Reasons for becoming a landlord (non-exhaustive list): you’ve inherited a house; you’ve ended up with two properties on moving in with a partner; you need to rent your home out due to a job move; you’ve made the decision to buy-to-let as a way of investing your money.
It doesn’t matter which route has brought you here, though. Every new or aspiring landlord needs to be sure they’ve checked every angle and swotted up on all of the legal requirements. Here’s our guide to getting things right.
Property is often seen as the way to get a good return for your money, but you also need to be aware of the possible downsides.
For many investors, the capital growth of increasing property value is their long term goal. Yes, property values do tend to go up over time, but the market has its downs as well. When making plans, remember that you could end up losing money if you have to sell when the market is at a low point. If you need to borrow money to buy a property or there’s a lot of renovation to be done, there’s also the chance of your outgoings swallowing up the rental returns. You should be prepared for periods of vacancy, where the bills keep coming in but there’s no rent to offset the costs.
The returns on being a landlord are medium to long term. Making the assumption that you’ll always get the best scenario rent and it will always cover your expenses is risky.
Work out a detailed and realistic budget which includes all possible costs, including the initial set-up, all routine annual outgoings, costs incurred when tenants change, and for repairs and overheads. These can be both expensive and unpredictable - a new boiler, for example. Then there will be fees if you plan to use an agent, insurance and tax. It’s best to base income projections on 10 months for every year, which covers vacant occupation or rent defaults. You should also plan a contingency fund just in case you end up with nightmare tenants.
If you’re buying a house to let, then your budget also needs to include standard fees such as stamp duty, valuations, surveys and legal work. If you already own the property, check that your mortgage lender will allow you to rent - it might be that you’ll need a Consent to Let giving permission to rent for a limited period of time. This will involve a fee, and may lead to higher interest rates. Some leaseholds also include restrictions.
Tax obligations depend on whether you are renting a property you personally own, or if you are classed as running a business.
You are running a business if being a landlord is your main job, you rent out more than one property, and you’re buying new properties to rent out. If you fall under this definition, you’re also liable for Class 2 National Insurance.
As a landlord who personally owns the property you’re renting out, you will benefit from a property allowance - this means that a certain amount of rental income is tax-free. The amount tends to change over time, so make sure you’re up to date with the latest figures.
Above this threshold, currently £1000pa, you’ll be liable for income tax. Remember that allowable expenses can be deducted. These include agency and accountancy fees, insurance, utility bills and council tax, and repairs and maintenance. You can also deduct direct costs of letting, such as phone calls, stationery and advertising. Capital expenditure, such as improvements to the property, are not eligible. There may, however, be relief available on the purchase of domestic items such as beds and white goods.
There are different rules for holiday lettings and commercial properties. You can check them on the government website - www.gov.uk.
You have your property and you’re ready to make a start. Now there are more decisions to make.
When you’re renting, you can either be a private landlord - managing the letting yourself - or use an agency to manage things for you. There are, of course, pros and cons to either choice.
Private landlords will need to advertise the property, interview and get references from prospective tenants, manage the rent and ongoing tenancy, and be available when things go wrong. In return, you’ll keep a closer control over how the property is managed, won’t be paying out agency fees, and might be able to organise repairs etc at a better rate. You may also benefit from a better relationship with your tenants. On the other side, you’ll be involved 24/7 - if anything goes wrong, you’ll be the person that the tenants call, and you’ll also have to manage things if there’s a dispute. It can take a lot of time finding tradespeople to come in for repairs, and it’ll be your responsibility to keep up with changing legislation. If rent isn’t being paid, it’s down to you to chase the tenants and, in a worst case scenario, see through an eviction process.
Letting agents provide varying levels of service, from let-only to full management. Let-only means they will find the tenants and manage the initial paperwork but pass all responsibility back to the landlord once the tenancy starts. Rent collection, as the name suggests, will add the collection of rent to finding and establishing tenants. They’ll also chase up late payments. A fully-managed service will take care of all aspects, including inventories, maintenance and dealing with tenancy requests and renewals. Costs vary: a let-only arrangement will typically be charged as a one-off fee of around 5 - 8% of the annual rent. Full management might cost from 10 - 15% of the rent, paid in monthly instalments. Check what services are covered by each agency, and remember you can negotiate for a better price.
The benefits of using a letting agency include having someone nearby if you live at a distance, and not having to manage things yourself on a day-to-day basis. If you know you won’t have time to deal with problems or requests, then perhaps an agency would make your life simpler. If you’re concerned about profit margins, then having to pay additional fees might make all the difference to your balance sheet. This is also the case when it comes to repairs and maintenance: the agency won’t necessarily choose the cheapest option, and you’ll have no control over who they choose to carry out work. There’s also the question of the tenant/landlord relationship: getting to know your tenants can lead to easier communication.
If you do decide to use an agency, do your homework and try to get personal recommendations. Knowing that you have an agency who communicates well and promptly with both landlords and tenants will go a long way to establishing a frictionless relationship.
To a certain extent, the kind of property you have will dictate the answer to this question. If it’s in a student area, for example, you may not find it easy to market to professionals. A high end rent, on the other hand, will bring the expectation of a certain level of decoration and finish. Having a clear idea of who your market is will help with decisions in terms of how you present the property. The right furnishings can sell a property to someone on a temporary work contract who doesn’t want to accumulate their own; desks will be important for students, and plenty of storage space if there’s space for a family. Most tenants will expect an oven and fridge as a minimum in the kitchen.
In general, neutral furnishings will mean your property will appeal to the widest number of prospective tenants. You might think a bold colour scheme will make an impact but it might as easily put people off. You should also aim for a durable finish for walls and flooring: the last thing you want is a major refurb at the end of each tenancy.
