Letting Out Your Property – putting your house or flat on rent
Are you interested in property investing or letting out your property? Whether you own multiple properties, recently became an accidental landlord, or what to make passive income, this article is for you.
Before you put your house on rent, there are several things you should know. While rewarding, this entire process can be extremely stressful and time-consuming.
Not only are you responsible for managing and maintaining your properties and finding and vetting responsible tenants, but you also need to stay up-to-date on laws, regulations, and guidelines. Many landlords simplify this process by hiring a letting agent.
Letting agent fees cover a wide range of tasks that will help reduce your stress and boost income. For many landlords, the letting agent fees they pay are well-worth the convenience of having help when you put your house for let.
But choosing a letting agent means finding out what services they offer and how much they charge. Here we’ll explore not only common letting agent fees but the services you can expect in return.
The benefit of choosing a letting agent is your ability to select specific services or hire a full-time agent that takes care of all aspects of letting out your property. Rentround helps you compare letting agent fees based on your location.
The free tool requires you to enter your postal code before generating a list of reputable letting agents in the area. Now, you can compare rates, fees, and services to guarantee you get the most affordable rates and a letting agent that fits your needs.
Regardless of why you’re letting out your property, the end goal is to turn a profit. Choosing the right letting agent can help get you there.
You also need to know the ins and outs of claiming this extra income on your income taxes. As with any financial investment, knowing the potential financial pitfalls can help protect you against a major loss.
This guide will cover all aspects of the letting process to help guarantee your success.
1. What Services Do Letting Agents Offer to Help When Letting Out Your Property?
Before you let out your property or hire a letting agent to help, it’s important you understand exactly what they do, what services they offer, and how much they charge.
This information will help you make the best financial decisions based on rental income and expenses.
The first thing to consider is if you want a full-time letting agent or one that performs a specific service. For example, if you plan to manage and maintain the property, you can hire an agent to perform one task, like finding you a tenant.
If you don’t have the time or knowledge to be a full-time landlord, you can hire a letting agent to perform all associated responsibilities. Here’s a breakdown of the most common services letting agents offer.
Finding and Screening Tenants
Finding reliable tenants is often the hardest part of letting out your property. Background and credit checks, plus scheduling viewings are all time-consuming and tedious. Letting agents have connections that regular landlords don’t.
They have a deep understanding of rent valuations, marketing techniques, and how to handle inquiries both online and in-person. Managing multiple properties also means a discount on letting agent fees. These savings could possibly be passed down to you.
Not only do letting agents find tenants but they also vet their history and perform all the necessary paperwork. This includes drafting a legal tenancy agreement that outlines the terms, fees, rent, and length of the tenancy.
Having a professional tenancy agreement is a must in the event of a dispute or potential eviction.
So, how do letting agents find qualified tenants? The first place they look is online using services like Right Move and Zoopla. These sites are also used by countless prospective tenants looking for rental properties and opportunities. When they see something they like, interested parties contact the letting agent listed on the property for more information or to schedule a viewing.
The letting agent you hire will guarantee your property listing is visible and attractive to prospective renters. If you want the letting agent to perform the viewing, you may need to pay an additional fee.
Just remember, platforms like Zoopla and Right Move are only accessible to letting agents and property managers and are unavailable to private landlords.
Finding tenants is only half the battle. Performing background checks and references takes time and is the only way to ensure you’re choosing a responsible tenant that will pay on time and take care of your property.
The ideal tenant will sign a lengthy tenancy agreement, treat your home like their own, and pay their rent on time. Without proper referencing, you could select a less than desirable tenant that turns into a nightmare!
While there’s no guarantee when choosing tenants, there are some major red flags to look for including (but not limited to):
Low Income and Bad Credit
Without a stable source of income, how can a tenant pay their monthly rent on time? They can’t! Bad credit is a sure sign that the prospective tenant doesn’t do well with paying debts. A good rule of thumb is not to let your property to anyone with a credit score of 620 or below.
Low income is another red flag when letting out your property. Without substantial income, the tenant won’t be able to meet their monthly obligations.
