10 Tips for Buy-to-Let Landlords
Buying property is potentially stressful under any circumstances, but investing as a buy-to-let (BTL) landlord poses particular challenges.
At Oakfield, we’ve been involved in the local market for more than 25 years, and are trusted experts in our sector.
We’ve put together these tips for current landlords and those considering making their first foray into the property market. Read on – and benefit from our extensive industry knowledge and years of experience.
1 – Calculating rental yield
In a nutshell, rental yield is the yearly sum you can reasonably expect to receive in rent. It’s also a good tool for comparing how different properties are likely to perform. Yield is expressed as a proportion of the market value of the property in question. You calculate it by taking a property’s yearly rental income and dividing it by the sum you paid for the place. To get the relevant percentage, multiply this figure by 100.
For example, take a flat worth £180,000, with the typical monthly rent for this type of home in its area at £900. Total rental income for a year would be £10,800 (assuming 100% occupation over this period). 10,800 divided by £180,000 is 0.06, giving a rental yield of 6%.
Bear in mind that maintenance and insurance costs, managing agents’ fees, mortgage interest plus ‘void’ periods (in which the house or flat is empty) all eat into rental yields.
If you’re wondering what a ‘good’ rental yield would be, a number of different factors will come into play. But, broadly speaking, average UK rental yield is 3.63%, so achieve around this mark or higher and you’ll be doing well. Again very generally, somewhere between 5 and 8% is a decent rental yield to aim for.
2 – Buy-to-let (BTL) mortgages
As the name suggests, these financial products are aimed at landlords wanting to buy a house or flat to rent out. The maximum you can borrow is linked to the income you stand to receive in rent, while rent generally needs to be up to 30% more than mortgage payments. There are some key differences compared with standard
- Fees tend to be considerably higher
- Interest rates are also typically steeper
- While minimum deposits vary, these deposits are usually 25% of the property’s
- Most of these products are interest-only, although some are also repayment
- The Financial Conduct Authority (FCA) does not regulate most BTL lending
Most big banks, along with some specialist lenders, will offer these products – a mortgage broker can also help, while comparison websites can be a good starting point, although of course you should look at more than one such site before deciding anything.
Whatever you do, research the product and the features you want before coming to a decision on a new BTL mortgage, or switching provider.
3 – Which properties are consistently in demand with tenants?
As a broad rule of thumb, anything with two or three bedrooms tends to be snapped up pretty quickly. However, if you’re letting out a three-bed property, it needs to be a house rather than a flat. Equally, if you’re letting out a twobed house rather than a flat, there are advantages including a lack of service charge and leasehold issues.
While Houses in Multiple Occupation (HMOs) can bring in a strong rental yield, the licence application process can be long and ar duous.
Recent research has found that two-bed houses offer the best rental yield, and that number of bedrooms is optimal if you want to stick to flats. But flats outperform houses for one-bed properties.
In terms of capital gains, a terraced house is likely to show the biggest longterm increase in value over time, compared with other types of property.
4 – The tax benefits of buying as a limited company rather than an individual
The key advantage of buying to let as a limited company rather than an individual is tax efficiency. That’s because higher-rate taxpayers who rent out a place as a private individual pay income tax at 45% per cent on earnings of more than £125,140, lowered from £150,000 in Chancellor Jeremy Hunt’s November 2022 Autumn Statement. So that means paying up to 45% of your rental income in tax.
Let as a limited company and you only pay 19% corporation tax (25% from April 2023 if the profits of the Limited Company exceed £250,000).
As a limited company director, you get the minor perk of £300 a year tax-free from your company. But there are also potential benefits in terms of eventual inheritance tax if you are thinking of your portfolio as a long-term investment. Additionally, as a limited company you get mortgage interest tax relief that is no longer available to higher-rate tax payers.
Finally, limited liability means that, if something goes wrong, you are not personally liable for any debts your company owes, other than in some specific circumstances.
5 – Self-managing or fully managed?
A let-only service is the most basic option offered. In this case, the agent sources tenants and lets out the property on your behalf, but doesn’t do anything else to manage it.
With a fully managed service, you can get on with anything else in your life requiring your attention while the letting agent takes care of all aspects of property management. These include:
- Tenant management
- Rent collection
- Safety compliance
- Property inspection
- Taking care of all maintenance issues
- Dealing with any disputes which arise
This takes away a lot of the stress involved in letting out somewhere. You will also have the peace of mind of knowing you are complying with all relevant legislation and laws, with experts on your side who understand all changes to these and how they could affect you. It means you get information you need in a clear and jargon-free way.
6 – How to choose the right letting agent
Making a smart decision on your letting agent can make the whole process of being and becoming a landlord so much easier.
Decide the level of service you need, from simply finding tenants and collecting rent to a fully managed offering. Then do your research, comparing fees and talking to other landlords.
The agent you choose will also need to be registered with the Property Ombudsman Service or Property Redress Scheme – and this is a legal requirement.
