What You Need To Know Before Becoming A Landlord

So, you’re thinking of becoming a landlord, but you’re not sure if it is still a good idea given the impact on your profit margins from rising mortgage rates, changes to buy-to-let taxes and the rental sector legal reform? 

At the start of June 2023, the average two-year fixed rate mortgage deal was around 5.47%, with expectations of a further rise and withdrawal or repricing of mortgage products should further increases to the Bank of England base rate occur in the remainder of 2023.  

However, the demand for rental properties has never been greater, with a pool of around 11 million tenants in the UK and rental fees reaching a record high of £2,500 per month on average in London and £1,190 per month outside of the capital in the first quarter of 2023. With demand outstripping supply (and up 57% in the last five years alone), these figures continue to rise. 

Of course, there are a number of upfront costs which you need to factor in before you can start to recoup any profit from a rental property, but if you have the necessary capital and you are planning on dipping your toes into the buy-to-let market, below are our top five tips for first time landlords.

Additional costs involved in a buy-to-let property purchase. 

Whilst you may have been through the process of buying a house before, there are additional costs that you need to factor in on top of the usual fees when you purchase a buy-to-let property. All of which will eat into your eventual profits, so you need to take them into account. 

• Higher deposit: the deposit you pay for a buy-to-let property is always a lot higher than a normal mortgage. It will generally be at least 25% of the property’s value but it can vary between 20–40% depending on the mortgage provider you choose. 

• Higher interest rates for a buy-to-let mortgage. 

• Letting costs: such as the Energy Performance Certificate (and any repairs to bring the property up the required ‘E’ rating), adhering to the Gas Safety (Installation and Use) Regulations 1998, Electrical Equipment (Safety) Regulations 1994 and Furniture and Furnishings (Fire and Safety) Regulations 1993, plus agent fees for listing the property, finding and placing tenants and on-going property maintenance.

Make sure the sums add up.

If you are buying a property with a mortgage, any rental fee you charge needs to cover your monthly repayments and then some to take into account any on-going maintenance, management fees or unexpected costs like a new boiler or leaky roof whilst still giving you a decent return on your investment. Even if you are paying an interest-only mortgage, you need to allow for a fluctuation in interest rates, as we have seen quite spectacularly in the last 12 months! 

For first time landlords, most mortgage lenders will also set a minimum income before they agree to the loan which is typically around £25,000.   

Doing your sums beforehand means you know the maximum amount you can spend on a buy-to-let property and still make a profit. A rental yield of between 5-8% is considered good (the UK average is currently 4.75%), so if you spot a property that could offer more than this it could be a very canny investment. 

Do you research on the local area. 

Before you purchase a property, you need to make sure that the area you are looking at has a good rental yield and steady supply of tenants. Anywhere near a university which could appeal to students, or a large employer like a hospital or technology park is usually a safe bet. 

You also need to consider the type of tenant you are likely to attract and make sure the property you are buying is appropriate so that it always remains occupied. Is there a highly rated school within walking distance? Then a family home will be a popular option. In the middle of a lively town centre, close to lots of offices, entertainment venues, bars and restaurants? Then a two-bedroom flat should have a regular stream of young professionals knocking at your door.

Generally, you will find that areas to the north of the UK will have a good rental yield since properties are often a lot cheaper here, however, the rental yield can differ from area to area, even within the same town, so make sure you do your homework, especially if you are buying in an area you don’t know well. 

Practically speaking, if you plan to do a lot of the maintenance work to the property yourself then a property in fairly close proximity will be helpful, although if you expand your search area you may find that your money goes further.

Don’t let your heart rule your head when it comes to deciding on a buy-to-let property. 

Unlike when you buy your own home, purchasing a buy-to-let property should be a business transaction plain and simple. Unless there is a likelihood that you may one day move into the property yourself then it doesn’t need to be a house that you would like to live in, in an upmarket (and pricey!) area that appeals to you. You aren’t looking for a dream home so don’t fall in love with a property and then overbid on your offer price to secure it. Have your figures ready and be prepared to haggle or walk away if the price isn’t right.

Using an online valuation tool is an easy way to get an accurate idea of whether a house is accurately priced for the area and you can compare the asking price to similar-sized properties locally which have sold recently. 

You should also consider the resale opportunities in case you decide to sell the property down the line, particularly if you plan to take out an interest only mortgage which will require you to repay the full amount at the end of the mortgage term.

The rental industry and the wider economy may have an impact on your investment.

Since the start of the new tax year on 6 April 2023, landlords now need to take into account the reduction to the dividend allowance and the increase in corporation tax from 19% up to 25% for profits over £50,000 if they rent out their property via a limited company. The reduction to the tax-free personal allowance and the Capital Gains Tax annual exempt amount plus the reduction of the top rate tax threshold from £150,000 to £125,140 could also have a bearing on the tax you pay and therefore your profit margin.   

When it comes to the rental industry in particular, The Renters (Reform) Bill has been in the news for some time now, and was finally introduced to parliament on 17 May 2023, with the expectation of changes to the law being passed in 2024. Alongside the provision to abolish ‘no fault’ and ‘back door’ evictions, there will also be a number of other legal obligations that landlords must adhere to.