Becoming a landlord didn’t really start to gain traction as a profession until 1988, when the New Housing Act allowed landlords to regain possession of their properties via what was known as a section 21 notice.
However, the Private Rental Sector really expanded in the mid-1990s when the first buy-to-let mortgages came on to the market. According to the Council of Mortgage Lenders, more than 1.7 million buy-to-let loans were granted between 1999 and 2015. The continual rising of house prices in the UK have made buy-to-let a popular way to invest.
Over the course of 6 guides, we’re going to look at the ins and outs of becoming a landlord, and today we’re starting with the why.
How do landlords make money?
Income as a buy-to-let landlord can include a stable income from rental receipts, as well as an accumulation of wealth if house prices go up over time. However, this is not guaranteed, and it’s the only profession where you are expected to provide a service without the guarantee of an income, which can unfortunately happen if a tenant defaults on their rent or if you don’t purchase wisely.
This is very much a don’t do what I do, do as I say kind of situation. We (my husband Matthew and I), bought a thatched cottage next door to where we live in the early 1990s because we wanted a bigger garden.
As an investment strategy, that’s not what we’d recommend you to do!
However, we’ve since gone on to build a small portfolio of five properties which have grown in asset value over time by 55%.
Our plan was always to have the properties to boost any pension we may have, and that leads us to the first question you need to ask yourself…
What is the end game?
If you’re thinking of becoming a landlord, you really need to have a clear idea of why. Is it so you can have the income to top up your pension? If so, you need to consider when your mortgage is going to be paid off, and what sort of mortgage to take in the first place.
Property vs pension
It’s worth looking at all of the options here, because if you were to invest £75,000 in purchasing a £300,000 property you will be paying £9000 in Stamp Duty.
If you were to take that £75,000 and put it into a pension, it would gain a basic rate tax relief top up of £18,750. This is why it’s important to know your end game, and look at all options to check if its financially worth it.
Do you want to invest in property to pay for your children’s university fees? If so, you need a plan to access the capital.
If you’re considering building a portfolio to pass on as an inheritance, what’s the most efficient way of passing on the asset?
And if you don’t have an end game to inform you of the specific advice you need to get, you need to have a really good general idea of what’s possible so you can make the most of your investment. To get this information, find yourself an accountant and a financial advisor to talk through all of the implications of owning property, or you could fall foul of the new landlord trap.
It’s worth bearing in mind though, that the biggest mistake we see new landlords make, is not understanding why they’re getting into the business of being a landlord – and it really is a business.
The downsides of becoming a landlord
We’d be lying if we said becoming a landlord was all sunshine and rainbows. One of the biggest risks is government policy. Substantial changes can have a massive effect, as evidenced by what happened in 2015:
- Tax relief on mortgage finance costs was restricted to basic rate tax only
- The removal of the 10% ‘wear and tear’ allowance on properties
- A 3% stamp duty surcharge was introduced
- Introduction of an accelerated payment schedule for Capital Gains tax due
In 2019, the government banned tenant fees, which left landlords picking up the cost of preparing a tenancy agreement, checking the tenant references, Right to Rent, and any inventory check-in costs.
Mortgage interest tax relief
Mortgage income tax relief has been replaced with a 20% tax credit, meaning that landlords with a mortgage can no longer offset mortgage interest costs in full against income tax bills on rent.
Previously, a landlord with mortgage interest payments of £400 a month on a £1,000 rental property could take off that entire sum before calculating their tax bill on the difference. This meant that they got relief on the highest tax rate.
Now their rental income is added to any other income, and they get a 20% basic rate on mortgage interest costs.
More companies have been set up to hold buy-to-let investments between 2016 and 2020 than in the previous 50 years combined. This is because investing in property via a limited company is one of the ways investors can mitigate some of the tax changes.
Under the limited company model, landlords can still obtain full mortgage interest relief and therefore reduce their tax bill.
Also, those owning their investment within a limited company will pay corporation tax at 19%, which is considerably lower than the higher rate of income tax of 40%.
It’s also important to consider the number of regulatory hoops that landlords have to jump through.
There are a lot of regulations you need to adhere to as a landlord, it’s not just a case of buying a property and letting tenants do their own thing. There are actually around 170 regulations that are laws, and over 400 obligations for landlords to abide by. Here are just a few things to think about.
- Landlords need an Energy Performance Certificate with a minimum rating of E.
- Electrical safety checks are required every 5 years
- Gas safety checks are required each year
You can get around needing to know all of those things as a landlord by employing a letting agent to manage your property, and that’s another cost to factor in when figuring out if investing in property is right for your personal circumstances.
As a landlord, you’ll also have to consider rental arrears, void periods in between tenancies and general maintenance costs.
For example, if you owned three or four terraces in the north of England that each earns a rental income of £8000 per year and you end up with one roof repair that costs you £30,000, you might be in trouble. So, with that in mind, you need to be aware of the risks and have a plan in place for that sort of eventuality.
We’ve not written this to put you off, we’ve written this so you’re aware of the risks as well as the good stuff – they often get overlooked, and it can cause real problems and heartache further down the line.
WANT TO KNOW MORE?
If you’re thinking about becoming a landlord in Cambridgeshire, especially the Huntingdon and St Ives areas, please do get in touch. We’ll be happy to talk through the services we offer, and answer any of your questions.