Demand for rented homes bounces: 5 things to consider before becoming a landlord

May 14, 2020 10:19 am Published by

After a brief slump, the demand for rented homes has bounced back. After decades of rising property pieces and rental yields, it’s easy to see why people want to invest their savings in the property market. However, being a landlord comes with outgoings and responsibility too. If you’re thinking about using property to boost your income, there are some important things to consider first.

The initial impact of Covid-19 saw a 57% fall in demand for rental housing in the two weeks to 30th March. But the market is starting to bounce back, though is still lower than before the pandemic began. It’s an encouraging sign for landlords and those looking to purchase Buy to Let property. Rental yields have also been rising. Year-on-year rental income has increased by 2.4%, and whilst the pace of growth is expected to slow in 2020, it’s anticipated that it’ll remain in positive territory.

With younger generations renting for longer, either through choice or due to difficulty getting on the property ladder, there’s an opportunity for those that want to create another income stream through being a landlord. But there are some things you need to consider first.

1. Could you secure a Buy to Let mortgage?

Unless you have enough capital to purchase a property outright, you should consider whether you’re likely to be approved for a Buy to Let mortgage.

Whilst for a standard mortgage, you’d need at least a 5-10% deposit, this rises significantly for Buy to Let mortgages. Expect to need a minimum deposit of 25%, with some lenders requiring as much as 40% depending on your circumstances and plans.

In addition to this, the property you choose will have an impact on the success of your mortgage application. Lenders will look at the rental demand and expected yield when assessing your application. As a result, it’s important to understand the market in the location you’ll be investing.

2. Do you have the time to dedicate to managing a property?

Managing a property can be time-consuming, whether you’re actively looking for a new tenant or are dealing with complaints. Letting out a property can seem like a hands-off way to invest your money, but this isn’t always the case. Ask yourself if you have the time and resources, as well as inclination, to be a landlord.

Of course, the alternative for this is to work with a letting agent. They will take on the responsibility of finding and vetting tenants, as well as ongoing support, such as acting as a contact point for tenants. This, however, comes at a cost and you need to factor this into the expected rental returns.

3. What are your responsibilities as a landlord?

Landlords have many responsibilities towards their property and the safety of tenants. Gradually, over the years, these have become far more stringent. It can increase outgoings, eating into your profits, as well as taking up more time.

Among the legal responsibilities of landlords are installing smoke alarms on every floor, ensuring every gas appliance has a gas safety certificate, and checking the water supply is working properly to protect tenants from Legionella. In addition, you’ll also need to purchase an Energy Performance Certificate and must upgrade the property if it doesn’t meet minimum standards or face a fine. Make sure you fully research and understand what your responsibilities will be.

Keep in mind that legislation changes and responsibilities could increase in the future.

4. Would a rental income affect your tax liability?

Tax relief used to mean purchasing a Buy to Let property could be a tax-efficient way to invest. Up until 2016/17, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

However, from the current tax year, tax relief for finance costs will be restricted to the basic rate of Income Tax and relief will be given as a reduction in tax liability rather than a reduction to taxable rental income. This means landlords, especially those that are higher or additional rate taxpayers, are likely to find their taxable income increases. In addition to this, the mortgage interest payments that can be offset against rental income fell from 50% to 25%.

Depending on your financial situation and goals, investing in property could increase your tax liability and may not make financial sense for you.

5. What are your other options for achieving goals?

What do you want to achieve financially by investing in property? Depending on your goals, property might not be the best option for you. It’s important to explore what other options you have first, such as accessing your pension or investing in stock markets. Your financial decisions should always focus on your aspirations, investing in property is no different.

If you’re looking for ways to generate an income, please get in touch. We’ll help you understand what your options are, including purchasing a Buy to Let property if appropriate, and how to proceed.

Please note: Your home may be repossessed if you do not keep up with repayments on your mortgage.

Tax Planning advice and some forms of Buy to Let are not regulated by the Financial Conduct Authority

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This post was written by John Davies and Richard Wilcox