Ideally, choose a tenant whose monthly income is at least 2-3 times more than the required payment.
No one wants someone with a criminal record letting out their property. Anyone who can’t obey basic rules and laws is unlikely to follow the guidelines or rules outlined in the tenancy agreement.
Negative References and Past Rental Record
If the candidate was a bad tenant in the past, chances are, not much as changed. After performing references do former landlords offer a long list of complaints or grievances? Does the candidate have past evictions on their record? The last thing you want to deal with is a lengthy and expensive eviction process. If it happened before, it can happen again.
Rent Collection and Deposits
Once you successfully find a tenant, the next most important task is rent collection and securing any deposits as outlined in the tenancy agreement. Not only is this job tedious but it also requires some experience with record keeping – something not many landlords have but most letting agents are familiar with.
Letting agents will not only make sure rent is paid on time, but many will transfer the funds directly into your account. Most payments are electronic or made using a card and then sent to your bank account. Maintain a positive relationship with your tenants by allowing the letting agent to have uncomfortable conversations over late rent.
Landlords often collect security deposits at the start of every tenancy. This money protects you against property damage, late rent, and other unexpected expenses. If the tenant doesn’t pay or causes damage to the property (beyond wear and tear), you can legally apply their deposit to these expenses. A recent law requires that all deposits are safeguarded in a scheme within 30 days of receipt.
You must then provide this information (known as Prescribed Information) to the tenants within 30 days.
Property Certifications and Inspections
Property inspections are not only required by law but they’re also an important part of the rental process for landlords. Without proper inspections, many insurances are considered void and may get you into legal trouble down the road.
All inspections must be performed prior to the tenant moving in and should be detailed in the tenancy agreement. Inspections include heating, plumbing, gas and electric, structural security, damp, leaks, smoke detectors, and CO2.
Letting agents are well-versed in inspections and have the full list, ensuring that you’re meeting all of your legal requirements. In most cases, your letting agent can even perform these inspections themselves.
Repairs and Regular Maintenance
It’s your responsibility as the property owner to ensure that the rental property is safe and in good condition for the tenants.
That means performing routine maintenance as well as any necessary repairs. Most landlords dread getting a phone call in the middle of the night because the heater isn’t working or there’s an electrical problem.
Letting agents will not only field these calls but they’ll respond to them – performing the necessary repairs and maintenance to ensure the tenant’s safety. This is a must since any unaddressed issues could get you into legal trouble.
Disputes and Legal Issues
Sometimes, disputes happen. Whether you want to evict your tenant or there’s a dispute over the deposit or tenancy agreement, you’ll need professional, legal guidance. Both online letting agents and high street agents are skilled in handling disputes. They know the law and can protect you against financial and legal complications.
But legal documentation is important even outside of evictions and disputes. The tenancy agreement and other paperwork must meet all legal requirements and cover all potential disputes or disagreements. A skilled letting agent can help draft the correct paperwork. They also have templates in place that help save time and hours of tedious work.
Guaranteed Rent and Fully-Managed Services
If guaranteed rent sounds too good to be true, it’s not. It’s one of the luxuries of choosing a letting agent who offers fully-managed services. Full-service agents handle all responsibilities associated with a rental property including drafting the paperwork, finding and vetting tenants, performing maintenance and repairs, and handling legal disputes.
Guaranteed rent means that a letting agent will guarantee you receive your monthly rent even if the tenant doesn’t pay. In this case, the letting agent actually becomes your tenant and then sublets it to others.
Just keep in mind that these letting agent services don’t come without a cost.
You can expect to pay higher letting agent fees for fully-managed services over basic or individual services.
Rentrounds letting fee comparison tool makes it easy to compare agents and find one that not only fits your needs but your budget.
2. Understanding Letting Agent Fees
If you want help when renting out your property, look no further than a qualified and experienced letting agent. Online letting agents and high street agents offer a variety of services at different prices.
Here are some of the most popular letting agent services and respective fees.
