BREAKING DOWN COMMON BARRIERS TO BECOME A LANDLORD

Given that the rental market is worth approximately £86 billion, it’s little wonder that people often see it as an easy way to make money.

But as any landlord will tell you, it’s not always easy. Between contract disputes, repair costs, paperwork and taxes, there’s a lot that goes into being a landlord. Yes, the rewards can be lucrative and, overall, it’s far from the toughest job in the world. But it’s also fair to say that it’s a business with plenty of potential pitfalls. In fact, it’s a business that most people aspire to get into but stumble at the first hurdle.

Securing your first rental property can be a lot tougher than people expect because of the upfront costs.

It can be tricky, as you need to offset all the costs involved against the projected increase in the value of the property. Working out the best time to buy is challenging, as you must keep abreast of prices. It’s all in the timing!

Before investing in a property that you intend to rent out, there are more considerations, apart from the initial cost. It isn’t a case of buying a property, moving tenants in and watching your nest egg grow, as you will probably realise!

While you can still make money from the housing market, it’s not as easy as it was say 18 months ago, before prices surged. Today, you will need more money to get onto the property ladder. You will typically need a deposit of around 25% for a buy-to-let mortgage.

If you know you’re going to apply for a buy to let mortgage, setting up an individual savings account (ISA) can be a good option. ISAs offer around 2% interest which, although low, is better than standard current accounts. Even better, a stocks and shares ISA gives you the ability to make tax-efficient investments.

This strategy can be used by savvy homebuyers who want to put their savings into investments and, potentially, earn a better return than a standard ISA. For example, some people may consider index-tracking ETFs, which are accumulative products that reinvest their dividends back into the ETF.

These products ring-fence any profits from capital gains tax. As long as you’re within the annual limit (£20,000 in 2021/2022), you won’t pay tax on profits gleaned from an investment made via an ISA.

Assuming your investments are profitable, this can be an effective long-term saving strategy that can help you hit your target. Prospective property owners can also look at remortgaging options. It may be possible to release equity from your current home to get a deposit. However, this strategy has to consider the added cost of borrowing money. What’s more, you need to know how much equity you can release.

The exact figure will vary between lenders. But let’s say you’ve got 40% equity worth £100,000. A lender might allow you to borrow up to 70% of that figure – £70,000. Again, you will have to factor in the long-term cost of borrowing this money on top of getting a buy to let mortgage.

The reality is that there are positives and negatives. Saving in the traditional way will take longer, stocks and shares ISAs don’t guarantee a return, and remortgaging can be costly.

But as long as you weigh up the options and it’s financially viable, you can overcome the biggest barrier to becoming a landlord, namely the deposit.

Apart from the cost of actually purchasing a property, you also need to consider what type of property and whether it will be furnished or unfurnished. For many landlords, investing in a house in multiple occupation, or HMO, feels like a safer choice, as even if one tenant doesn’t pay their rent on time, there are others to soften the blow.

If you’re planning to buy an HMO rental property, you’ll be more likely to offer it as furnished, as traditionally, they attract tenants who are looking for a cheaper option. Your property will be more desirable if it comes furnished, so they can move in without any hassle or extra outlay.

Another tried and trusted investment is a student property, as there is always a high demand for lets in this sector. While this might not have been a prudent investment in 2020, due to the lockdown affecting students who could not return to campus, it’s now a more favourable option.

Buy-to-let remains an attractive option, although potential buyers often falter because of fears it won’t be profitable. Factors you need to take into account include how much stamp duty you need to pay, getting a mortgage, paying for a survey and forecasting whether the market value will go up over time.

Don’t forget your running costs including landlord insurance, mortgage interest payments and council tax if you’re responsible for this. You may also need to spend money on home improvements if you have bought a property at a cheaper price to convert it into flats. The stress can become too much for some landlords.

For it to be a lucrative venture, you need to have an accurate business plan in place before signing on the dotted line, taking into account all of the potential expenditure. Then you need to work out whether it’s worthwhile investing.

In particular, calculate whether you can justifiably charge the rent you need to make your money back with a profit on top. To maximise your chances of making money, the longer you own the house, the more time you have to earn money from your investment. As a landlord, ideally you need to be in it for the long haul to see your investment grow, as there aren’t any “get rich quick” schemes.

Before buying a property, carry out a few important checks, such as whether the local area has good transport links, how many schools are in the vicinity and the general level of house prices – look into whether they have risen or fallen recently.

When you see a property you like, check if there is any work to be done. If it’s a case of whipping out a paintbrush and sprucing it up, that will be more cost-effective than having to get builders or decorators in. The less you need to spend on the house at the outset, the bigger profit you will make.