will want the house back in a few months time, either to live in yourself or to sell with vacant possession?
If you let the house on a five-year tenancy, you will not be able to get possession back until the end of that time, unless the tenant agrees, and why should they unless you make it worth their while?
Many lets are for six or twelve months, which gives you as the landlord some degree of flexibility should circumstances change. However, it may well be that you will attract a better tenant if you offer a longer let.
4. Planning Permission
Planning permission is not normally required to let property, but if you are going to let the house to more than one family group, or divide it into flats, then permission may well be required.
You should contact the planning department at your district board unitary council to discuss your plans with them.
Every landlord wants a tenant who will look after the property well, pay the rent on time every month, and at the end of the letting will voluntarily vacate the premises without the need for a court order. Insist on references being provided – and be sure, if you use an agent, that they obtain references on your behalf.
Ideally, you should obtain employers reference, to show that the prospective tenant is in employment and therefore has the means to pay the rent (this will not, of course, guaranteed that they will actually pay it).
Many people also recommend getting a reference from a previous landlord to say the your prospective tenant was a good tenant. However, landlords are generally not amenable to giving such references, and insisting on one would rule out someone who has never rent a property before. The personal reference as to the person’s character is a good alternative.
Be vigilant, however, with all references – it is not unknown for people to write their own or ask relatives to do it for them. Check the names and addresses of all those giving the references, whether employers or individuals.
You can search the BT web site for phone numbers and addresses (except for individuals who are ex-directory). Bear in mind that even impeccable references are no guarantee the you will have a trouble free time as a landlord – there is always an element of luck involved.
If there’s a doubt over the prospective tenant’s ability to pay the rent regularly, it is not unusual for a landlord to insist on the tenant providing a guarantor.
A guarantor signs an agreement to the effect that if the tenant does not honour the terms of the agreement (for example, by not paying the rent regularly), then the guarantor is liable. Such an arrangement is often used in the case of a student renting property – a parent will be required to guarantee the obligations under the lease.
Again, such a guarantee is only as good as the financial standing of the person given it, so references should be obtained for the guarantor, too.
The Risks of Letting Property
Letting property can be risky. You only need one bad tenant who stays for six months without paying any rent and then disappears, leaving the house in need of hundreds of pounds worth of redecoration to bring it back into a decent condition, and your profits for that year – and probably the next – could be gone.
No matter what happens with your tenant, you will still have to go on playing the mortgage and the other outgoings on the property.
If you cannot keep up the mortgage payments, then your lender will have the right to take possession of the property and sell it in order to recover their loan and interest.
Reducing the Risks
You should take out property insurance, which would cover damage, but the rent is not insurable. If you employ an agent and they fail to check references properly, you could claim negligence.
You can also get legal costs insurance to cover your costs if you have to sue a tenant.
Buying to Let
In recent years buy-to-let mortgages have revolutionised the letting market, making it easier to buy and let out property than ever before. The logic behind buy-to-let is simple. Over the years, the value of property has gone up by more than the rate of inflation.
If you can buy property and then let it at a rent that is more than the cost of repaying the loan financing the purchase, then you have the perfect investment – an income-producing asset that will also increase in value.
Most people make a gross profit of between 5 – 10% (the rental yield) and property value has risen by up to 25% or more a year in many areas.
It’s an excellent investment and is seemingly risk-free – unless there’s a property crash.
Points to Consider
However, there are a number of issues you’ll need to think about carefully before you buy:
- Ask letting agents which types of property, and in which areas, are easiest to let.
- Buy a property that will be easy to let – size, location, and the rent you will need to charge to make a decent return on your investment will be paramount.
- Don’t get carried away by dreams of wealth. In many parts of the country, there is already a surplus of accommodation to let, and there’s no guarantee that you will get a tenant or have a steady succession of tenants. In some areas, rental yields are less than 1% in many areas and some landlords may actually lose money.
- Like any other business, a letting business has to be run. Be prepared for things to go wrong – burst pipes, for instance, and other problems that need fixing quickly. You’ll have to organise these, and you will be liable to compensate the tenant if you are not able to act quickly enough. Alternatively, you can delegate responsibility to an agent, as part of a full management service.
- Do your sums carefully before buying and don’t believe what letting agents tell you regarding rental income, as they may exaggerate the return you can expect, in order to encourage you.
With property values stagnating or even falling in some areas, investors are being advised that they could be better off keeping their money in a savings account over the next few years, so think carefully before you buy.