Let’s start at the top. If you want a full-management option where the agent handles all aspects of the rental agreement and tenancy, you’ll pay higher fees but enjoy much lower stress levels.
If you’re a landlord that doesn’t mind being hands-on with the rental property, you can still use a letting agent when letting out your property to help find and vet tenants or draft important paperwork.
If you want full-management services be prepared to pay between 10% – 20% of the monthly rent.
Letting Agent Fees for Tenant Services
The most common single letting agent fee landlords pay is for tenant services.
This includes advertising the rental, finding prospective tenants, vetting those tenants (including background and credit checks and referencing), plus meeting and scheduling viewings of the property. In many cases this service fee also includes rent collection and dispute settlements.
Because tenant find services cover a large portion of the rental process legwork, you can expect to pay a traditional agent between £80 – £200 using a fixed fee upfront term.
Although there are no upfront costs to cover, most letting agents charge between 75% and 100% up to the first month’s rent.
Guaranteed rent is another service most landlords invest in. Late payments or non paying tenants are a landlord’s biggest headache.
Guaranteed rent ensures you get paid regardless of what the tenant does (or doesn’t do). These letting agent fees range from £80 – £200 annually. If you choose a more expensive policy you’ll benefit from lower pay-out periods and fewer restrictions.
Additional Letting Agent Fees
One thing to look out for when choosing a letting agent or property manager are hidden or additional fees. Some of these fees are included in the service agreement while others sneak up out of nowhere.
If you’re not a knowledgeable landlord, you may not know what to look for. When choosing to rent out your property, you need an in-depth knowledge of common letting agent fees. Here are the ones you’re most likely to see.
Late Payment Fees for Tenants
Paying rent late doesn’t come without a penalty for tenants. Your tenancy agreement should include late payment fees that are added to any late monthly payments. These fees are in place to deter tenants from defaulting on their obligation.
Some letting agents use these fees as part of their commission. If your letting agent is tasked with tracking down and collecting late payments, it’s only fair that they receive part of these late payment fees as compensation.
Be sure that the guidelines surrounding these fees are clear in the contract. This prevents letting agents from using these late payment fees as an incentive to make more money. Once you decide on the late payment fee, the letting agent will likely collect 5-10% of this amount. Late payment fees for tenants can range from 5-8% of the monthly rent.
Tenant Renewal Fees
When your tenancy agreement ends but the tenant wants to resign or renew it, there are fees attached to this process.
The duration of the rental agreement is listed on the initial agreement. The tenancy renewal fee is often frustrating for the landlord since the letting agent already did the hard part – finding a reliable tenant and drafting the initial agreement. The renewal should be simple.
So, what exactly does tenancy renewal fees cover? Primarily the cost of writing up a new contract with new dates and any other related terms or line items.
In the past, landlords have offset this cost by passing the renewal fee onto their tenants. This is a bad idea, especially since a law passed in 2019 made this illegal.
If you want to avoid paying a tenancy renewal fee you’ll need to create a new agreement yourself, based on the initial one. Before signing an agreement with your letting agent, make sure the renewal process isn’t listed as a service they’ll perform or else you’ll be obligated to pay them.
Not all letting agents charge for this basic service so be sure to check the fine print. Another option is to adopt a rolling contract. These contracts usually have no start or end date and follow the original terms and conditions in the initial agreement.
This change can be made once the original term ends. Your tenant would now be considered what’s called periodic.
So, how much are letting agent fees for a tenancy renewal? It depends but most agents charge between £50 – £100.
Reserve Fund Fees
Reserve funds are exactly what they sound like – accounts of extra money created to cover any accidents, damages to the property, or unexpected expenses. Letting agents often set up these savings accounts as a safeguard.
Similar to the hassle of chasing tenants for rent, landlords and letting agents don’t want to scramble to find money to cover emergency repairs – especially since most repairs have to be made immediately if it impacts the safety of the living conditions. Examples include problems with the heating, electric, or gas.
The good news for landlords is that even if the letting agent uses any money from the reserve fund, it’s returned, in full, at the end of the agreement term.
