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Landlords -
Eleven mistakes buy-to-let landlords make
Becoming a buy-to-let landlord can be a very profitable use of your capital. That’s not to suggest that it is easy to do, especially if you’re taking on the management of the property portfolio yourself.
The best approach is to work through a check list of considerations, things not to forget to undertake before investing. Having the right knowledge and putting the right plan in place can help you save time, stress, and ultimately money, in the months and years ahead.
Energy Performance Certification (EPC)
From 2025, we expect a new legislation on EPC ratings to come into effect. This will require a minimum EPC rating of C on all newly rented properties. Properties already tenanted will have until 2028 to achieve a minimum EPC of C.
If you are looking to buy a property to rent out which has an EPC of D or E, you can let the property during 2023/24 but will need to think about the cost and work required to improve the EPC to C or above by 2028. If the house is tenanted into 2025, do not assume you will have a few years in which to carry out the improvements; your tenant may decide to move on and give notice to vacate the property. You would then be left with a situation in which you cannot re-let the property until you have carried out the required improvements.
It is important for all buy-to-let landlords to be aware of this legislation and the potential impact it will have on their properties and their ability to let these out in the future. If you have not already started looking at the costs involved, now is the time to start thinking of this and how you will bring your properties up to the minimum EPC level.
Minding your own business
Whether you are doing it for the first time or you are a portfolio landlord, it is important you keep on top of your record keeping.
Good record keeping not only helps you keep track of income and outgoings, but it is also important for staying on top of administrative tasks, like when insurance renewals are due. It can also be a lifesaver if you are unfortunate enough to face a tenant dispute.
Planning for periods with no rent
It is fair to say you will experience periods when your property is vacant; generally this is after one tenancy has ended and you are advertising the property for new tenants. If you manage it well, you may have a new tenant lined up to move in soon after the previous tenant leaves, but you cannot assume this will happen. On average, a house will be vacant for up to 4 weeks a year.
You need to allow for this either by holding a contingency sum in your bank account or by retaining the surplus rent, after mortgage and other costs, in the account to cover you when no rent is coming in. As a minimum, it is worth holding the equivalent of three month’s rent to help you through these periods.
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Thinking ahead, allowing for unforeseen costs
You need to think about the costs associated with a rental property. Not just the mortgage, but insurance, maintenance and the costs involved with keeping up-to-date with legislation; such as current energy efficiency requirements and gas safety certification.
Have your contingency fund available to cover this, and as with vacant periods, think about keeping it topped up by retaining surplus rent in your bank account.
Dealing with the tenant deposit correctly
If you do not deal with the tenant deposit correctly you open yourself up to being fined. Legislation is quite strict around this area, so it is important you are familiar with procedures and the paperwork you need to provide to your tenant.
Make sure you have thoroughly checked the property before handing it over to your new tenant. Draw up a detailed inventory (take photographs) of the property and any contents included in the rental agreement. Provide a copy to your tenant before they move in.
Carrying out regular inspections of the property
By undertaking a regular inspection, you have the opportunity to check the property to ensure it is being looked after, but this can also give you the opportunity to catch up with your tenant.
Not only does this allow them to draw any issues to your attention, so you can deal with them before they become a major problem, but also gives you the chance to check on them, find out about their work situation and any plans for the future. You may come away with a view that they are planning to stay longer term or may be struggling financially.
Allowing for buy to let tax changes
You should be aware of tax changes brought in over the last few years and how this may impact your income or ability to raise the level of mortgage you are seeking.
Taking advice from a specialist tax accountant before you commit to buying a property is crucial. Not only will this help you understand your allowances and liabilities but may also help you decide how you buy the property (in personal names or a limited company vehicle) and any potential implications on your other income.
Low Rental Yields
Rental yield is a percentage figure calculated by taking the annual rental income and dividing this by the amount you have invested in a property. It is worth doing your homework to get an idea of the level of yield you can expect to achieve on the property type and area you are looking to invest in.
For instance, two smaller properties (e.g. two or three-bed terraced houses) may provide a better yield than if you invest the same amount in one larger four + bed house. This will also drive the amount of borrowing that you can have on the property as this is assessed on the income the asset produces rather than a loan-to-value (LTV) request.
Choosing the right location
Location, location, location – it’s a fact that you need to think about the location when purchasing a property to rent. Get to know the area and its reputation. Think about your future tenant and if the property is right for renting in that area.
If you choose an area with a poor reputation or poor transport links, you may struggle to achieve the rent you are aiming for.
Another consideration: Is the property type right for the location? For instance, an HMO (House of Multiple Occupancy) in an area with little need for this type of property is less likely to provide you with a good return on your investment than if it were in close proximity to a university.
Meeting the tenants or vetting them properly
You have invested a large sum of money in your property and are about to entrust it to a stranger. If you are using an agent, do your research. Are they reputable? Yes, you want to make sure your relationship with them is good, but do they treat tenants properly as well? If the tenants are happy, they’re likely to take better care of your property. Similarly, it is good practice to make sure potential tenants are vetted properly, ideally you should meet them yourself before you commit to the tenancy.
It is worth finding out a little about them and their reasons for the move. Also, if you can begin to build a relationship with them it will help for the future.
Choosing the right insurance cover
Insurers look at a buy-to-let property differently to owner-occupied homes. You will need specialist landlord cover, as standard household insurance is unlikely to cover your rental property.
Insurance cover not only considers the building (and contents if you are letting a furnished property) but other risks such as periods when it will be vacant or if serious damage is caused by your tenant. Having the right cover in place now, could save you from substantial cost in the future.
At Arbuthnot Latham, we have funded a number of residential investment portfolios with debt requirements from £1 million to over £40 million and are fully versed in dealing with the issues that landlords face. Find out more about our Buy to Let service or how the Real Estate Finance team at Arbuthnot Latham can help you.
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Author -
Tracey Stronghill
Commercial Banker, Real Estate
Tracey Stronghill is a Commercial Banker in the Real Estate Finance team at Arbuthnot Latham. Tracey has over 30 years of experience in the real estate sector. Based in Exeter but also works with the wider team to support clients across the country.