Buy-to-let pitfalls: avoiding the hazards of life as a landlord
Property expert Kate Faulkner looks at the pitfalls first-time landlords need to avoid
Owning buy-to-let property can certainly be financially rewarding, but it’s not something that everyone can or should jump into. Buying, refurbishing, letting and managing a property well and legally require effort and expertise.
A lot of the process and many of the responsibilities can be handed over to a letting agent. However, you still need to understand what needs to be done, so you know what questions to ask to ensure you’ve got the right professional help.
Read on to find out about the potential pitfalls of buy-to-let and how you can avoid them, or click on the individual headings to read about each pitfall.
- Pitfalls of being a landlord
- Buying the wrong property
- Running out of available capital
- Falling foul of legal requirements
- Bad tenants
- Not maintaining the property properly
- Not having the right insurance
- Avoiding the buy-to-let pitfalls
- Why you need a landlord business plan
- What to include in a buy-to-let business plan
Pitfalls of being a landlord
Buying the wrong property
You have to buy something that you can be confident will let well, both now and in the future. It’s also important that the property will increase in capital value over time at or above the average for the area. If you don’t do enough research, the danger is that you could end up with something that is hard to let, doesn’t achieve the rent you want or need, and becomes a drain on you, emotionally and financially.
The best place to start looking for a buy-to-let property is with a good local letting agent. Talk to them and find out what always lets well in the area and what kind of rental property is most likely to achieve the returns you want. Carry out some research online, checking supply, demand and rents in your local area.
And don’t be taken in by investment companies and property ‘gurus’ who try to convince you that the best place to pick up an investment is at the other end of the country. By and large, you can find a good buy-to-let deal within 15-30 minutes of where you live. It can be worth then becoming an expert on your own local area, which will make it much easier to assess and keep an eye on your property investment.
Running out of available capital
It’s vital that you budget properly for your buy-to-let investment to make sure you know when bills will need paying and when money will need spending on the property. The section below on having a business plan covers this in more detail.
If you don’t make sure your cash flow is enough to cover all the needed outgoings for the property, you will run into problems. That could mean having to use savings or borrow money to cover bills, or even having to sell the property because you simply can’t afford to keep it.
It’s key to make sure you plan properly before you invest. Plus, assuming you’re intending to hold on to the property for a number of years, only buy a property that generates sufficient rental income to cover its own costs, with enough left over on top to put into a ‘slush fund’ to cover bigger maintenance jobs.
Falling foul of legal requirements
The laws governing lettings change frequently and keeping on top of new legislation, working out how it might affect you, and making sure your run your property lawfully is hard work. Falling foul of the rules could result in fines and even convictions, so it’s vital you stay on top of buy-to-let laws.
You also need to make sure you understand all your and your tenant’s legal rights and responsibilities, as outlined in general lettings law and the contract between you and your tenant. This contract is usually an Assured Shorthold Tenancy agreement (AST). If you fail to carry out your responsibilities, don’t fully understand your tenant’s rights and don’t explain their responsibilities properly when they sign, there could be potential problems down the line for you.
If you self-manage, you should join a landlord association, such as the National Landlords Association (NLA) or the Residential Landlords Association (RLA). They keep their members up to date with upcoming legal changes and offer legal advice, support and helplines.
By far the most efficient way to make sure your properties are always legally let is to use the management services of a lettings agent who is a member of the following associations:
- Association of Residential Letting Agents (ARLA)
- National Approved Letting Scheme (NALS)
- Royal Institution of Chartered Surveyors (RICS)
Member agents sign up to a Code of Practice and most of their staff have undergone training to ensure they’re properly qualified to administer a let. You can handover many of your legal responsibilities to your agent and it also means you have some recourse should anything go wrong, but make sure you have this in writing.
‘Bad’ tenant are ones who impact negatively on your investment. If you end up letting to ‘bad’ tenants they can cost you money through non-payment of rent, damaging your property, and potentially causing a problem with the neighbours and local council if they’re disruptive.
No matter how well you (or your agent) reference tenants, if you’re in buy-to-let for a number of years, it’s highly likely you will have a ‘bad’ tenant at some point. However, you can greatly reduce the chances of this happening if you follow a few simple rules. These include:
- referencing properly
- carrying out periodic checks
- making sure the property is nice to live in
- acting quickly if the tenant causes damage or stops paying rent and won’t communicate with you.
Of course, if you employ a qualified letting agent to manage your property, they will handle all this on your behalf.
Check out this guide on referencing tenants for more information and advice on avoiding nightmare tenants.
Not maintaining the property properly
You’re required by law to have a gas safety check and secure a certificate every year, ensure the electrics are in good condition and keep the property free from hazards – as laid out in the Housing Health and Safety Rating System (HHSRS). Plus, if you don’t respond to a tenant’s complaint about the condition of the property and fail to carry out any needed repairs, you will be unable to then evict them for any reason.
Even though it’s your legal responsibility, it’s also in your own best interests to keep the property in good condition. Carrying out regular maintenance and timely repairs will ensure the property’s capital value stays at a good level and show your tenants you care about the condition of their home.