Reserve fund fees are often determined based on the value of the property you’re letting out. The more valuable the property, the higher the risk of expensive damage. Fees range anywhere from £200 – £1000.
Necessity Bill Fees
As a landlord, it’s your responsibility to provide a safe and healthy living space. This includes staying up-to-date on any necessities. Unfortunately, these daily tasks can become a nuisance, which is why hiring a letting agent is often worth it.
Paying bill fees can help take the stress and hassle off your shoulders.
Owning a rental property comes with basic necessities that include the mortgage, electric, gas, and heating. It’s your responsibility to pay these bills on time to provide consistent, safe living conditions to your tenants.
Combine these bills with your own personal bills and it can get not only confusing but time-consuming. Letting agents can handle this for you by paying the rental property bills on time each month.
Now, you don’t have to worry about missing a payment or keeping track of due dates. The best part is, this letting agent fee is often minimal – only about 1% – 4% of the amount billed.
Are you letting out your property fully-furnished? Or do you have valuable decor that you want to protect?
Either way, you should perform an extensive inventory check and list prior to letting out your property.
This guarantees that you receive adequate compensation in the event tenants cause excessive damage. Inventory lists are a must-have when facing a dispute later on. Compiling the list can be a tedious task and one that many landlords leave to their letting agents. Of course, you’ll need to pay for these services.
A bonus is that most letting agents will perform an initial inventory check and then a secondary check at the end of the tenancy, documenting any damaged or missing property which is essential for receiving reimbursement. Inventory fees generally hover around £100 depending on the size of the property. Large rental properties or houses that have more than 3 bedrooms might be double the price to inventory.
Our letting agent fee calculator can help you estimate these expenses.
Maintenance fees only apply if you don’t play to manage and maintain the property yourself. Some landlords simply don’t have the time or desire to handle this aspect of the rental process.
If you choose to hire a letting agent for this job, they’ll charge maintenance fees plus contractor fees in some cases.
Finding, vetting, and scheduling contractors to perform the maintenance and repairs takes time and sometimes, money upfront. The letting agent will charge you for conducting these searches and making the necessary arrangements.
Maintenance fees are usually a percentage of the maintenance bill and range from 10-15%.
Remember, if your contract details fully-managed services, you shouldn’t pay an additional fee for maintenance. This should be included in your agreement so be sure to check.
This is another point of contention for some landlords – and one that recent laws have changed. Sometimes, letting agents will lump a whole bunch of fees under the umbrella of “administration fees”, often at the detriment of the landlord.
These fees are then passed down to the tenant so the landlord can make ends meet. Now, everyone is paying extra and above what they initially agreed to.
Some basic tasks that fall into the category of administration fees including uploading your bank account info, adding your profile and listing to rental websites, and setting up direct deposits. Landlords have some leeway with these fees.
While it doesn’t mean you can skip out on paying them, it does mean that most letting agents will work with you to reduce these fees or eliminate them all together. It’s definitely worth asking since administration fees can range from £50 – £200.
Sometimes, evictions happen. There are a multitude of reasons why you may need to evict a tenant from late payments to no payments at all to excessive damage or other disagreements. Even when you’re in the right, the eviction process can be daunting and long.
The letting agent fees you pay can cover the eviction process, which means allowing a professional experienced in evictions to handle the particulars.
Some steps in the process include notifying the tenants of the eviction, taking them to court, and even removing the tenant in extreme cases.
Your letting agent has current information regarding local laws and legislation so you can ensure the eviction process is done legally.
In this situation, you’ll want to compre the letting agent fees for helping with the eviction process to what it would cost you to handle it yourself. Most agents can handle the eviction process swiftly and effectively.
Another bonus if having a letting agent handle the eviction is that the faster the unreliable tenants are evicted, the sooner you can move a new tenant in and start collecting rent again. Remember, you’re still responsible for all your monthly bills including the mortgage and utilities regardless of whether or not you’re collecting rent.
