How to become a landlord: your definitive guide
Thinking about renting out a property for the first time? Property expert Kate Faulkner runs through what you'll need to know to get started.
- Should I become a landlord?
- Things to know before becoming a landlord
- A couple of important things to know
- What to do to become a landlord
- Renting out a room in your home
- Renting out your whole property
- Finding a suitable buy-to-let property
- Buy-to-let mortgage broker
- Registration & licensing
- Using a letting agent vs DIY
- Finding tenants
- Tenancy paperwork
- Tenant deposits
- Legal responsibilities
Should I become a landlord?
This is the first question to ask yourself before deciding to let a property or buy one to rent out.
The first thing to consider is that it’s a big financial commitment. So if you’re planning to borrow to fund your purchase, are you comfortable with having a lot of mortgage debt?
There’s also the question of how much capital you have to invest and whether you’re happy tying that capital up? If you invest in bonds or shares, you can usually access it fairly easily if you have to. Property is not an asset that can be liquidated quickly and easily.
Before you do anything, don’t assume that property will deliver what you want based on what you have ‘heard’. It’s worth checking what returns you can get from a property versus investing your money elsewhere.
Things to know before becoming a landlord
Still on finance, people tend to be well aware of how much money they’ll need to invest at the outset – deposit funds, other buying costs, refurbishment costs, etc. But far too many grossly underestimate how much they’ll need to invest in maintenance and repairs over the lifetime of being a landlord. You could even have months and years where upgrades mean you may earn no income at all.
So it’s worth talking to a good independent, regulated financial advisor or wealth manager – preferably one who owns property themselves. You may find it useful also to talk with a property tax advisor or even other landlords too.
Plus, recent tax changes to investments, including property, may mean you could lose benefits you receive or end up in a higher tax bracket. Get a full picture of what’s going to be required, in terms of finance, knowledge and time, and put together a plan for your future.
Finally, is it for you? I’ve spent some days where I do nothing else but talk, visit and fix things for tenants, sort out disputes and file endless paperwork. Being a landlord, even if you use an agent, isn’t a ‘hands off’ job. In fact, it can take up your time on a weekly basis.
So from a financial and personal perspective, ask yourself, does being a buy-to-let landlord still look like the right option for you?
A couple of important things to know
Buy-to-let mortgages are different to the mortgage you take out on your own home. Firstly, the loan-to-value ratio is lower. Usually 75% is the highest you’ll get before the interest rates start to rise considerably. So you’ll need a bigger deposit than you would as a homeowner.
Secondly, the lending criteria is generally that the rental income must be between 120% and 135% of the monthly mortgage repayment amount. So, you’ve got to be able to prove that the rent will cover the mortgage payments and give a surplus on top of that.
There’s also a lot of legislation involved in renovating and letting buy-to-let property. Plus, these rules can vary wildly from one local council area to another and one country to another. Scotland, Northern Ireland, Wales and England all have different rules, and these may – and do! – change regularly.
What to do to become a landlord
Once you’ve done some detailed financial planning and looked into exactly what’s involved in being a landlord, there’s a lot you have to do in order to end up with a successfully let property.
Not only that, but there are different types of lets. For example:
- single households
- corporate and holiday lets
- multiple occupancy lets (HMOs)
You’ve got to research all the options and see what’s best for you and most suitable for the area in which you’re investing. It’s much more complicated than finding and buying your own home, so here’s our list of the key steps you need to take.
Renting out a room in your home
This is the smallest-scale landlord. You can rent out a room in your property and earn a wopping £7,500 a year, tax free from April 2016. Rooms tend to be let on a licence, rather than a tenancy, and are either fixed-term or periodic, running from one rent period to the next.
Assuming your tenant shares facilities and living space with you or a member of your family, you’ll only have to give them reasonable notice if you want them to leave. Find out more here.
Renting out your whole property
If you’ve been unable to sell your own home or have inherited a property that you decide to rent out, you fall into the category of being a ‘consumer’ landlord. This is type of landlord is also known as an ‘accidental’ landlord.
Under new EU legislation, if you want to mortgage the property, you’ll need to take out a regulated buy-to-let loan, which gives you a higher level of consumer protection. You should also speak to a letting agent to make sure you let the property legally and to the most appropriate tenant. Not all agents know all of the rules, so make sure you speak to an agent who is a member of one of the below associations.