At some point, you’re likely to be asked about pets. Almost half of the population owns a pet, so saying yes to a dog or a cat will open up a much wider pool of potential tenants. It can also help to ensure a longer letting term: if a tenant has found a place where they can live with their pet, they’re more likely to stay put, and work to ensure a good ongoing relationship with you as their landlord. Of course, the fact that so many landlords say no to pets is for a reason: you’ll have to balance up the possibility of a pet leaving its mark on the house, or neighbours objecting, for example, to barking dogs. You could include a pet clause in your tenancy agreement covering behaviours, and stipulating that the house must be left clean with no damage.
On paper, this seems ideal, but it’s worth thinking around all of the possible outcomes. Are you going to charge the full market rent? If not, this may have implications for how much you can deduct for expenses when paying your tax bill. Will it actually be harder to be the landlord when your tenants are friends or family? Chasing late rent payments or dealing with problems may be much harder to negotiate, and can cause friction in your personal life. It’s worth keeping things professional when it comes to tenancy agreements and paperwork as a matter of course. Accepting rent for your property will create an unwritten tenancy agreement anyway, and having everything signed will manage expectations on both sides. If your tenant is your best mate’s brother, it might also seem reasonable to skip references, but without them you won’t be able to access rent guarantee insurance. And this might be vital for continued relationships if there are any money problems in the future.
The most common tenancy agreement in the UK is the assured shorthold tenancy (AST). It’s used for private rentals which are the tenant’s main accommodation, and the landlord doesn’t live at the property. Most ASTs have an initial fixed term of 6 or 12 months, with the rent fixed for this time period. You must keep your tenant’s deposit in a government-approved deposit protection scheme. The tenant is liable to pay rent for the whole of the fixed term.
Once the fixed term is over, you can ask the tenant to sign another fixed term contract, you can allow the contract to become a rolling or periodic tenancy, or the tenant can leave. You don’t have to check with the tenant in advance to find out what their plans are, but it makes sense to get things organised in advance.
A rolling tenancy happens automatically if no new contract is signed at the end of the fixed term. It has no specific end date and the rent remains the same, unless negotiated to a different amount. The landlord and tenant can both give a month's notice to leave.
If there’s more than one person renting the property, you have three options.
Other types of tenancy agreements cover different circumstances. If the tenant has a main residence elsewhere, the rent is less than £250 a year or you still live in the property but don’t share facilities, you’d use a non-assured shorthold tenancy. If you live in the property and share facilities with your tenant, this would mean an excluded tenancy. An assured tenancy gives the tenant the right to stay unless a specific circumstance breaks the tenancy agreement.
An HMO (or House in Multiple Occupation) is when more than three unrelated people live in the same house and share facilities, eg bathroom and kitchen. You’ll sometimes see them referred to as ‘households’: if several people are in the same family, they count as one household. So, if a mother, son and two daughters share a house, they’re one household and the property is not an HMO. If four students from different families share a house, it is an HMO.
HMO regulations cover minimum room size and over-crowding, as well as safety measures such as snake and carbon monoxide alarms.
If your property is an HMO with five or more tenants, you will need an HMO licence and fall under regulatory terms for living space. Your council is obliged to undertake a Housing Health and Safety Rating System (HHSRS) risk assessment on your HMO within 5 years of receiving a licence application. You’ll be asked to address any unacceptable risks identified during the inspection.
Council requirements vary, and some might specify a licence for three or four tenants as well. It’s always best to check.
There are certain standards that every landlord must comply with. Even if you plan to use an agency, it’s best to keep track of everything yourself: at the end of the day, if things go wrong, the buck will make its way to you in the end. Here’s a handy checklist.
The paperwork’s done, all of the necessary checks are complete and the tenancy start date has been agreed. If you’re using an agency, they may well undertake handing over the property to the tenants. If not, here’s what needs to be done.
If you’ve been living in the house before renting it out, you may want to have a mail redirection in place. Utility bills and council tax should be transferred to the new tenant’s name. Take a final meter reading and pass this on to the tenant, along with the gas safety certificate.
When the tenants arrive, have a set of keys ready for them, or several sets if there are multiple tenants. You’ll need to go through the inventory with them, agree on the details and all sign it. Demonstrate how to use any equipment such as alarms or locks, and also go through the available safety equipment. You might want to leave emergency contact numbers in case anything goes wrong.
Check if the tenants have any further questions, then hand over the keys.
An assured shorthold tenancy means that the tenancy period will last for six months. After this period, if you want the tenant to leave, you’ll need to give a ‘notice to quit’ - a written notice to say that you want the property back and the date you’d like this to happen. COVID regulations mean that the notice period in 2021 has to be six months. This may well change, so check on the government website for up-to-date details.
If the tenant has broken the tenancy agreement, for example by failing to pay rent, or using the property for illegal purposes, you can serve a Section 8 notice, in which case the notice period can be shorter. If the tenants refuse to leave, you would then move on to an eviction.
Hopefully this will never happen, and the end process of the tenancy will be straightforward. You should make an appointment to come to the property to go through the inventory together, and check for any damage. If possible, agree on how much of the deposit will be returned. A reasonable amount of the deposit can be retained for missing rent, damage to the property, or missing contents. The deposit can’t be used to cover fair wear and tear. It also can’t be kept for standard cleaning costs if you can prove that the property has not been maintained to the standard it was at when the tenancy began.
It may be worth checking that all bills are up-to-date, though you are not responsible for unpaid bills in the tenant’s name.
Once any deductions have been agreed, the tenant will hand back the keys and vacate the property. You will then contact the administrators of the deposit protection scheme you’ve used so that the money can be released. If there is a dispute about the deposit, this needs to be referred to the scheme’s administrators for arbitration.