Tough market conditions and increasing red tape might put off some people becoming a private landlord in 2024. But if you get the right advice, invest carefully and stay in the game for the long-term, it should still pay to own a buy-to-let in the UK. Here are 8 pointers to help you get started.
Thinking of becoming a private landlord in 2024?
1) Check the figures work for your specific needs
Before you even start looking for a rental investment, do some sums and have realistic expectations about returns. Decide if you are investing primarily for regular income or mid to long-term capital gains – usually it’s a bit of both. Get to grips with typical gross yields for the area(s) and types of property you are considering. Pure residential yields can vary widely across the UK from around three per cent to 10 per cent, but 4-6 per cent is typical in an established, low-risk market. Current economic conditions, specifically high interest rates, lack of stock and strong demand, have been fuelling investment yields. Talk to a few local agents for first-hand information.
2) Understand your mortgage costs
For buyers using finance, the strength of your net yield will be dictated largely by how expensive your monthly mortgage repayments are. Right now buy-to-let finance is comparatively expensive (compared to the past decade and a half). The consensus is that the Bank of England will reduce rates marginally in the next few years, making shorter term deals more popular. Investors are prepared to carry higher borrowing costs for a year or two, then refinance with the hope of enjoying higher returns. Don’t over-gear yourself and only borrow what you need. When comparing deals, ask for simulations and check what upfront fees the lender charges.
3) Speak to finance experts
Don’t jump into any big-ticket investment without talking to your accountant or financial advisor (if you don’t currently have either of these, it’s probably a good time to get one). They’ll consider your financial profile and that of your spouse/family as a whole, which will help them decide the best ways for structuring ownership. This ties in with tax considerations, which they will also outline. Rule changes introduced in April 2017 have reduced the tax benefits of investing in a rental property. Relief on finance costs has been restricted for most unincorporated landlords of residential property. Stamp duty and capital gains taxes have become less favourable too. For these reasons, keeping income tax (or corporation tax) as low as possible by owning through a limited company is increasingly popular. If you’re a business owner, using commercial premises owned by your private pension could make financial sense.
4) Have a plan for managing the property
Most private landlords with busy lives opt to use a letting agency to manage their rental property. A full hands-off service starts with advertising the property and checking/ referencing and placing suitable tenants for you, then includes preparing contracts (known as ASTs or Assured Shorthold Tenancies), ensuring new tenants receive all necessary paperwork, organising deposits, preparing inventories, rent collection, dealing with ongoing maintenance issues and if necessary dealing with troublesome tenants and evictions.
For full management, a typical agency will charge a monthly fee of 8-10 per cent (more in London) of the rent received. You may wish to use an agent to find you a tenant and prepare contracts only and then handle ongoing maintenance yourself. In this case, fees can range from a fixed amount, for example £250, up to 4 weeks’ worth of rent. Some landlords use an agent for rent collection only and typically will pay a small percentage fee, say 1-2 per cent, of rent received. Remember, agents’ fees cover their time only – the cost of any repairs and call-outs by tradespeople will be left for you to pick up. Your agent should get you to approve these before organising work and can pay your monthly rent net of these expenses.
5) Pre-tenancy requirements
A private landlord must check the tenant’s ‘right to rent’ status.
It is now a legal obligation for certain checks to be done before a new AST can be granted. By law, a landlord (or their agent) must check an incoming tenant’s ‘right to rent’ status, which involves ID checks that confirm the tenant is legally allowed to reside in the UK. At the same time, a landlord is legally required to provide the following to a new tenant: gas safety inspection certificate (for the boiler), EPC rating for the property, details of the deposit scheme used and an approved ‘how to rent’ guide. In addition, it is worthwhile providing the electrical certificate (EICR), which shows the property is safe electrically (it must be checked and pass every five years).
6) Deposits
The law now restricts how a tenant’s refundable deposit is held and how much it can be. Firstly, landlords of private residential properties cannot hold more than the equivalent of five weeks’ rent as a deposit. Secondly, the deposit cannot be looked after by the landlord but instead it must be held in one of the Government approved tenancy deposit schemes. There are three schemes in operation, namely the Deposit Protection Service (DPS), the Tenancy Deposit Scheme (TDS) and MyDeposits. Tenants need to be provided with details of the scheme within 30 days of paying the deposit. At the end of the rental period, both the landlord and tenant must approve the return of the full deposit or any proposed reduction.
7) HMO, way to go?
Be wary of the rules governing Houses in Multiple Occupation (HMO). Any rented property where three or more unconnected tenants (so are not related or a couple) – each being regarded as an individual ‘household’ – live together and share facilities is considered an HMO. The advantage to landlords, especially in student areas, is being able to charge each tenant rent independently (as opposed to an amount for the entire property which would be split between multiple tenants). There are government guidelines on minimum requirements for HMOs and you may need planning permission to offer a property as an HMO. An HMO for five or more tenants (separate ‘households’) typically requires a licence.
8) Renters Reform Bill
If you watch the news, you’ll know that new legislation affecting the private rented sector (PRS) and changing the rights of tenants and landlords is grinding its way through Parliament. Dubbed the Renters Reform Bill, headline changes would include the abolition of ‘no fault’ evictions (so-called section 21s) and the prohibition of discriminating against certain types of tenants. Keep your eyes open for updates in the news!
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