A Guide for New Landlords
Over the years Property Hawk has guided tens of thousands of new landlords through the process of becoming a landlord and investing in property for the first time. Here is a brief guide on how to become a residential landlord and some essential things to consider.
What new landlords need to know
Despite the headlines, the first thing a new landlord should realise is that rental property is not necessarily going to be a ‘get rich quick scheme’. Despite the headlines of investors making fortunes overnight, the reality is that for the majority of landlords, property investing is for the long haul. The average time a private landlord owns a property for is 19 years. Having said this, get it right and even a small landlord can secure a life of relative financial freedom envied by most of their colleagues or friends. Still interested then read on.
How much work is involved in being a landlord?
How many hours a landlord spends on their property management will depend on a number of factors under their control. These are:
Whether the landlord manages the property themselves or employs the services of a letting agent.
A landlord can employ a letting agent on a full management contract, which will cost between 8-15% of their gross rent. In theory this will pass much of the day to day management of their property to their agent. True…but if things go wrong with the tenancy or a landlords’ property then the bucks stops with the landlord and they will be brought into to solve and resolve the problems or pick up the additional legal and maintenance costs of getting the tenancy back on track. A full management agency agreement will not necessary mean an end to all property management issues. Assuming things go well with the tenancy, a landlords management time will be minimal, but it will cost. Having said that, a landlord will need to factor in the other general management duties of running a rental business such as compiling the end of year tax return. This applies even if a landlord expects to make a loss on their rental business.
If a landlord does go down the route of managing everything themselves (advisable unless a landlord has a large portfolio, or the rental properties are spread around the country.) The management time involved for this is on average should be no more than a couple of hours a week. Average being the key thing because the nature of being a landlord is that input is sporadic. A landlord can go for months without hearing a peep from their tenant and then all of a sudden there is a barrage of activity that might take a day or a weekend to sort out. For instance, if the tenant moves out and the landlord needs to re-let. This necessitates having to carry out the check out with the existing tenant, advertise the property to let and then get another tenant in.
Property investment is not a spectator sport
Property investing is not passive. New landlords are under the misapprehension that property investing is just a case of putting the money down and watching the rent come in. It’s not; it’s a rental business. The key is in the word BUSINESS. It is no different, harder, easier than any other business but it is a rental business, therefore a landlord needs a game plan. There is no one rental business model out there. Property Hawk recently ran its’ first Landlord Training Course and it was apparent immediately just how diversified the different business models are.
Understanding your market and your tenant customers
There is no one type of business model for a landlords rental business. A new landlord needs to understand and be clear of their rental market before even considering buying a rental property.
A list of the type of standard landlords and rental businesses include:
1. Student lets
2. International or post grad students
3. Invest for income benefit or high yield
4. Pension investors
5. Young professionals
7. Tenants on benefits
The secret of landlording success…research research research
Landlords need to research their properties. Property Hawk has written about researching BTL property online. This includes key criteria on how to find a buy-to-let property and what to look out for all from the comfort of a landlords own armchair and an Ipad.
Have a look at Property Hawks 3 Pillars of Buy-to-let to find out some of the key considerations of successful residential property investment. To guarantee that you have a successful rental business a landlord needs to ensure that they buy the right property, in the right location, at the right price so that will appeal to their targeted tenant market but also make a good return in terms of rent & capital appreciation.
Understanding the numbers
Landlording like any business is a numbers game. Understanding the figures and what they mean is one of the most important aspects of any form of investing. Property investing is no different.
Numbers are massively important for the initial investment. Property Hawk has explored some of the key metrics over the years.
Take for instance obtaining a buy-to-let mortgage. What rate of interest should a landlord pay? What is the different between the initial pay rate and the APR. These are the things that a landlord needs to know about BTL finance.
For instance a landlord always needs to look at the Annual Percentage Rate (APR) when choosing if they are going to end up with the cheapest product as this will also include the cost of the set up fees.
For a newbie landlord looking to invest they need to understand how to gear their investment to gain the maximum tax advantages. For instance is a new landlord is fortunate to be able to afford a cash purchase. This may be advantageous in maximising the gross rental returns, but it exposes a landlord to a higher income tax charge because of the likelihood of rental profits. Getting an appropriate gearing ratio is critical in maximising the overall returns to a landlord. The exact ratio will depend on the financial circumstances of each landlord and their financial objectives (to build a substantial portfolio or just secure a pension pot). As a rule of thumb a gearing of between 50-70% will generate significant income tax savings.
To have a look at our new investment appraiser to see how the amount of gearing effects a landlord expected investment returns.