Buy To Let Mortgages
Unless you can buy a property outright, you will need to raise the cash by taking out a mortgage with one of the increasing number of lenders who offer buy-to-let loans.
These are just like a mortgage you take out to buy your own home, except that:
- You will usually need to put down a deposit of between 20% and 25% of the value of the property.
- You may have to pay slightly higher interest rates then you would if the loan was for a home to live in, although at the present time increased competition in the buy-to-let loan sector is bringing interest rates down.
- The mortgage payments, together with other expenses involved in letting the property, can be deducted from the rental income, which reduces the amount of the income on which you have to pay tax.
- The size of mortgage a lender will allow you is based not on your personal earnings but on the expected rental income for the year.
You can use an interactive calculator, found on many web sites, to work out how much money you may make both in terms of rental income and the likely profit from the eventual sale of the property.
Finding the Right Property
The type of property you have, its location, its condition, will very much determine the rent levels that you can charge and the clients that you will attract.
It’s important to buy the right property in the right area to maximise both rental income and capital growth. The type of rent that you might expect to achieve will be around 5-10% of the value of the property, although your eventual profit will be determined your mortgage payments and other outgoings.
If income rather than capital growth is your major concern, you may be better off buying in an unfashionable area where prices are low and yields are high, but capital growth is relatively low.
Identifying Your Market
There are clearly a number of different markets when it comes to people who rent. There are those who are younger and less well-off, possibly needing to share, but more likely to need more intensive management than older, more professional people who can afford a higher rent but want more for their money.
Before buying a property to let, it’s important to identify your ideal tenant and to ensure that there’s a demand for rental properties in the area where you plan to buy.
High yields can be gained by letting to students sharing a property, but this must be balanced against the fact that they will almost certainly not take care of the property, and may leave it in a terrible state.
Consequently, most landlords prefer to let to a business or to professionals with steady jobs.
Getting the Basics Right
Make sure that you are emotionally detached and buy something that appeals to your target market, rather than to you.
Any property you choose has the right qualities, such as being in a good area and close to public transport, major roads and amenities such as shops, pubs, restaurants, parks and sports facilities. If possible, it should also have off-road parking and a peaceful, secure location.
Prospective tenants often have a huge number of properties to choose from, so make yours different, and consequently, more desirable.
Buy a property with strong selling points such as a huge lounge, a terrace, a garage or off-road parking, wonderful views, a beautiful kitchen or a luxurious bathroom with a Jacuzzi and power shower.
If you are considering letting within a city, a one-bedroom apartment will give you the best rental prospect, and will give you an average let length of around six months to a year.
Competition for high quality apartments is usually fierce, and so yours must be well equipped, well decorated and very well furnished, with all mod cons if you want to command a high rent.
Rural and Suburban
Houses are the best bet for the rural or suburban market, where they are much more likely to attract long-term tenants – the average stay of a tenant in house is approximately two and a half years.
Rooms should be well proportioned, well lit and preferably south facing. Low-maintenance gardens with paved surfaces or decking rather than lawns and flowerbeds are best.
Resale or New?
Buying resale usually provides better value – flashy new developments are often expensive and the extra cost isn’t usually reflected in the rent you can charge, although your capital growth may be higher.
Don’t buy a very expensive property, as the rent won’t cover the costs.
Renting Out a Room
If you’re thinking about letting out a room (or rooms) in your house, there are a number of points you should consider.
The first, and possibly most important, are the implications of sharing your house with a stranger. Always take up references from people who know the person who is renting the room. If possible, get a reference of the person they last lived with – this may be a parent or their last landlord.
Before a Lodger Moves In
Before the lodger moves in, take some photos of the room and draw up a full inventory of its contents. The photos may be useful if the lodger causes damage and you need to claim money for repairs.
You should also decide how often rent will be due – perhaps weekly or monthly – and how this will be recorded. Ask your new lodger for a deposit, typically one month’s rent, to be held until the lodger leaves.
You can check the market rent by looking in local newspapers.
Since April 1992, a landlord who rents out one or more rooms in their home can take advantage of the Rent a Room scheme. This means that the first £4,250 of income received from renting is usually exempt from income tax.
To be eligible, the landlord must be an owner-occupier or tenant, and must be letting furnished accommodation in their only or main home. The tax relief applies to gross income received in the tax year from the letting, regardless of how many rooms are let.
