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A First Time Landlords Guide to Renting
Becoming a landlord can be a difficult process, leaving first time and accidental landlords asking what does a landlord need to do before renting. Understanding how to evaluate a rental opportunity and finding the ideal tenants will become second nature in time, but first you must understand what the responsibilities and obligations of a landlord are. For those considering becoming a buy to let landlord, here we detail the essential things first time landlords need to know.
Is Becoming a Landlord Worth It?
Few occupations offer the independence and financial freedom that becoming a landlord provides. Of course with receiving a reliable, fixed income each and every month from a portfolio of properties, the potential to earn significant sums through renting out a buy to let property is clear. Naturally, if the property owner has taken out a buy to let mortgage on their property this will influence the total amount of revenue they will take home, but there are many other variables to consider when asking if it is worth it to become a landlord.
Landlords that let out their property will also be able to enjoy tax deductions at the end of every financial year. Whilst property owners will have to navigate the headache that is self-assessment tax returns, the ability to claim business expenses relating to property maintenance, cleaning and other services, such as accounting, alongside the costs of commuting between properties; makes the initial investment all the more worth it.
However, becoming a landlord is by no means a simple process, with a host of legal jargon, regulations and processes you’ll need to understand before letting tenants into your property. The flexibility that comes with the profession can also be compromised, albeit on rare occasions through emergencies within the property. Tenant losing their keys, broken appliances and burst pipes will all require communication and engagement with the tenants that could arise at any hour.
Types of Rental Properties
When considering a buy to let property for rental, emphasis is placed on those that can bring the landlords the greatest rental yield and capital gains. It’s not hard to see why either, after all these are the two direct ways in which a landlord would receive income from their property portfolio. Rental yield is the amount of money that a landlord would receive on a property through the rent they will charge for it. This figure is essential for determining of the given buy to let property is a sound investment that will yield positive returns, calculated by dividing the annual rental income of a property by the amount invested into it.
A high rental yield is the ambition of landlords looking to make a short to medium term return on their property investment, with research revealing that after Houses in Multiple Occupation, or HMO’s, flats with two bedrooms and 2 bedrooms homes command the highest rental yields. But, it is not just the amount of bedrooms a rental property is able to boast than influence the rental yield it can produce; as always location is a dominant factor also. Of course, properties in city centre locations surrounded by local services, amenities and culture will generally enjoy an increased rental yield.
For the forward thinking property investor that is looking for a long term investment, the return that can be realised through capital gains will be the significant factor when choosing a new buy to let property. Capital gains are essentially the amount by which the value of your property has, hopefully, increased over a given time. Recent research has determined that a semi-detached property will bring the highest appreciation over a 5 year period, with a terrace house seeing the largest realised profits over 20 years.
House in Multiple Occupation
Whilst the types of properties that could technically fall under the umbrella term of a House in Multiple Occupation encompass everything from, hostels to shared houses and private halls, any rental property with three or more tenants that all share common facilities can be classed as a HMO. With this being said there are some more strict requirements to determine which properties will fit the HMO band, with the property having to be the main residence of all its occupants, with the property exclusively being used for residential purposes with a single tenant being liable for the monthly rental payments. Landlords of HMO will find that the health and safety standards are upheld far more rigorously, with potential hazards such as gas, fire and electrical safety having stringent regulations to follow.
Types of Tenancy Agreement
For new and accidental landlords choosing the right type of tenancy agreement can be confusing at first, however, there are only a handful of varying tenancies.
Most commonly these agreements take the form of an assured shorthold tenancy, requiring the tenants to occupy the property for at least 6 months, for the property to be their main occupation, alongside the annual rental for the property being under £100,000. Tenants pay a fixed amount of monthly rent, unless the tenancy agreement allows for the amount to be reviewed during the tenancy period, throughout their agreement, with any taken deposits being entered into an approved protection scheme.
Once the tenancy period expiries, if the tenant wished to remain in the property for an undetermined amount of time and therefore is reluctant to enter into another long term tenancy, a “rolling” or “periodic” tenancy is entered. As the name suggests, a rolling tenancy automatically renews each month, with the rent being slightly higher to accommodate this freedom for the tenant. Neither the property owner nor the tenant has to go through any formal agreement process, with the assured shorthold tenancy automatically becoming a periodic tenancy as soon as the fixed period is over.