Eviction fees vary and some letting agents charge for different services. For example, serving an eviction notice might run you £100 whereas getting a court order might be as much as £900.
Letting Agent Fees Associated with the Landlord Agreement
Yes, your letting agent is responsible for managing your tenants. They’re tasked with making sure they pay on time, treat your property with respect, and adhere to the terms listed in the tenancy agreement.
As the landlord, you’re also obligated to sign a contract with the letting agent and make good on it. Here are some letting agent fees that you may face as the landlord if you don’t adhere to the contract.
Late Payment Fees
Just as tenants are expected to pay on time, so are you. Letting agents expect to be paid on time for the services they provide. Your letting agent should provide a detailed invoice for their services plus any associated costs.
All invoices should be paid within 14 days of receipt to maintain a positive working relationship. If you wait longer than 2 weeks to pay, you may face late payment fees (the same ones your letting agent applies to late tenant payments).
In some cases, your letting agent might use the reserve fund to pay themselves and you’re then required to replace that money. If you pay your letting agent fees late, you can face a fee of £50 – £100 or 5-10% of the payment that was due.
Early Exit Fees
Contracts are in place for a reason. Ending your contract early is a violation of the agreement and comes with associated penalties and fees known as early exit fees. This fee protects letting agents from unreliable or shady landlords (yes, they’re out there).
These fees are comparable to the security deposit you collect from tenants to protect yourself from late rent payments. But there’s also protection in place for you as the landlord. If you end your agreement early because the letting agent isn’t doing the job they promised, you can challenge these exit fees.
Poor service is subject to debate but certain things you can challenge include failure to collect rent, not maintaining the property, or ignoring specific requests you might have. The best way to avoid discrepancies is to include specific details about the letting agent’s expectations and services in your contract.
Be sure to also include what the exit fees will be if the situation arises.
Another way to protect yourself against exorbitant exit fees is by using a redress scheme. In fact, redress schemes are designed to protect both landlords and letting agents when entering into an agreement.
As of 1 October 2014, all letting agents are required by law to enroll in an approved redress scheme. These schemes help to mediate disputes when a landlord claims that the letting agent isn’t performing their job or the letting agent is trying to impose unfair exit fees.
Letting agents must inform landlords of exactly what redress scheme they’re a part of. There are two popular government-backed schemes that most agents use.
- The Property Redress Scheme
- The Property Ombudsman (TPO)
So, what kind of exit fees do landlords face? Some fees are as much as 10% of the remaining rent.
Not only are you required to pay these fees now but for the remainder of the tenancy agreement. That means if you choose to end your agreement early and there are still 6 months left on the lease with rent at £1500, each month will cost you £150, totaling £900 in fees by the end of the agreement.
This is a good reason not to end your letting agent agreement early unless you have a good reason.
Estate Agent Fees
Last on our list of letting agent fees and service are estate agent fees. These come into question once you decide to sell your rental property.
This is common among accidental landlords who inherit a property they don’t plan to use or let out.
If you currently have a letting agent, they will help you with this process, but not without collecting a commission. Estate agent fees cover the cost of advertising the property for sale, scheduling showings, and negotiating any parcel and part services.
The introduction of more online letting agents is giving landlords more options for selling unwanted property. Instead of charging a percentage of the property’s sale price, online letting agents often charge a flat fee for their services. This fee stays the same regardless of what price the property sells for.
Estate agent fees vary greatly, but like anything else, you get what you pay for. Higher fees mean less work for you. This could result in a quick sale and more exposure to buyers. But if you don’t want to pay high estate agent fees, some of the work might fall on you.
Don’t forget that if you choose to sell the property yourself and do so before the end of your letting agent contract, you may face an early exit fee. You may also face these fees if you use a different estate agent for the sale.
If your estate agent chooses to charge a commission, it’s generally between 1-3% of the value of the property when it’s sold. Online letting agent fees are a fixed amount and range from £90 – £1,000.
3. Calculating Fees When You Let Your House for Rent
If you’re preparing to let your house for rent and want the help of a letting agent, you probably also want some idea of what letting agent fees you’ll face.
