Between the recovery of the housing market and the potential money to be made in buy-to-let investment properties, many people are considering getting into the landlord business. However, it’s vitally important that you understand the obligations and the risks before you commit yourself — and your money!
Your property may stay vacant for a while
If you can’t find a good tenant, or if the property needs repairs, you may have to go a few months without income while still paying for all the expenses. If the house is empty, you will still have to pay taxes, make mortgage payments, and cover other expenses out of pocket.
Your tenants will on you for upkeep and repairs when things go wrong
You probably know from your own home how expensive repairs can arise suddenly, usually with terrible timing. As a landlord, you must assume that sooner or later similar inconvenient emergencies will occur with your tenants. Are you ready to handle those situations in the middle of the night, on a weekend, or while you are on holiday?
Your tenants can cause expensive damage
Everyone hears about the nightmare situations. There are the tenants who turned their abodes into cannabis grow houses or brothels. The ones who smashed holes in every wall after being evicted. The ones who depart without warning, in the middle of the night, taking all of the kitchen appliances with them.
One way to avoid some of the risk is to make sure you thoroughly vet all prospective tenants through background checks, collect substantial security deposits, and have a lease agreement that spells out clearly what tenants may and may not do. For example, your lease can specify who is allowed to reside at the house, and who cannot. This helps save you from the lovely older couple who appear to be dream tenants, but who move in their ne’er-do-well adult children and multiple grandchildren as soon as they have the keys!
Even with all these precautions, you may discover that tenants who looked good on paper, or who started off well, turn into bad tenants. U.S. News and World Report tells the story of one landlord who discovered that her renters were stealing utilities. Eventually, the utility companies removed the meters and disconnected the house completely, and after the tenants left, the owner had to pay hundreds in reconnection fees and penalties to restore services.
You may owe more taxes than you expect
Tax increases can be shocking, especially if you transition from living in your home to renting it out. Certain property tax and capital gains exemptions disappear when you don’t live in your property.
In addition, the Government has made recent changes to tax policies for landlords that can seriously affect your bottom line. These include lower caps on tax relief for mortgage interest, and changes to how profit is calculated. According to YourWealth, the Government has estimated that one in five landlords will see tax increases.
The learning curve can be steep and expensive
There are many regulations governing landlord-tenant relations at both the national and local level. For example, you must place any collected security deposit in a government-approved scheme; you can’t simply hold it yourself. You have to document that you have completed ‘right to rent’ checks on your tenants. There are requirements for safety inspections and certifications for various utilities, and all of these must be kept on file. Any violations can leave you open to legal actions, fines, and worse.
One way to protect yourself against these worries is to hire a lettings agent to find and screen potential tenants, handle inspections, emergency maintenance and documentation, and enforce lease terms. The agents collect a fee but your peace of mind may be worth the trade! Look for an agency that is part of a national network so it will have the most resources for locating and vetting tenants, and that has an excellent reputation (Fulfords was named 2015 Lettings Agency of the Year by the Times).
Whether you opt to go it alone, or hire a lettings agency to manage your property, it is important to educate yourself on all the potential pitfalls before you make the decision to become a landlord. Buy-to-let can be a great investment, but it can also hold unpleasant surprises for the unprepared investor. Make sure you have taken a thorough look before you leap to become a landlord!
Walter Stevenson is property investment consultant. Also a father of two, Walter enjoys sharing his investment insights online. His articles mainly appear on property blogs.