To calculate whether you will be better off joining the scheme, or simply declaring your letting income and claiming expenses on your tax return, you need to compare the following:
- the amount of your receipts (rent plus any income from laundry services, meals and so on) over £4,250
- how much income you are left with after your expenses
If you opt into the scheme you will pay tax on the first amount; if you are not in the scheme, then you will pay income tax on the second amount.
As long as you have lived in the house, or a member of your family has lived in the house, as your/their only or main home since the beginning of the letting agreement, and as long as you share accommodation with the tenant, then the tenant is likely to be an ‘excluded occupier’.
For this definition to apply, you must be sharing the use of a room, for example living room, kitchen or bathroom.
An excluded occupier does not have any statutory protection against eviction but you should still give notice at the end of the tenancy. In nearly all cases, four weeks’ notice would be considered reasonable.
The notice you give does not need to be in any particular form, and could be oral. However, it’s best to give notice in writing and keep a copy for yourself.
At the end of a tenancy, you should check the inventory with your lodger, and after you have made any deductions for damage or rent arrears you should return the rest of the deposit to your tenant. You do not have a legal right to deduct money for fair wear and tear – if you tried to do this your tenant could sue you.
If possible, get your departing lodger to sign a receipt for the money returned and deductions you have made.
Having given much thought to the purchase of a property to let, you will also need to look at the possible sources of the tenant for your property. The tenant is the key to your future income, so must be chosen very carefully.
When you chose the property, you will have formed an idea of the type of person that you are looking for; professional, student, working, on benefits or retired.
There are a number of ways to find the right tenant for your property, some examples are shown below:
The Public Sector
One source of income is the local authority or housing association. Your property will be taken off your hands under a long-term contract and you will receive a rental income paid directly for this period, with agreed increases.
The rent that you’ll get will be lower than a comparable market rent, however, in return you’ll be getting full management and a secure income.
Many letting agencies and landlords are not keen on letting to students – there is the perception that students tend to live a lifestyle guaranteed to increase the wear and tear on a property, and that they will not look after it properly.
However, if dealt with in the right way, student lets can be profitable. Rent is guaranteed by confirmation that they are a genuine student with references from parents, who act as guarantors.
Although students quite often want property for only eight or nine months, they are usually required to sign an agreement for a whole year.
There can be a lot of money made from student lets – however, the tenancy will have to be watched over more carefully than other lets, purely because of the nature of student lifestyle.
There are many advantages in using an agent:
- They will already have tenants on their books,
- They are likely to be experienced,
- They can provide you with a tenancy agreement,
- They can vet tenants properly before the tenancy is signed,
- They can provide a service after the property is let.
However, the disadvantage of course, is that they will charge you for all this – and their fees can vary enormously.
A typical management fee might be 10-15% of the rent, although there are many different levels of services. You will need to make sure that you are clear about what they will charge and how much you’ll be left with afterwards.
In addition, they may want to charge a slightly lower rent in order to attract tenants and get the property filled, so you will also need to take this into your financial calculations.
Tax Implications of Letting
Income tax is payable in the UK on rental income from a second home or an investment property, and so all rental income must be declared to the tax authorities (except for the Rent a Room scheme).
Your Tax Return
You will have to pay income tax on any profit that you make over and above your outgoings on the property, and will therefore have to inform the Inland Revenue and fill in a tax return every year.
These outgoings may include:
- Buildings, contents and other insurance
- Bills for services such as gas, electricity and water
- Service charges and ground rent for an apartment
- Management and letting expenses, such as inventory and tenancy agreement fees and advertising
- Accountant’s and book-keeping fees
- Financial fees and loan interest payments
- Repairs and maintenance to the building and fixtures (but NOT improvements)
- Renewal costs for appliances and furnishings
- Cleaning and gardening
- Council tax
- Legal fees
- Security, such as a monitored alarm system
- Miscellaneous expenses such as telephone calls, stationery, and travel expenses to and from the property when collecting rent or carrying out inspections
After personal allowances and expenses have been deducted, you may find that there’s little or no tax to pay on rental income.
Capital Gains Tax
When you come to sell a property you have let out, you will also be liable for capital gains tax on any profit that you make on the sale.
Capital gains tax doesn’t apply to your own home as long as you have resided there throughout your ownership.
HM Revenue & Customs publishes the following useful leaflets:
- IR87: Letting and your home
- IR150: Taxation of rents – A guide to property income
- IR250: Capital allowances and balancing charges in a rental business