Commercial Insurance Articles
Advice for first-time landlords
23 Feb 2011
Deciding whether to dive into the challenging, yet potentially lucrative, waters of the UK buy to let scene is not a choice to be taken lightly. One bad tenant could spell the end of a fledgling landlord's journey before it's even begun.
The process of becoming a rental property investor needs to be viewed as exactly that – a process. It doesn't happen overnight and there are countless personal and financial considerations to make before taking the leap of faith.
"Becoming a landlord is not as easy as putting your money in the bank – after all, your bank manager won't ring you in the middle of the night asking you to fix the boiler," wrote Rosie Murray-West for the Daily Telegraph in December.
You therefore need to prepare yourself for a lot of hassle and hard work. Those who view property investment as a fast-track to retirement or effortless get-rich-quick scheme are tragically disillusioned.
While the buy to let market has been kind to landlords in recent times, with rocketing rents and sky-high demand for accommodation, the role of a property owner extends far beyond the handing over of keys and collection of profits.
Let's not forget, however, that the eventual returns can be worth it - particularly if you choose the right place to invest. Knight Frank recently reported that student houses were proving especially lucrative.
According to the firm's latest figures, landlords in university towns are enjoying a typical return of around 13.5 per cent. Meanwhile, the nationwide average sits at a relatively weak 4.5 per cent.
Some would consider that too measly an amount to be worth the effort and stress of buying, managing and maintaining one or more buildings. However, by its very nature as an average, it highlights the importance of doing your homework.
Making buy to let pay dividends requires a lot of research – or luck. There are clearly parts of the UK in which landlords are able to collect a significantly higher stipend for their services.
But with so many potential pitfalls along the path to becoming a successful buy to let investor, you should thoroughly consider your decision before taking the plunge. The following guidance is just your starting point.
First and foremost, you'll need to take a long, hard look in the mirror. "Not everyone is cut out to be a buy to let landlord," noted Ms Murray-West in her recent Telegraph guide to the private rented sector.
Nationwide's head of mortgages, Andy McQueen, told the writer that successfully running a buy to let property would take approximately 15 per cent of an individual's working time.
Therefore, if you already have a full-time job, you need to decide whether you're comfortable losing that much of your out-of-hours life – plus the hours inevitably spent taking phone calls from tenants, at any time of the day or night.
In the interest of protecting your investment, it also important to consider what you'd do in the event of a DIY emergency. Buy to let property is ideally suited to those handy around the house – or with plenty of friends who are.
If you're likely to require the expensive call-out of a round-the-clock plumber or sparky when things go wrong, there's a good chance you'll be frittering your returns away.
This leads into another important point – the best landlords are also good mathematicians. While Knight Frank's promise of a 13.5 per cent yield seems attractive, a much smaller return might not be worth the work involved.
When considering the potential for buy to let profits, it is usually worth comparing a property's likely returns to the amount you could have earned from bank interest, without lifting a finger.
New landlords also need to be realistic in their aspirations. Don't expect the value of your investment to rocket any time soon. Few credible analysts are predicting any major property price increases in the foreseeable future, making your return whatever's left of the rent collection after costs.
And the costs of owning a rental property are not to be overlooked. Remember that even students expect digs of an inhabitable standard – and you'll also need to account for the cost of redecoration, upgrades and safety checks.
When your building is occupied by a number of tenants who are not family, your work as a landlord is subject to additional regulations, as a House in Multiple Occupation (HMO). The further considerations you'll have to make in this instance could be costly. Similarly, enlisting the help of an agent will eat into your profits.
Tax issues are also important when weighing up your buy to let venture. Landlords can benefit from a number of beneficial tax breaks. You're allowed to claim your mortgage interest against your income from rent, for example.
On the flipside, don't forget that when the time comes to pass your investment onto a new owner, you'll be hit with capital gains tax. And no matter how extensive their portfolio, a landlord is never eligible for the kind of tax relief handed to entrepreneurs when selling on their businesses.
Finally, and probably most important of all, is the need to choose the right buy to let property. It seems obvious, but when viewing residential buildings, newcomers often fall into the trap of simply plugging for somewhere they wouldn't mind living themselves.
Just as marketing executives obsess over target markets, you need to think about who you'll be renting to. And it needs to be in the right area – ideally somewhere close to a decent source of employment or study.
In terms of location and finding prospective tenants, a landlord's life couldn't be much easier than on the doorstep of a hospital or university. At the same time, it helps if your purchase is close to where you live.
Clearly, there's a lot to think about – and this guidance has only skimmed the surface of what can be a daunting prospect for newcomers to the world of buy to let investment. But any first-time landlord who follows these steps, taking their time to consider all decisions carefully, should be well on the way to success.
