Tips For Renting Out A Property For The First Time
Becoming a landlord has grown to be more popular than ever over the last few years, mainly because a shortage of housing has produced high demand for rental properties, and despite a Government crackdown on landlords via tax and stamp duty changes. Being a successful buy-to-let (BTL) landlord can be very lucrative, but equally, it can be time-consuming, and if you get things wrong it can be expensive, so there is an awful lot to consider if you are a novice landlord looking at renting their first property.
Buying and managing a second property is very different to your main residential property. That is a safe haven for you and your family, while a BTL property is a business and comes with big responsibilities. This blog article will highlight the main considerations and the key factors you need to be aware of, which in most cases will apply whether you have already bought a second home and are preparing it for tenants, or are in the process of looking for and buying one with the intention of then renting it out.
What type of tenant do you want to rent to?
This is something you need to think about before you even buy a property, but of course, if you have inherited a property and are thinking about renting it out for some handy income, then you are somewhat stuck in terms of who you can rent it to, because you can’t change its location.
Generally speaking there are four main groups of tenants on the rental market; families, young professionals, students and low-income tenants. Each type of tenant brings their own pros and cons for a landlord, but it is important you understand their needs in terms of what kind of property they want and what kind of area it needs to be in.
If you are wanting to rent to families, then you ideally need a property in the suburbs, near a good school and maybe with a garden and sufficient bedrooms. Meanwhile, a student wants to be either in the city centre or near their campus, close to bars and restaurants and isn’t too bothered about nice decking in the garden or a driveway and garage. The type of property has to match the demographic you are wanting to rent to, and equally, what type of tenant do you want to deal with? Young professionals might have the money, no problem, but they can be demanding in terms of furnishings and fittings, while a low-income tenant may occasionally cause problems with late payment, but they won’t have expensive tastes in décor and won’t expect a high-spec, high quality property.
Research your location
It is important that the market you have chosen for prospective tenants can be found in the location of your property. If you get this wrong then you may face void periods where it is difficult to find tenants to fill the property. For example, if you have a converted HMO or a four-bedroom house near a university campus, then you should never struggle to find suitable student tenants.
Researching your location is imperative. This can unearth prospective planning issues which could cause a problem, or turn your market demographic away – such as new roads or big leisure developments which a family might not wish to live near to. But you also need to consider the location of the property in terms of its condition and potential. You could buy a cheap property that needs a lot of work, but is it ever going to be nice enough to appeal to your target tenant market? Will it cost too much to refurbish, and will it ever produce enough capital appreciation when you look to re-sell it?
A final consideration with location is the expected yield % on your rental income. With some research you can usually establish what a typical yield % is for a particular area, and it is usually a good indicator that an investment in this area or renting the property to a certain target tenant market, is a good idea. Some areas produce a smaller yield % than others, but you shouldn’t discount an average yield % if there is high demand, because a more modest income might be beneficial if it can be pretty much guaranteed by a never-ending supply of prospective tenants. This is often the case in traditional student areas, and is also a good idea to form part of a diverse portfolio of properties, where the level of risk can vary from high to low.
Do you want to be a hands-on or hands-off landlord?
A key to your success as a landlord is deciding at an early stage what kind of landlord you want to be. A hands-on landlord will do a lot of the refurbishing and maintenance work, will market the property and find tenants themselves, will do all the legwork with arranging contracts and will collect rent and chase non-payments or late payments. This can be a full-time job, but then if this is your new career then that’s fine, and it can be very fulfilling and rewarding, particularly if you gradually add properties to your portfolio. However, if you are a part-time landlord for the purpose of a bit of extra income and you have a separate full-time career, then the hassle and time required could be very difficult to manage.
The alternative is to employ a letting agent. They will market the property, handle all viewings, prepare and agree tenancy agreements, carry out credit checks and collect rent for you. They will basically do everything, and they are mostly very professional and efficient, so you will have no hassle to deal with. But of course this comes at a cost. A letting agent will take a good percentage of your rental income each month (typically between 8-15%), so you need to balance that reduction in income against the time and stress it saves you.
Of course this doesn’t have to be a black and white issue, and there are ways to compromise and meet some of these commitments halfway. You can also adjust your role as you gain experience or as you buy more properties to rent out, and transition from being a hands-on landlord to a hands-off one.
Know and understand your responsibilities
As we mentioned above, owning a BTL property is very different to owning your primary residential home. This is mainly because being a landlord comes with many important responsibilities, and it is imperative that you research these and understand your duties before you start this process.
Health & Safety – You have a duty to offer and maintain a property that complies with legislation regarding gas safety (appliances and pipework need to be installed and maintained as safe by CORGI-registered engineers) electrical safety (installations and appliances must be safe to use) water safety (systems need to be checked for legionella and boilers and hot water tanks need to be properly installed and maintained) and fire safety (alarm systems need to be fitted and fire doors and fire extinguishers installed).
Furniture – Any furniture you provide needs to comply with fire safety regulations and be identified as such.
Privacy – Although the tenants are living in your property, they have privacy rights and you can’t just access the property as and when you like, or store and share their data as you like. So you need to research privacy laws and GDPR and understand what you can and can’t do.
