Welcome to the Rental Playbook series hosted by HAIIMZA
In the first part of this series we will take a look at one of the blueprints for renting out a residential property
Setting Up; Locations & Paperwork
Renting out your property can be a daunting task and has the potential to even ruin some people financially if they are not careful and don’t understand exactly what it is they are doing. Renting should be easy and is considered a form of ‘passive income’ so let it be just that.
When you are looking to purchase a property there are several factors that you want to be considering. The first would be the location you are looking at; anything near a major train station with good transport links, amenities, schools or high roads tend to be better for rental (those properties tend to cost more too). Properties isolated from such things still do get rented out but you are making things harder for yourself as you narrow down your potential target market.
Initially you are going to need a property that you have the appropriate paperwork for proof of ownership so an estate agent is able to establish you have the right to rent out the place in the first place.
If you are using a buy to let scheme then you are expected to pay double stamp duty and will have to prove ownership differently through the bank (the agent can direct you further with this, I am not too clued up on how the mortgage process works). The stamp duty does vary and there are exemptions, if you are buying your first property or depending on the value of the place etc. It is a progressive tax system and does increase depending on your circumstances.
Agents & Fees
Once you have acquired a property and have it in an acceptable standard to rent out you need the estate agent to come and value it and tell you what you can expect for rental in that area. You should have an idea of what you can get for the area before you even send in an offer to purchase the place. Supply and demand.
The agent would most likely take pictures then go advertise and find potential tenants. This is where some tenants may ask for minor changes to the property such as change in paint or a carpet in the master bedroom etc. This is your job to accommodate as the landlord, but the price of the rent charged can get adjusted due to the work done. It is generally a good idea to give a fresh lick of paint before viewings start.
You are also expected to provide the fridge/freezer, dishwasher and washing machine and any maintenance/ replacement required for these and the boiler during the agreement. You will be expected to install at least 2 fire alarms and 1 carbon monoxide alarm otherwise you will not be cleared for the property to be safe to rent out. You will also require an electrical and gas safety certificate which can be handle via your agent if you can’t get your own
Management & Fees
Once you have found a tenant the next question is who will manage the tenant? You have the choice between paying the estate agent a one off fee for the find and managing the tenant yourself or you can allow the estate agent to take on the management process for you
Once you have a tenant willing to rent it out for an agreed price you have to negotiate terms with your agent, you can manage the tenant yourself but if you want a full managed property for it to be truly passive and minimal headache for yourself this is the option, the rates vary and they can move them 1-2% but they start from around 6% and have seen some trying to charge 11%. This is not paid directly by you, it is deducted from the rental income received from the tenant. OPM; Other peoples money.
Once the tenant has agreed and all terms are favourable you do not receive the first months rent which is usually used to pay the agents fees. This is what the initial invoice tends to look like, any addition monies owed are then deducted from next months rent. Any remaining is then transferred directly to your bank account.
You will also want the agent to do an inventory for the property which comes in handy when the tenant is being evicted and you are able to ascertain what can be classified as ‘wear and tear’ and what they have to repair or replace
Agents & Costs
Licenses & Insurance
You will also be required to get a ‘private rented property licence’ which in the borough of Waltham Forest is £650 for 5 years per property you rent out. It is non-refundable so if after the first year you decide to sell the property the £650 is not partially refundable (some councils have different policies, some give the licence for free and some charge more, the information is readily available on your councils website). The process for getting one of these is very simple and just requires some paperwork to be filled in, if you do not obtain one there is heavily financial penalties that ensue so it is not worth taking the risk especially since the £650 is deductible from your taxes as it is a cost for you setting up this venture. You will need Landlord insurance too which is also deductible and depending on if you have a flat or house the prices vary but are normally a couple hundred
If there is an issue during the agreement which comes under your responsibility the tenant will be in touch the estate agent and they will have to ascertain what work is required and you will be informed that a new tap is required or the boiler needs to be repaired etc. You have two options at this point, the first being tell the agent to get you a quote from his builder and then get them to just get it done. If you think you can get it done cheaper from your own preferred contractors then you will have to deal with them yourself. If the agent gets it done he pays them and it is deducted from your monthly rental as usual. The agent is not obliged to inform you before hiring an emergency contractor and paying them any amounts as it is in your own interest if the house gets flooded that it is dealt with ASAP and waiting for confirmation from a landlord may take too much time. This is how they usually charge the work done on your invoices
From past experience it is a lot of unnecessary headache trying to find your own contractor and getting him to come down, let the agent earn his 8% and deal with all of that. There normally isn’t much difference in the price they charge with your own guys.
This is just one of the ways the rental market can be worked, this definitely isn’t the most efficient way to do it but it is the most hands off way to get some constant income sent through to you. I cannot speak on the market outside of London but inside London rental is very lucrative, there is talk of a maximum price scheme to cap rent prices. If this does take effect it may be more efficient for you to just flip houses by fixing them up and moving on but from what we’ve seen ever since the Brexit noise started the market has been quite quiet as everyone is unsure where the housing market is heading.
If you do choose to move out of London and maybe test this out, in your research and different ideas you would ideally want to always think about who your target market is? Do you want students as your tenants (worst tenants BY FAR) or would you be willing to accept housing benefit tenants etc
And if you do choose to go down the Buy to let method you would want to consider a lot of other factors as it is a different compared to a normal mortgage, buy to let mortgages are interest only so in the agreed term you are only paying the interest on the loan and expected to pay the lump sum borrowed at the end of agreed term. This however can be problematic if economic conditions are unsure or turbulent as if the housing market slumps and the agreement ends you would not be able to sell the house to cover the amount of debt which would leave you with negative equity. And even if economic conditions are fine, can you guarantee your tenant will keep paying rent? If the tenant stops to pay the rent will you be able to keep up with the payments for the house (remember this is meant to be minimal stress, no point wanting something ‘passive’ and be stressing about it all day long). The landlord insurance does cover you but how long are you going to keep claiming from there as your premium next year will increase now too. The process to evict a tenant can sometimes take up to 6 months and if you are not able to wait it out for 6-12 months then you are not going to have a pleasant time renting this way. The good news is that any court costs, bailiff costs, unpaid rent etc is payable by the tenant but realistically you won’t receive anything as the tenant will just claim bankruptcy and leave you out of pocket. This is extremely worst case scenario and has yet to happen as if there is no reason for the tenant to stop paying they won’t.
Thats it for part one of the Rental Playbook series, hope you found some value, watch this space for the next instalment