Buy to let - Back to basics part 1
May 12, 2021
Over the last few weeks we have noticed a large number of people getting in touch who are new to property investment and thought it would be a perfect occasion to dust off some of our previous blogs.
Bringing it back to the basics, the following should be considered:
- Is being a landlord right for me?
- Setting property goals
- Financing a buy-to-let property
- Costs of acquiring and running a buy-to-let property
Let us walk through each of the above points step-by-step.
Is being a landlord right for me?
For anyone considering investing in property it is important to understand what you will be getting into. It is not simply a case of letting a property out and watching the rent roll in! Being a landlord comes with significant responsibilities and legal obligations.
Over 160 regulations
The first point to understand is that landlords must adhere to over 160 Government statutes and regulations in order to provide safe and compliant homes for their tenants. The penalties for non-compliance are harsh and can carry maximum fines of £30,000. It is important to understand that, even if you employ a lettings agent on a fully managed basis, you cannot be divested of your legal responsibilities and the buck will always stop with you. So, if you are going to become a landlord, you will need to treat it as a business and educate yourself as to your legal obligations and feel comfortable with the responsibilities you are taking on.
Businesses come with risk
Secondly, like any business, renting out a property comes with associated risks and it is vital to understand what these are and if you feel comfortable with shouldering them. If you are buying a property using mortgage finance, the biggest risk you are taking on is that of the tenant not paying the rent or having a void property (when a property is empty). Do you feel comfortable with debt, and could you manage if the tenant stopped paying the rent? If the answer to these questions is “no”, then maybe being a landlord is not right for you.
The second area of risk is whether the tenant will look after your investment. A naive and uninformed landlord will be an easy target for a delinquent tenant to take advantage of, which once again highlights the importance of education. Landlords must feel comfortable with risk and they also need to be good problem solvers. If worrying about rental payments or whether the tenant was looking after your property would keep you awake at night, then perhaps you ought to re-think being a landlord.
It's a people business
Next, being a landlord is a “people” business, as you are supplying a service to your tenants, or as we prefer to call them “clients”. People do not always behave in the manner you might hope and even the most-robustly referenced tenant can sometimes develop problems or experience issues such as personal crisis, mental health problems, or lose their job and a good tenant can suddenly become a problem tenant. If you are not a fan of dealing with people and their issues, then being a landlord may not be for you.
There are costs involved
As well as acquiring a property, there are significant costs involved in managing and maintaining it. Landlords are obliged to undertake repairs and maintenance in a timely manner. If a boiler needs replacing, that could cost between £1,500 and £3,000, so landlords need to have a “rainy” day fund to pay for the maintenance and upkeep. If it would stretch you financially to do this, then you may need to consider if being a landlord is the right option for you.
Market conditions play a factor
Another aspect to consider is if you are willing to take a long-term view. In the current market conditions, property investors should be thinking in terms of holding their investment for 15 or 20 years. If you are the type of person that seeks instant gratification or who does not have the patience to take a long-term view, then you should consider looking at other investment options.
It is worth mentioning here that property is an illiquid investment, so if you might need access to your money quickly, property may not be the best place to park it.
Being adaptable to change
Another quality of landlords is the need to be adaptable to change. In the last few years there has been increasingly onerous taxation and legislation of landlords and many have had to adjust their business model to survive.