Energy Performance Certificate (EPC) – You can’t let a property without an EPC, which clearly categorises the energy rating of the property. From April 1<sup>st</sup> 2020, new and existing rental properties need an EPC with a minimum rating of E.
**Alarms **– You need to install smoke alarms and many properties also have security alarms and carbon monoxide detectors.
Deposit protection schemes – You need to safeguard a tenant’s deposit in a Government-approved deposit protection scheme. This ensures that the money is safe and available to return to the tenant when applicable under the terms of the tenancy agreement.
Right to rent – The landlord is responsible for checking the background of each prospective tenant to ensure they have a right to rent property in the UK, under existing immigration laws.
Get trusted and professional legal advice
Apart from the obvious challenges of funding a BTL property, most of the problems a landlord faces are covered in the contract that you agree with your tenants. This will normally be known as an Assured Shorthold Tenancy (AST) and you will agree and sign a new AST for each new tenant that lives in your property. It is therefore important that the AST is watertight in terms of protecting both your rights and those of your tenants, but also that it complies with the law and is fair.
Ultimately, your objective is to fill the property with contented and obliging tenants, and the best way to do this is to prepare an AST that is fair and reasonable and sets out conditions that create the right impression. You don’t want a tenant to immediately think you are screwing them over. So getting independent and professional legal advice should enable you to prepare a standard AST that complies with the law and can be tweaked to include your individual requirements.
As a minimum, an AST should include agreements on:
Payment of rent – What is due and when, and what happens if payment is late or not forthcoming at all. You should also include an agreement on when rent can be reviewed and/or increased.
Duties and obligations of both parties.
Access – Include details of when the landlord can enter the property and what prior arrangements need to be made to facilitate this.
Ending the tenancy – Include dates of the existing tenancy agreement, if and how these can be extended and what happens if one party wishes to end the tenancy early.
Rules – Include agreements on smoking, visitors, pets, decorating and modifications, noise and disturbance, cleanliness and hygiene.
When to put the property on the rental market
It can be very tempting to open your property up for tenants as soon as you have the keys, particularly if you are in a financial predicament and need some cash flow pretty quickly. But you need to remember that the best way to attract tenants is to present to them a property that suits their needs. So there is no point trying to market a property to a family if it isn’t decorated, it needs a new kitchen and the garden is a mess. Even students or low income tenants have rights regarding safety, hygiene and cleanliness, so some patience is required in order to get the property up-to-scratch and prepared for tenants.
You also need to carry out a full inventory of the property. This is a written record of all the items that are included with the tenancy and come with the property, and which draws a distinction between what is provided and what the tenant brings with them as their own property. So this might include furniture, furnishings and cooking utensils and equipment. Often you will include photos with an inventory to show how things looked at the beginning of a tenancy, which can be helpful to avoid or conclude disputes further down the line.
When you are ready to market the property you also need to choose your advertising outlet wisely. So make sure the property’s availability can be seen by the kind of people you want to attract. This will be the responsibility of the letting agent, if you are using one, but if not you need to look into suitable websites, and student accommodation organisations.
Get your personal affairs in order
The foundation of any successful business is being organised and having everything in place which satisfies compliance in terms of regulatory and financial factors. So this means you need to:
Register with HMRC ready to declare your income for tax purposes
Sort out your insurance for buildings and contents, but also look into rental guarantee insurance
Council tax – Make sure you are paying the correct amount for the property and the local authority it is in
Mortgage – A BTL mortgage is the most popular way for landlords to fund a property purchase, and of course this needs to be in place early in this process
Working capital – You need to make sure you have cash flow available to smooth this process and allow you to make the key decisions at the right time. A contingency fund to allow for possible void periods of no tenants, is also very important to have and allows you some breathing space at important times.
Things for a new landlord to consider
While a new landlord is faced with lots of commitments and responsibilities, there are aspects of the landlord/tenant relationship which are open to individual choice. These may depend on the type of property, the skills you have or what amount of hassle you want to put up with, and all should be included in the AST when it is drawn up, so that the tenant is fully aware. In most cases these factors can influence the appeal of a property, so you need to be open to allowing some of these as they may make the property more attractive to your target market. Generally speaking the decisions you need to make include the following:
Should I offer the property furnished or un-furnished? (A student would expect a furnished property, for example, while a family would prefer to bring their own belongings)
Do you want to allow tenants to have pets?
Do you want to allow smoking inside the property?
Do you want to encourage tenants who are claiming housing benefit?
Will you insist that tenants have references?
Should you carry out a credit check on all tenants?
Do you need low-income tenants to provide a guarantor?
Will you allow tenants to redecorate or refurbish a property?
What damage/repair or maintenance tasks will you allow the tenant to deal with, and what will you deal with?
What size of deposit will you require?
The benefits of being a landlord
Taking a strategic and measured approach to renting out your property should lead to you being able to build a successful business as a full or part-time landlord. Of course this involves taking heed of all these tips outlined here, and following up with research and ensuring that you understand your responsibilities. The outcome of being a successful BTL landlord can bring great benefits, which can include:
A steady and reliable income
Long term security
Flexibility in your work commitments
The option to build a property portfolio with diverse income streams.