Becoming a landlord is a great opportunity to create a reliable source of income. With the uncertainty of buying and selling properties due to rock-bottom interest rates and economic instability, letting a property gives you peace of mind when it comes to your regular property income. Current statistics from HMRC and compiled by Homelet show that, in 2013-2014 the number of landlords increased by 7% to reach 1.75 million. During that time, landlords banked a total of £14.2 billion which was up from £13.1 billion in the previous year.
The lucrative path to becoming a landlord is a rewarding one but it isn’t without its pitfalls. At 3 Wise Bears, we are specialist landlord accountants who have the knowledge to pass on to you. Here are five important steps to becoming a landlord.
1. Check Your Entitlement to Let a Property
You may have found the right property to let and you are already thinking about finding the perfect tenant(s), but you must make sure you are ready to do so.
After finding the right property, it is easy to start looking for the perfect tenant(s) to move in. However, you can’t make such big plans just yet. The first thing you must do is ensure that you are legally entitled to rent out your property. Without this entitlement, your project will not get off the ground. Owning a property is not enough as your mortgage and insurance need to be compatible to house tenants. If you did not purchase your property with a buy-to-let mortgage then it is essential that you look into this before searching for your tenants.
There is a possibility that other parties need to be informed of your intentions to let a property. Some councils now run compulsory landlord licensing schemes but not all, so you have to check if this is a requirement in the area. If your property is part of the Shared Ownership Scheme – a government scheme aimed at helping first-time buyers – you will also need to inform the housing association and other parties involved in the property.
2. Make Sure Your Property Meets All Legal Requirements
There are a number of legal requirements and responsibilities that are expected of a property which a landlord must acquire. A property needs to be well maintained and certain standards need to be met. Here is a list of those standards:
- Electric Safety – All fixed wiring (this includes sockets and light fittings) and any portable appliances supplied in the property must be completely safe to use. These need to be tested every five years.
- Energy Performance Certificate (EPC) – An Accredited assessor must carry this out before the property is let. This certificate will include information regarding the energy use within a property and the typical energy costs alongside recommendations on how to reduce energy consumption. This needs to achieve a rating of an E or above for a landlord to rent the property.
- Gas Safety Certificate – A registered Gas Safety engineer is needed to perform an annual safety certificate. This makes sure that all gas equipment is safely installed and maintained. Tenants must also be given a copy of this document.
- Health and Safety – Each floor must be fitted with a smoke alarm. It is advisory to fit a carbon monoxide alarm also and is expected in rooms containing a fireplace. The risk of Legionella and Legionnaires’ disease must also be assessed.
- House in Multiple Occupation (HMOs) – Providing fire alarms and extinguishers is a must.
3. Completely Understand all the Risks and Responsibilities of Being a Landlord
This is where your biggest pitfalls could arise. There are a number of risks involved in being a landlord that you have to consider.
Hidden Costs and Fees
The legal certificates required cost money and there are other hidden costs you must consider. All rental properties will lead to expected income tax payments. Then there are the unexpected costs for repairs that are needed on the property. Laws and taxes are subject to change so a landlord must also comply with these.
The rental market has boomed in recent years, as the price of buying a property has become further out of reach for many. However, there is a chance there will be a period of time that your rental property will be empty. This means no rent is coming in. If you have a mortgage to pay on your property then this can be damaging. Keeping your rent at a reasonable price will keep a healthy flow of tenants in your property.
Issues with Tenants
According to government statistics, over 100,000 evictions happen every year in the UK. This is where you need to consider what to do if something does go wrong. The 1998 Housing Acts ensures that you cannot evict a tenant within the first six months of an agreement and after this time a correct notice must be given. Legal costs are involved in the eviction process.
Tenants could damage the property and the cost will be covered by the deposit. However, you must obtain the correct landlords insurance to support you with this. With all these risks involved, it is recommended that you conduct thorough referencing on prospective tenants, just as an employer would do on a potential employee.
Protect the Deposit
It has been law since April 2007 that landlords must protect the deposit given by a tenant. This needs to be placed within a government-backed deposit protection scheme within 30 days of the payment being made. A landlord faces legal action, heavy fines or difficulty evicting tenants if they fail to do so.
Right to Rent
Every tenant must provide a landlord with documentation that proves they have the right to rent a property within the UK. A landlord must check these documents in person or face a fine of up to £3,000 if tenants are found to be renting illegally or cannot prove the check has been made.
4. Decide The Type of Landlord That You Want to Be
Your property is ready to to be let but you need to inform those looking for a place to rent. There are a few options when it comes to advertising your property and managing it once the tenants are settled in. With three potential paths for doing both, you must decide what type of landlord you want to be.
Use a Letting Agent to Manage and Advertise your Property
The first option is a huge timesaver. However, this will cost you. Letting agents fees are typically charged as a percentage (10%) of the rental amount. This is a huge cut of your monthly income and there is no guarantee that the letting agent will spend much time on the property itself, for the fees they are paid.
Use an Agent to Advertise Only
In this option, an agent will advertise your property, conduct viewings and take care of the contract, deposit and tenancy agreement. They will also negotiate the rent on your behalf, sort out the handing over of keys and collect the first month’s rent. The downside of this option is that advertising with an agent will cost you hundreds or even thousands of pounds. Tenants would have to pay admin fees to the agency which may not please your new tenant.
Advertise the Property Yourself
The final option requires a lot of work but will save you a lot of money and allows a landlord to keep total control of every aspect of the property. As an example, you would be conducting viewings yourself which allows you to vet your prospective tenants face-to-face. You can decide there and then if they are right for your property. Tenants like to meet their landlord personally, so this option will inevitably lead to more enquiries.
5. Find your Landlord Accountant Specialists
The final step to becoming a landlord is finding your expert landlord accounting specialists to support you through your busy life in the role. Taking out an accounting package with 3 Wise Bears will allow you to use leading online accounting software that streamlines the entire letting processes. Using Xero Accounting, you will be able to check all of your rents, record any expenses and view 24/7 real time financial information. This information will provide you with a head start on gaining a loan or mortgage to buy your next property. 3 Wise Bears will also assign to you your own dedicated landlord accountant who will helpfully explain what expenses you claim, tax on all rental income and support in preparing your accounts and tax returns.
For more information on landlord accountants and our landlord accounting packages, please contact us today.