Becoming a landlord is one of the best ways to make the most of your property and earn a substantial income. You could rent out your own home or purchase an investment property. It could be your full-time career or simply a passive income on the side. However you make it work, renting out property can take a lot of time, effort, and money. Read this complete guide to help you get started on your journey.
Why become a landlord?
There are so many benefits to becoming a landlord, including:
- Income: Everyone wants a steady income, and this is undeniably the primary benefit of becoming a landlord. Particularly if you have another job on the side, renting out a property to tenants can be extremely lucrative if done right. And if you charge the right amount, the rental income should more than cover the monthly payments on your buy-to-let mortgage and other maintenance costs. This income does of course rely on your tenants, so you’ll need to ensure you have picked trustworthy tenants who pay their rent on time and don’t cause you any financial setbacks.
- Independence When you work as a landlord, you are effectively your own boss and in total control of your career. Yes, you have various legal and tenant responsibilities, but the freedom of working for yourself far outweighs these. And if you outsource the day-to-day administration to a property management company, you will enjoy all the financial reward with none of the hard work.
- Security People will always need somewhere to live, and real estate is one of the safest financial investments there is. Although the market is fluid and fluctuates all the time, as long as you own a quality property in a good area, you are guaranteed always to have tenants.
Rental costs vs returns and rental income
Buying a property to let can provide a landlord with two income streams. Firstly, you have the rental income from your tenants, and secondly, the capital appreciation as the value of your investment property increases. Of course, neither income stream is guaranteed. You may struggle to find tenants to fill your property, and as a result, you’ll lose money while your property lies vacant. Nor is your property guaranteed to increase in value. The property market can fluctuate, and depending on the property and its location, it could lose value over time.
The financial rewards of being a landlord are accompanied by numerous costs, and you can only be successful if your income exceeds your outgoings. The costs of renting out property may include:
- Letting agency fees
- Landlord insurance
- Safety checks
- Property maintenance and repair
- Cleaning costs
- Legal fees
- Landlord income tax
- Stamp duty
- Property survey
- Mortgage arrangement fees
It might sound like these costs would be overwhelming, but your rental income should make up for these expenses in a short space of time. Additionally, the government will offer some relief from these expenses, as many of them are tax-deductible. This includes repairs, maintenance, insurance, replacing contents, and any necessary professional services like accounting.
Buying property with a mortgage
Buying a property to rent it to tenants is very different from buying your own home, and the mortgage you take out will reflect these differences. Although you can buy your investment property outright, most landlords will often take out a buy-to-let mortgage. Most buy-to-let mortgages work in a similar way: they are interest-only, meaning you only pay the interest on the loan as it accrues each month, ideally from your rental income. You will then pay off the full amount of the mortgage at the end of an agreed term. This type of mortgage is more expensive overall, but with lower monthly repayments. At the end of the term, you can cover the debt with the profits you’ve earned from your investment, or by selling the property.
Your specific mortgage plan will depend on several factors, including the size of your initial deposit, personal circumstances, and rental income.
Renting properties out, picking good tenants
Being a successful landlord will be much easier if you have the perfect tenants. If the occupants of your property are late with payments, damage your property, or incite complaints from their neighbours, you will struggle more than is necessary. In an ideal world, your tenants would be respectful, reliable, and self-sufficient. But how can you find the perfect tenant?
Getting a credit check is an excellent way to determine how likely they are to be able to cover their rent each month. There are multiple services you can use, which will take a look at their
credit history and tell you how responsible they are with their money and whether they have a history of racking up debts. You can also conduct a background check to determine if they have been convicted of any criminal offences.
Asking for references from previous landlords is another wise option, as they will be able to tell you if prospective tenants have a history of not paying rent or mistreating the property. If this is their first rental, you could get a similar picture of their character by asking for an employer reference.
In addition to checks and references, it’s essential that you interview your new tenants as well. Ask them some basic questions about them and what they do, and this will give you an indication of their characters. Trust your instincts. An applicant could be perfect on paper, but if they don’t feel right to you, you shouldn’t be afraid to walk away.
Health and safety
As a landlord, you have a legal, professional, and ethical obligation to ensure the health and safety of your tenants. You need to provide safe accommodation for them and ensure you have taken every precaution to minimise risk. All equipment and fixtures need to be safely installed and maintained by properly registered professionals. The contents of your property need to meet fire safety regulations, and there need to be working smoke detectors throughout the home. To minimise the fire risk you must ensure there are fire escape routes with clear signs placed to denote this. One potential health risk that is easy to forget is damp and mould, which can cause respiratory problems. You must make sure the property is well-ventilated, especially in kitchens and bathrooms, and that you check periodically for signs of mildew.
These precautions are your responsibility, and if you fail to act on them, you run the risk of your tenants taking legal action against you.
Gas and electricity
Although your tenants will pay for the gas and electricity they use, in the periods during which your property is vacant, you will have to foot the utility bills. Choose a plan that meets your needs. You have a variety of options here. You could simply ask your tenants to pay their energy bills, based on what they use each month, or you could pay it yourself and include these bills as part of their monthly rent. The former option is much simpler for everyone, as your tenants can simply set up a direct debit. If you choose to include energy in the rent, you need to be careful not to overcharge, as you are legally only allowed to bill them for the energy they have used.
All gas fixtures must be inspected and maintained by a registered engineer, with a safety check carried out each year. Regarding electricity, you are legally required to ensure all electrical systems are safe, with an inspection from an electrician every five years.
Rental and tenancy agreements
Once you have found your tenants and got your property in order, the final step is to draw up a tenancy agreement. This will outline the responsibilities of both parties and by signing, you have committed to upholding your obligations as a landlord. The terms of the agreement will depend on your property. You might wish to add your own clauses such as a rule on no pets, but everything must be in line with the tenant’s legal rights. For this reason, it’s a good idea to seek legal advice to ensure the contract you have written up is above board.
Becoming a landlord takes a lot of hard work, and there will be a lot of new knowledge to learn and skills to wrap your head around. The biggest challenge is financing a property to rent out, while ensuring you remain legally compliant at all times. It is a good idea to seek financial advice from a mortgage broker or financial advisor to help you make the right decisions. A professional will be able to give you advice on the right mortgage plan and assistance in accruing the capital necessary to cover your initial deposit.
If you are looking to enjoy the freedom and financial benefits of becoming a landlord, talk to one of our experts today. Click here to arrange a callback.