So put together a maintenance plan as part of your overall business plan. It will need to include a schedule of periodical inspections, gardening, redecoration and servicing of the boiler, etc. That way you’ll know what you need to do and when, and can make sure you have money put aside to cover the work.
Not having the right insurance
Buy-to-let requires specialist landlord insurance that covers you and your property against the common risks that apply to most property as well as those that come with letting to tenants.
Landlord insurance can make sure you’re not only out of pocket for repairs and also cover lost income from rent arrears and heavy legal bills if you’re prosecuted for accidents that occur in your property due to your negligence. If you have several properties, putting them all on one policy if you can will help make administration simpler and can reduce the cost per property.
And do remember to check your obligations, which can include such things as keeping guttering clear and protecting pipe work, to make sure you don’t do anything that could invalidate your policy. It’s best to always ask your provider to explain any exclusion clearly.
Find out more about landlord insurance.
Avoiding the buy-to-let blues
Buy-to-let is ultimately about making money. So, whether you’re focusing on income or lump sum returns, it’s important you keep a close eye on the following to make sure you maximise your profits.
Yields and return on investment
Gross yield tells you how profitable a property is, based on its rental income versus its purchase price. This is useful when you’re looking at different properties in an area and deciding which to buy, or whether it might be better to sell an existing buy-to-let and reinvest in a different one.
Net yield is a more valuable calculation, as it looks at rental income minus costs. For example, an apartment might appear to be a more profitable investment than a two-bedroom home on gross yield, but when you take off the service charge, ground rent and other leasehold costs, the freehold home might give a better net return.
Find out more on how to calculate rental yield.
Annual return on investment (ROI) is the best measure of how your money is performing in your buy-to-let investment. It looks at the total amount of capital you’ve invested versus the annual profit. With property it’s important to add any uplift in the capital value to the total rental income, then when you deduct your costs, make sure you factor in any capital gains tax. This ROI figure allows you to compare buy-to-let with all types of investment, not just property, and helps you make sure your money is always working in the best way for you.
Voids are probably the biggest income killer for landlords, next to tenants falling into arrears. Having a property sitting empty between tenancies means not only are you losing income, but your property can quickly start to look unattractive if it becomes cold and dusty. That can result in you getting lower offers from prospective tenants and the property taking even longer to let.
You need to do all you can to minimise the length of time between one tenant leaving and the next moving in. This can mean taking slightly less monthly rent. If your property usually lets for £650 a month and someone offers £625, it’s probably better to take that than wait and risk a longer void. Accepting £25 less for 6 months is a ‘loss’ of only £150 over the period, versus losing £150 every week that your property’s empty.
Your mortgage payment is likely to be your biggest monthly outgoing and even a 0.25% reduction in the interest rate can make a significant difference.
For example, if you have an 80% interest-only mortgage on a £250,000 property, at 5% that’s a monthly payment of £833.33. At 4.75% it’s £791.66 – a reduction of £41.67 a month and an annual saving of £500. At 4.5%, the repayment is £750 a month – a reduction of £83.33 a month and nearly £1000 a year.
There are new products coming onto the market all the time, so get in touch with your broker every six months and check that you’re still on the best rate for your circumstances.
Tax is an area where you really need to take the best advice so you can minimise your liability. This is especially true with the recent and planned changes in legislation seeming to target landlords, which include new higher stamp duty charge for buy-to-let properties, 8% extra tax to pay on property capital gains versus other types of businesses, and the planned reduction of mortgage interest relief.
Why you need a landlord business plan
Ultimately, your ‘success’ as a landlord depends on whether you achieve your financial goals, so it’s absolutely essential you have a business plan in place. Unless you know exactly what returns you need, when and how you need to realise them and how to track the performance of your buy-to-let investment, you can’t fully measure your success.
Buy-to-let is a business, like any other, and you’ve got to have a good grip on your income and expenditure and budget for both the immediate and long-term future. That will enable you to compare your figures over time against your own goals and what the rest of the market is achieving. Then you’ll be able to see whether your properties are performing as they should be and whether you need to make any changes.
What to include in a buy-to-let business plan
A common way to tackle a buy-to-let business plan is to start with a budget and put in annual figures, i.e. what’s coming in and going out each year. Then add columns for years 3, 5, 10, 15 and 20 to give you projections for the life of your investment.
Key things to include:
- Details of all capital invested.
- Renovation/refurbishment costs.
- Rental income.
- Expenditure – including utilities, maintenance, administration, health & safety and other legal compliance costs, insurance, etc.
- Allowance for voids.
- Contingency (10-15%).
- Projected expenditure – including periodical larger works, e.g. new boiler, new kitchen, roof repairs.
- Rent rises.
- Scenarios for interest rate rises.
- Planned re-mortgage and capital withdrawal points.
- Maintenance schedule of works.
Buy-to-let is not an easy business. You need to understand a lot of different elements of the industry and employ good legal, financial and lettings professionals to help you along the way. If you do this and make sure you have a plan and that you constantly review your costs and the returns you make as well as checking big costs such as mortgage interest rates, then you have the best chance of avoiding the pitfalls landlords can face.
Check out this infographic on how to be a successful landlord.