Becoming a landlord can be a great way to create your own business and become your own boss.
However, with a number of recent changes to the buy-to-let market, it can also feel a bit intimidating when you are just starting out.
This simple guide to becoming a landlord will tell you everything you need to know about taking your first steps onto the buy-to-let property ladder.
How to become a landlord
If you are considering becoming a landlord and renting a house for the first time, it may all feel a bit overwhelming, but don’t panic, we are here to break it down for you and help you get your head around what you need to know about being a landlord.
If you do not yet own a property that you want to rent out, it is important that you do thorough research before deciding on a property.
When you are starting your property search, there are several questions you need to ask yourself:
- How ‘hands on’ do you want to be? This will have an impact on your geographical search area. If you are planning to do much of the property management yourself, you will need to factor in the time it will take to travel to and from the property.
- What is your budget? This will play a significant role in decided not only the size of the property, but also the location.
- What sort of tenant are you hoping to attract? The kind of property that will attract a family is likely to be very different to the kind of property that will attract young professionals.
- What sort of properties are in demand in the area in which you are planning to invest? Part of building a viable and profitable business is ensuring your property has as few vacant periods as possible, and to do that you need to ensure that there is strong demand for your property.
Renting out a property
The costs involved in renting out a property can be off-putting for some would-be landlords, but what exactly do you have to pay out for?
If you’re planning to start renting out your house, perhaps in order to move up the property ladder yourself or because you are moving away, you must let your mortgage lender know so that they can change your mortgage to a ‘buy to let’ mortgage.
This is likely to have a financial implication, as the interest rates on buy to let mortgages are generally higher than simple owner-occupier mortgages.
If you are planning to manage the property yourself, you will also need to factor in the cost of getting a tenancy contract drawn up for your tenants to sign before they move in, and you must ensure that any deposit your tenants pay is placed in a protective Tenancy Deposit Scheme.
Becoming A Landlord…Landlord requirements
Your basic legal responsibilities as a landlord are:
- Drawing up a contract
- Protecting your tenant’s deposit
- Telling the tenant(s) what action they can take if there is a dispute about the deposit
- Regularly having any gas and electrical appliances in the property safety checked by a professional gas or electric engineer, and gaining a certificate to evidence that this has been done
- If the property is furnished, you must ensure any furniture within the property complies with fire safety standards
- An Energy Performance Certificate (EPC) should be given to the tenant before they move into the property with information on how energy efficient the property is
- You must register your ‘business’ with Her Majesty’s Revenue and Customs (HMRC) and give them details of the income you make from renting out the property. The easiest way to do this is to search for ‘landlord registration England HMRC’ on a search engine; this should bring up all the information you need for a quick and easy registration process
- In order to make the paperwork aspect of becoming a landlord as simple as possible, make sure you keep thorough records of all income and expenditure, including property maintenance, any agency or management fees, and any other bills and costs associated with renting out your property.
Do I need to pay tax on rental income?
The short answer to that is ‘Yes, you do’.
There have been several changes to buy to let tax in recent years. In April 2017, the amount of tax relief you are able to claim on rental income was changed, which had a big impact on the profitability of buy-to-let property for many landlords.
Previously, if you were a higher rate tax payer, you were able to claim a higher rate of tax relief. However, since 2017, tax relief has become a flat rate 20%. This means those who pay 40% tax, but are only able to claim tax relief at 20% make significantly less profit than those who pay the basic tax rate (20 %) and are able to claim 20% tax relief.
If you are renting out a property that you personally own, the first £1,000 you earn from the property rental is tax-free. This is referred to as your ‘property allowance’. If you earn between £1,000 and £2,500 from your property, you will need to contact HMRC for advice. If you earn more than £2,500 you will need to complete a Self Assessment tax return to calculate how much tax is payable.
You are only required to pay tax on your profits, once certain expenses have been deducted. These expenses include:
- Any letting agency fees
- Accountancy costs
- Buildings and contents insurance
- Maintenance and repairs to the property
- Utility bills
- Council Tax
- Property maintenance services you pay for
How much does landlord insurance cost?
The cost of landlord insurance will depend on a number of different variables, including:
- The type of property
- The location
- The type of tenants
- What level of cover you choose
How much is landlord stamp duty?
In April 2016, in an attempt to stop landlords pricing residential buyers out of the market, the amount of stamp duty land tax buy-to-let investors (and those purchasing second properties) are required to pay was increased by 3%.
You can use our landlord stamp duty calculator to work out how much stamp duty land tax would be payable on your prospective rental property purchase.
Are there any other landlord costs?
Becoming a landlord comes with many costs. If you are a professional landlord (ie. if buy-to-let properties are your main source of income), you will be required to pay National Insurance on your income. If you have another career, and rent out property as an additional income generator, you will still be required to pay tax on your profits, but will not be required to pay National Insurance, as you will already be paying it through your main career salary.
What tenant fees are payable?
Before November 2016, tenants could be charged a fee to cover the administrative costs of setting up a new tenancy. This may have included the checking of references, drafting of contracts and preparing property inventories.
The charging of tenant fees has now been banned. Whilst this is good news for renters, it has increased the financial outlay for landlords, and further squeezed potential profits.
What are the legal rights of tenants renting?
The government clearly states that a tenant’s legal rights include:
- The right to live in a property that is safe
- The right to have their deposit returned at the end of the tenancy, and to have that deposit protected in a deposit protection scheme
- The right to live in a property that is in a good state of repair
- The right to know who their landlord is
- The right to question unfairly high charges
- The right to see an Energy Performance Certificate (EPC) for the property
- The right to be protected from unfair rent charges and unfair eviction
What is a section 21 notice?
A section 21 notice is a formal document that should be used if a landlord wishes to regain possession of a property at the end of an assured shorthold tenancy (a tenancy that allows the renter to remain in the property for a fixed short-term period, usually 6 or 12 months). Landlords do not need to give any reason for the eviction if the assured shorthold tenancy has already come to an end.
If landlords wish to evict a tenant before the end of an assured shorthold tenancy, this may be possible if they can prove that certain criteria have been met. In these circumstances, the landlord would need to issue a section 8 notice, rather than a section 21 notice.
Where to go for landlord advice
Becoming a landlord for the first time? If you are looking for landlord tips and advice, there are several great websites you can visit.
- www.landlords.org.uk – The website of the Nation Landlords Association offers a wealth of advice and information on all aspects of rental property.
- www.homelet.co.uk – Specialising in tenancy referencing and lettings insurance, homelet is a great place to go for lettings product advice.
- www.landlordadvice.co.uk – Landlord Advice UK offers comprehensive legal advice for landlords on a wide range of topics, including evictions, disputes, deposits and legal documents.