Another critical metric is the rental yield. A landlord needs to understand the relationship between rental income and the capital costs of purchasing the underlying asset (the rental property).
A landlord always aims to make money but also a newbie landlord needs to understand how they can minimise their rental profits and income tax liabilities.
At the end of the investment period look to minimise the capital gains bill by utilising the most of the allowing deductions. This will enhance a landlords net investment returns. Have a look at Property Hawks advice on selecting a property investment.
Landlords who to trust?
The reality is for landlords that the rental market is full of sharks looking to feast on landlords and particular newbie landlords. Here a brief guide on the classic cons that face newbie landlords:
1. Never get sucked in by property gurus promising mentoring, programmes, courses that will guarantee a landlord financial freedom. They are crooks and leaches and a landlord is far better off without them.
2. Don’t use a property finding service promising new property at a discount or below market value. Get on Rightmove or Zoopla and do your own research. The best tools for finding BTL property online
3. It’s possible to avoid paying a mortgage broker, so do think carefully about forking out unnecessarily for a brokers fee. Some buy-to-let mortgages are available direct from the lender, others a landlord needs to go through an intermediate such as a mortgage broker. This means that generally there is more choice for a landlord if they are prepared to go through a broker. But a newbie landlord needs to consider carefully if they need to pay for this service particularly if they are after a straightforward mortgage. If a landlord
4. If you do buy a property for refurbishment. Don’t spend lots of money on having an expensively designed bespoke kitchen and bathroom. Go to Ikea and buy the most basic white version, with a posh set of handles and get somebody to install it for you. Instantly, a landlord will save yourself five grand by doing it all yourself.
5. Unfortunately, there is no escape from landlord insurance. Not to insure your rental property would be commercial suicide, but do shop around to get the best deal.
6. Avoid expensive fully managed letting services from letting agents. In effect a landlord is paying over between 10-15% of their rents to somebody who often just collects the rent. It’s now easy to even get a tenant in yourself by using one of the bespoke services such as Letting-a-property to get your rental property on the main property portals such as Rightmove and Zoopla.
How much money will I make being a landlord?
It’s possible to make a fortune being a landlord. If you look at the Times rich list then you can see that a high proportion of the top hundred have made their money through property. A lot of the wealth generating aspects of property investment are based on the fact unusually that you can gear your investment. This means that you can borrow money to buy what you hope and anticipate will be an appreciating asset. Not only do you get this capital appreciation but you also get in many occasions (and particularly when interest rates are low) a steady and rising income stream (assuming you opt for a repayment mortgage). These things all result in an investment Nirvana.
I know landlords that have made millions out of residential investment. Have a look at the King and Queen of buy-to-let. These people are not extraordinary. They are just like you and me. The secret is timing quite often being and buying in the right place and at the right time. You only have to look at those landlords and investors who brought into the central London investment market recently to evidence this. For most landlords they will be happy with a single or couple of property investments. In this case and outside central London over a couple of decades where the buy-to-let mortgage gets paid off this realistically is going to result in a capital value of several hundreds of thousands of pounds and probably a net gross income in the tens of thousands. Not a fortune BUT for most mortals not a bad little income all the same. The reality for any landlord is that unusually, they can make what they want to make (subject to having some initial investment capital). The limiting factors are how hard that a landlord wants to work and dare I say it luck. Lady luck play her part when it comes to when a landlord buys and which area the rest is down to you the landlord.
Will I make a good landlord?
To be a good landlord it helps if you are organised and have a little bit of business acumen. A successful landlord needs to appreciate that property investment is not like sticking a wad of cash in a building society and forgetting about it. To be a good landlord a property investor does need to love it. They need to love the game of property investment and property management. As a landlord gets bigger it is possible for a landlord to offload more and more of the day to day management aspects of running a letting business. But most really successful landlords love all aspects of property investment and management. They also appreciate that as a rental business, individual landlords are better and more effective at running their business then a load of so called professional advisers.
Will I enjoy being a landlord?
To a large part I enjoy being a landlord. It’s never dull. Life as a landlord is varied. Everything from mundane house cleans to incredibly complex legal questions over landlord and tenants. If a new landlord approaches the whole journey and experience with the right attitude it can be an incredibly rewarding financial and life experience. This is particularly true for many people who have spent their life as employees, workers . Suddenly, they are business owners but still have the comfort of a day job. Embrace the ups and downs of business ownership and I’m sure you will enjoy it along with the financial returns. Go into it with the naive view that it’s going to be hassle free investing ….and you will be sorely disappointed.