Non assured shorthold tenancies are specific to certain rental situations, perhaps where the annual rent for the property fails to exceed £250, or the landlord lives in the property alongside the tenant. The nature of the agreement means that landlords are not required to enter the tenant’s deposit into a protection scheme, or serve notices to end the tenancy period.
Do You Need Landlord Insurance
Whilst there is currently no legal obligation for the property owner to take out a landlord insurance policy, standard home insurance will not cover any eventualities if the property is being let out. Of course there are many different types of landlord insurance offering varying policies and degrees of cover, but typically each policy will provide a safety net for the landlord in the event of loss of rent, damage to the rental property and missing or damaged contents.
As mentioned, landlords and property owners are not required by law to have insurance; however, they must have obtained written permission from their mortgage provider allowing them to rent the property before doing so. Mortgage providers also commonly stipulate that before tenants are able to enter a tenancy agreement, the property owner must have a landlord insurance policy in place. If the landlord fails to notify their lender, or disregards this requirement and the terms of their mortgage will be considered breached.
But why isn’t regular home insurance suitable? Frankly these policies simply are not intended for landlords and therefore offer a very lacklustre protection when applied to the needs of a rental property owner. Dedicated landlord insurance often offers building insurance as part of the cover, protecting against the costs associated with extensive damage caused to the structure of the building in the event of floods, storms, fires and accidents. Perhaps most appealing to landlords that intend on renting to pet owners or those apprehensive of accidentally opening their door to a problem tenant, contents insurance covers any damage caused to the landlord’s possessions whilst tenants are renting out the property. This is essential for landlords that want to offer their rental property to tenants including furnishings, but is vital to remind the new properties occupants that their possessions are not covered and they will therefore need to take out their own insurance policies.
Loss of Rent Insurance
Another great source of pain for many landlords is loss of rent. If there was an unforeseen accident at the property, such as a burst pipe or fire causing the tenants to have to temporarily relocate, loss of rent insurance will cover any amounts lost due to the tenants not paying rent whilst repairs are carried out on the rental property.
It is important to note that loss of rent cover will not protect landlords in the event of tenants simply refusing to hand over the monthly amount because of an on-going dispute. In this instance the property owner will need to have a policy that includes tenant default or rent guarantee insurance. These two terms are used interchangeably and are one in the same, essentially rent guarantee insurance provides the landlord with financial stability and dependence if the tenant is every unable to pay their monthly rent. With this being said as always, there are specific stipulations that must be enacted before a claim is paid out to the landlord. As soon as the monthly rental payment is considered late, the landlord must establish contact with the tenant to find justification for why the rent has not been paid. After this initial communication the tenants have another week in which to settle the outstanding rental arrears before the legal route can be pursued. Insurance providers typically ask in these circumstances that a valid Assured Shorthold Tenancy alongside appropriate affordability and credit checks have been carried out. This cover is still only finite; expect providers to offer financial support for an average of 6 months, with the first payment coming after as late as 90 days from the claim.
Landlord Liability Insurance
In the unfortunate happening that a tenant was to become injured when inside a rental property, liability insurance will cover the landlord if the injury was a caused by the property. Of course it goes without saying that it is the legal and ethical obligation of the landlord to ensure that all regulations relating to the safety of their properties inhabitants should be strictly abided by, with liability insurance being no excuse to cut corners when maintaining or repairing a rental property. The cover will protect landlords against accidents resulting is injury illness, disease and death, alongside property damage under specific circumstance. As we are sure you can image, the lengthy legal proceedings and resulting pay out of compensation to the tenant can be financially devastating for a landlord, making liability insurance essential to say the least.
Preparing Your Rental Property for Tenants
When preparing your rental property for tenants it’s important to keep in mind the type of tenants that you want in your rental property. If you are looking to rent out your property to young professionals or students, it’s safe to assume that they will be looking for fully furnished accommodation as they will not have truckloads of furniture accumulated over the years to move in with them. It is also essential that any maintenance or repair work to the rental property is completed prior to the start of the tenancy period, with the electrical and gas appliances having been authenticated as safe to use.
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