- Association of Residential Letting Agents (ARLA)
- National Approved Letting Scheme (NALS)
- Royal Institution of Chartered Surveyors (RICS)
Finding a suitable buy-to-let property
There's plenty of research you should do if you’re looking to buy a property to let. For example, you need to:
- assess supply of available property and demand for renting in the area
- look at the returns you want/need and find out what you therefore should invest in
- become familiar with rents and house prices
- understand what kind of property is right for what kind of let
- find out from the council what planning permission and licensing might be required
The list goes on.
Buy-to-let mortgage broker
Because buy-to-let mortgages are different to homeowner mortgages, you should use a specialist broker. The right type of broker will be familiar with what products are suitable for the kind of let you’re undertaking and how the lending is assessed.
In addition to lender’s using a rental income vs monthly repayment calculation on the property, they will also assess you too. Usually you’ll need to be able to prove you earn at least £25,000 per annum. Make sure you speak to a broker at the earliest stage of your property search to make sure you’re going to be able to borrow what you need.
Registration & licensing
Although there isn’t currently any national licensing or registration requirement in England, it has come in in Scotland, Northern Ireland and soon to be enforced in Wales, in various different forms. Some cities in England have already adopted their own, such as Liverpool, Oxford and Newham, who have their own landlord licensing scheme.
There is often a charge for this type of scheme, but it varies from area to area. It’s worth doing some thorough research, via the council and your local landlords association, to find out what you might need to do before investing and what is required of you on an ongoing basis. Another option is to work with a local estate agent who works closely with the local council.
Using a letting agent vs DIY
As already mentioned, there is a huge amount of legislation involved in letting and managing property. The best way for you to keep up with it and make sure your property is always legally let is to use a letting agent. Make sure that agent is a member of ARLA, NALS or RICS, or as a minimum is a member of a landlord association such as the Residential Landlord Association.
You can also make your agent responsible for deposit protection, gas and electrical safety certification and maintenance, which would save you a lot of time. Or you could just use them to find you a tenant. Check out our Landlord’s Guide to Letting Agents and their Fees.
This can take up a lot of your time. There’s advertising, carrying out viewings, referencing, credit checking and establishing a tenant’s legal right to rent. Getting this process wrong can not only mean you end up with the wrong kind of tenant, but you could also be fined if they’re found to be in the country illegally. This is the right to rent scheme – find out more.
It’s highly advisable to use a letting agent, even if you only employ them to find you a tenant find and then manage the property yourself. If you’re in Wales, it’s worth noting that from 23rd November 2016 you’ll need to be accredited to manage your own property.
Here's a guide to attracting and keeping the best tenants.
Most tenants should be on an Assured Shorthold Tenancy agreement (AST). This covers:
- the standard rights and responsibilities for both tenant and landlord
- how long the tenancy is
- the rent payment arrangements.
Then there are section notices you need to have issued when you rent to be able to end a tenancy. These include:
- the ‘How to rent’ guide
- deposit protection information
- energy performance and gas safety certificate.
It's vital these documents are issued in the latest legal version and at the correct time. If not, you might not be able to evict a tenant if you need to and may face fines.
You must make sure your tenant’s deposit is protected within 30 days of the tenancy beginning, either in a custodial scheme or via an insurance scheme. Again, if this process isn't followed properly, you will find it hard to evict a tenant and can be fined.
Find out more about the landlord tenancy scheme.
You have many legal responsibilities, from ensuring the property is safe, to maintaining it properly, as well as a duty of care to your tenant. Once more, you should consider using an agent to help make sure you don’t fall foul of one of the 145 laws you need to comply with.
You should also be aware that you will require specialist landlord insurance rather than standard home insurance which isn’t intended for the risks that come with rental properties.
Here's a guide to the legal obligations for being a landlord.
Property tax is a specialism within itself and several laws affecting property tax have been changed and introduced over recent years. Here's a guide to the initial tax timetable for landlords. However, you should consult a property tax specialist regularly to make sure you always own and run your buy-to-let property in the most tax-efficient way.
So, there are a lot of elements to being a successful landlord. As with any business, to do it well, you need to do one of two things. Either become an expert yourself in all these areas, which is now virtually impossible due to the complex nature of legals and tax. Or make sure you use the services of people who are already experts.
Becoming a landlord is not something you should go into lightly and to get the best rewards, you'll need to invest money, time and effort. For a more comprehensive review of how to be a successful landlord, visit the Landlord Knowledge Centre.