The best part of using a letting agent is that you can share the work and opt for individual services or hand over complete control with fully managed services.
But how can you choose with so many online letting agents available?
Rentround simplifies the process by letting you compare letting agents and fees in your local area. All you have to do is enter the postcode of your property and which services you need.
Rentround’s calculator generates a list of reputable agents in your area. Factors include their ratings, fees, and the types of properties they manage. The best part is, our services are completely free! There’s no charge to find the best letting agent for your rental needs. Try our postcode search bar below and start saving on rental costs today
4. Financial Planning
Renting out your property is a financial investment meant to make you money. But before you can jump headfirst, you need to do some financial planning. There are two main factors to consider – how much you can rent your property for and what your expenses will be.
Obviously, your expenses can’t total more than your income or you’ll be losing money instead of making it.
The three most important things to consider are landlord costs, rental income, and mortgage costs. There are initial and additional mortgage costs to consider.
If you need a mortgage to let out your property, it’s important you understand what criteria you must meet.
Criteria for Obtaining a Mortgage
Mortgage lenders look at a variety of factors when considering landlords for a mortgage. The first thing they look at is your salary. Similar to how landlords vet tenants based on their income, mortgage lenders won’t approve a mortgage they don’t think you can reasonably pay for.
Most lenders look for an annual income of at least £25k. They also require an LTV rate of approximately 80% on all deposits.
Applying for a buy-to-let mortgage is slightly more complicated since you’re basing your income or salary on projected rent. This income isn’t guaranteed yet, which makes some lenders hesitant.
To put yourself in a better position, be sure to charge rent that’s at least 25% higher than your mortgage payments. Most lenders won’t give you a loan that exceeds 75 years. Expect to pay higher interest rates and leave a larger deposit as well.
Speaking of interest, you also have to choose between an interest-only mortgage and repayment loans. There are pros and cons to both.
If you’re looking for lower monthly payments, this is the way to go. A buy-to-let mortgage consists of both the principal (the total cost of the mortgage) and interest for the duration of the loan.
The interest rate can range anywhere from 3% to 10% or even higher depending on the market, your credit, and the terms of the loan. Choosing an interest-only mortgage will save you money now but leave you with a big bill at the end of the loan.
The good news is if you time things properly, you can sell your rental property, pay off your mortgage, and potentially make money in the process. In some cases, you may need to remortgage the property.
On the other hand, if a looming bill causes you too much stress, you may want to opt for a repayment loan.
This means that your monthly payments are higher but you’re paying toward both the principal and the interest each month. When you sell your property or reach the end of the mortgage term, you’ll owe much less.
Both options aren’t without risk. If the market takes a dive and you don’t get the asking price for your property, you’re still required to make good on the mortgage balance. The good news is, the risk is minimal, especially for landlords who have owned their property for several years.
Determining Your Rental Income
Your rental income is one of the most important pieces of the financial puzzle. Without adequate revenue, you can’t cover your monthly expenses – including your mortgage. Do you own or plan to let out multiple properties?
If so, our HMO rental income calculator can help determine the expected income. You can also use websites like Zoopla to find comparable properties and see how much they’re charging. This is where a letting agent comes in handy.
Most agents can individually assess the properties and help predict potential income.
Landlord Costs and Potential Risks
On the other side of rental income is landlord expenses. You can’t have one without the other. Once you figure out your rental income, you have to consider related expenses and potential risks you may encounter along the way.
Common landlord costs include insurance, safety certificates, performing repairs and maintenance, finding and vetting tenants (or paying letting agent fees).
With so many responsibilities, most landlords find that paying letting agent fees is a must-have landlord cost that’s well worth the investment.
But no investment is without risk. Landlord costs and expenses can fluctuate depending on a variety of factors like the rental market, tenant troubles, and an unstable economy. You have to take all of these things into consideration before making any financial decisions.