While you’re at it, find out whether the prospective agent is signed up to a professional body such as ARLA Propertymark, or an accreditation scheme – like the National Approved Letting Scheme (NALS).
Landlords and letting agents must place rental deposits in a government approved deposit protection scheme – ask which one the agent you’re talking to uses.
Finally, be sure that you understand exactly how the agency will operate on everything from proactive marketing to paperwork, repairs and maintenance, money transfers and notice periods. Are they across the latest legislation and how long is their average void period? How frequently do they check on properties?
Ask all the right questions – and if you don’t like any of the answers, just walk away.
7 – Making sure you are covered with the right insurance
Landlord insurance is a specialist product for those letting out homes. You’re not legally obliged to have this cover. However, a standard policy won’t typically insure landlords, so without it, you’re taking a risk. (Equally, it may well be a requirement from your mortgage provider.)
You also get peace of mind that your properties are protected, both when tenants are in place and during void periods.
- Buildings insurance typically covers the structure of a property including
any fixtures and fittings, against fire, flood, storm or accident.
- Contents insurance is important if you let furnished properties. Even
unfurnished properties, however, should have insurance for carpets,
curtains, white goods and other kitchen appliances. Meanwhile, tenants
will need to insure their own belongings.
- Rent guarantee cover protects your rental income to an agreed sum during
a specified period and includes legal e xpenses cover.
- Home emergency insurance insures against problems with anything from
plumbing to guttering and pest control. It can be especially important if
you don’t have a managing agent.
- Key care insurance covers lost, broken or stolen keys plus locksmith costs.
8 – Tenants’ deposits
The Tenant Fees Act became law in June 2019 for new tenancies before being extended to all tenancies a year later. It means landlords (or their agents) can only charge for deposits, and rent – and NOT, for example, for admin costs, for doing an inventory or sourcing references. (There are exceptions allowing landlords to charge for late rent, lost keys and changes to a tenancy agreement.)
Holding deposits, or payments to reserve a property, are capped at a week’s rent and must be returned. Tenancy or security deposits must be no more than five week’s rent if yearly rent is below £50,000, six if rent exceeds that sum annually.
However, there are deposit replacement schemes offering landlords better cover. At Oakfield, we use the FCA-regulated Zero Deposit one, which gives landlords six weeks’ cover. Tenants pay a week’s rent plus a £49 set-up charge on moving, plus £17.50 annually thereafter.
9 – Safety certificates and compliance
As a landlord, you will be responsible for the following:
- EICR: An Electrical Installation Condition Report (EICR) is a legal requirement
for all tenancies and ensures all electrical installations are safe. It lasts for up
to five years, depending on what the electrician recommends. New tenants
must receive a copy of the EICR, within 28 days of the inspection, and to
tenants within 28 days of a written request. The report and any necessary
repairs must be completed by someone suitably qualified. Non-compliance
can mean a fine o f up to £30,000.
- Gas safety: Gas safety checks must be carried out annually by a Gas Saferegistered
engineer. You’ll need to keep a record of this check for two years
and issue a copy to every current tenant within 28 days of completion and
issue a copy to any new tenants before they move in.
- Smoke and carbon monoxide alarms: Landlords must fit smoke alarms on
every floor where a room is used fully or partly as living accommodation.
- Carbon monoxide alarms must be fitted in every room used as above which
contains an appliance burning, or capable, of burning fuel. This covers gas
boilers, open fires and wood-burning stoves etc., but NOT gas cookers.
- Energy Performance Certificate (EPC): An EPC gives a property an energy
efficiency rating from A (most efficient) to G, and is valid for 10 years. From
2025, all newly rented homes will need to have a rating of at least C – currently
it is E. Existing tenancies must comply with this by 2028.
10 – Legislation
Did you know that the lettings industry is governed by more than 150 separate pieces of legislation? That means that if you are planning on self-managing your property or portfolio, you will need to have your own, fairly detailed understanding of these.
The laws include the Homes (Fitness for Human Habitation) Act 2018, and the Gas Safety (Installation and Use) Regulations 1998. Fire safety rules govern domestic smoke and carbon monoxide alarms while the domestic Minimum Energy Efficiency Standard (MEES) regulations have applied to most privately rented domestic homes since April 2020 across England and Wales. The rules mean properties must have a minimum Energy Performance Certificate rating of E.
Then there are the Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020 which came into force in June 2020 and have applied to all tenancies since April 2021.
There are numerous other rules, too, covering everything from water safety to deposit protection. Particularly if you’re a new landlord, it can seem a lot to take in.
At Oakfield, we’re here to help landlords across East Sussex with our full property management service. Talk to us today to learn more about how we could help you make the most of your BTL portfolio. We’re also happy to answer any questions you may have.
After all Lettings is in our DNA. With our help, they could be in yours, too.
12 Sackville Road
35 Cornfield Road
60 – 61 Robertson Street