There has arguably never been a better time to be a British landlord.
According to the Office for National Statistics, the number of properties in the private rented sector increased by almost two-thirds between 2007 and 2017, from 2.8 million to 4.5 million. And with younger people (aged 25-34) making up over a third of all private renters, it doesn’t seem as if this trend is likely to reverse any time soon.
Why become a landlord?
Sure, the private rental market continues to expand – but why should you care? Is it really worth becoming a landlord?
The numbers suggest it certainly is. The Index of Private Housing Rental Prices reveals that UK-wide private rental prices climbed by 1% in the 12 months to December 2018, with Wales experiencing growth of 0.8% and England seeing a 1.1% increase.
Source: Office for National Statistics – Index of Private Housing Rental Prices
Interestingly, this growth isn’t London-centric; quite the opposite, in fact. Rental prices in the English capital saw an upturn of just 0.2% over the same period.
In short, this means two things:
- Private rental prices have increased significantly over the past four years, particularly in England.
- You don’t need to own or buy property in London to take advantage of this growth. In reality, areas such as the South-East and those on commuter routes to London may be a better investment.
How much does it cost to be a landlord?
When you’re calculating how much money you could earn by renting out a property for the first time, it can be all too easy to overlook the myriad of expenses faced by landlords. Clearly, it’s vital that the rent you decide to charge provides you with a tidy income after all the following costs have been covered:
1. Agency fees
Agencies provide a range of valuable letting services to help you manage your property. This means that you don’t have to be at the beck and call of your tenants 24 hours a day, seven days a week. Agencies will typically take on a lot of the essential admin work for you too. Fees vary, but they tend to be around 10-15% of the total rent.
2. Mortgage payments
Unless you have the luxury of letting a property that you own outright, you’ll still need to pay your mortgage. Bear in mind that the 2017 change to mortgage tax relief means that from 2020-21, landlords will only be able to reclaim the basic rate of income tax on residential property financing costs.
3. Renovation and furnishing
Unless your property is already in great condition, you’ll almost certainly have to consider costs for refurbishments and new furniture. The amount you have to spend will naturally depend on the area and your ideal tenant – parents with young children will have very different demands to a couple renting their first property.
As a homeowner, you’ll already be well aware that things occasionally go wrong with properties. Indeed, four-fifths of landlords claim to spend between £200 and £1,000 per year on property maintenance, according to an interesting – if somewhat dated – report from Endsleigh Insurance and TrustMark. You’ll need to have some money tucked away for repairs when they’re inevitably required.
Landlord insurance isn’t compulsory, but, like any insurance, it can be extremely useful. It’s helpful to think of it as super-sized home insurance, covering all the basics as well as landlord-specific problems such as damage by tenants or non-payment of rent.
6. Energy Performance Certificate
Not a major expense, but a legally required one. The Energy Performance Certificate assesses a property’s efficiency and provides specific recommendations on how to improve it. Costs vary, but typically range from £60-120. The good news is that once you’ve got one, it lasts for ten years.
7. Landlord association fees
Similar to insurance, you don’t need to be a member of a landlord association, but there are various benefits to joining. The greatest advantage is that you’ll get certification to demonstrate your fulfilment of certain professional standards – a major trust factor for potential tenants. Annual subscriptions vary in price, but start from around £50.
8. Solicitor fees
You’ll want a legal professional to review your tenancy agreement to iron out any problematic areas and spot important omissions. That being said, if you join a landlord association, you may be able to access approved tenancy agreements as part of your membership.
Investing in property for beginners: Choosing a suitable house
When it comes to buying a property to rent out, it’s obviously important that you understand what you’re looking for. Several factors go into determining whether a house or apartment will make for an attractive and cost-effective rental property:
1. Is there sufficient rental demand in the area?
Before you choose a property to let, you need to be sure that there are enough suitable tenants in the vicinity. Rental demand fluctuates from one area to the next. Check local listings to understand how quickly certain types of property are snapped up by tenants and do your research into the towns or cities you are considering buying within. Do they have amenities that would be attractive to your potential tenants? If you’re targeting families, is the area safe, with good schools? If you’re targeting young professionals, does it have good links to vibrant destinations such as London or Oxford?
2. Is the property affordable?
Your property investment may have relatively narrow margins, in which case it’s vital that the sale price – along with any necessary renovations and improvements – are within your budget. Given that you won’t have any onward property chain, you’ll be in a strong position to negotiate a lower price, so be sure to drive a hard bargain.
3. Should you buy old or new?
Choose a new-build and you’ll probably save money on maintenance and renovations, but it’s also likely that you’ll have to spend more upfront to buy it. Additionally, if you’re only planning to be a landlord for two or three years before selling, you may not earn a sufficient return on a brand new home. These factors must be balanced up before investing in a property.
4. Who are your ideal tenants?
Perhaps the most important consideration of all. You must understand the type of tenants in the area and the sort of property they find attractive before you’re ready to buy. To extend the example we presented earlier, families with young children may insist on a property with a large back garden, whereas a couple renting their first place together are likely to be more interested in local amenities (and may even be put off by the prospect of having to maintain a garden).
Ready to take the next step to becoming a landlord? Find out about your responsibilities, tax requirements and more by downloading our free Guide to Landlords.