Rent and Property Damage
Remember how we mentioned that finding reliable tenants is one of the most important aspects of being a successful landlord? Here’s why. When you have unreliable or irresponsible tenants it can equal late payments, property damage, and even refusal to leave the property during an eviction process.
Unfortunately, you can’t predict vacancies. Some months are slower than others, which is why finding long-term tenants is your best bet for guaranteed, steady income.
Guaranteed rent services can help offset these costs and prevent future losses.
Tenants that don’t properly care for your property might damage it. Wear and tear are normal, but significant property damage isn’t acceptable and illegal in some cases. Now, you have to pay to fix those damages.
You may also experience extended vacancy periods if the repairs take longer than expected. The good news in some mortgage lenders offer 6 month payment holidays that freeze your mortgage payments and let you get caught up on your finances.
Remember, though that you will need to make good on these payments. Another way to safeguard against such an event is by creating a savings account to cover vacancies and extensive damage.
Fluctuating Interest Rates
Just because you secure a mortgage with a low interest rate doesn’t mean it’s guaranteed to stay that way.
Low interest rates mean lower monthly payments and more financial freedom, but you have to plan for these rates to go up.
This means your current rate will increase as well as mortgage renewal rates.
Changes in the Property Market
Similar to the economy and Stock Market, the real estate market experiences ebbs and flows.
These changes often occur without warning and can make it nearly impossible to sell your property. In some cases, you may be forced to sell at a lower price.
Two common reasons for taking a hit on the selling price are facing repossession or reaching the end of your mortgage term.
If you choose a buy-to-let mortgage with fixed terms, the interest rate can spike at the end of that term, raising your rates and your monthly payments.
One option is to renew your mortgage, but doing so during a property market crash is tricky.
The property value of your home has most likely crashed along with the rest of the market. If so, you’re still responsible for covering the difference or pay a higher rate. An increase in unemployment is another casualty of property market and real estate crashes.
Everyone’s financial situation suffers and creates a domino effect of financial messiness.
They say two heads are better than one. When it comes to partnerships and letting out your property, things can get complicated.
On one hand, you’re sharing the financial responsibilities with someone else, which can be lucrative.
Unfortunately, this also means shared decisions and ideas. If you and your partners don’t see eye-to-eye on how to manage, run, or let out your property, you may find yourself facing legal proceedings, lost money, and unnecessary stress.
Some things are simply out of your control. Case in point – Covid-19. This 2020 Coronavirus pandemic was like nothing the world has ever seen.
Everything was put on hold, including the real estate market. Selling and even renting properties became very difficult.
Letting agents struggle to schedule viewings in the face of potential health risks. Medical pandemics are unpredictable and can cause major financial fallouts.
5. Renting Out Your House and Buying Another
Landlords who find letting out their property to be fairly lucrative sometimes choose to invest in multiple properties.
In other cases, they rent their own homes and purchase another one to live in. In these situations, landlords use their rental income to pay their existing mortgage.
They also use savings or equity from previous properties as a deposit toward the next one.
Let’s look at an example. Your current property is worth £350,000 and through monthly payments and the initial deposit, you’ve paid this down to only £175,000.
That means you now have 50% of the property’s value to use as equity. You can now negotiate new mortgage terms with your lender. Let’s say you add another £75,000 onto your mortgage, you know how £100,000 to work with as cash in the bank which you can use toward purchasing another property.
Remember, if you choose this route you need to adjust your current mortgage to a buy-to-let mortgage. It’s recommended you do this at the same time as releasing your equity to use toward the purchase.
The monthly payments on your rental property will also increase since you’re borrowing more money from the mortgage lender. Ideally, your rental income should cover these higher costs.
6. Claiming Rental Income on Your Taxes
Establishing your finances and income aren’t the only factors to consider. You also need to claim your rental income, whether you have one or more properties.
Calculating Rental Income
First, you need to calculate your rental income. This isn’t as easy as taking your monthly rent and multiplying it by 12 months (although that’s part of the process). Your rental income is actually considered whatever money is left over after you subtract your expenses and allowances from the total rent collected during the year.
If you own multiple properties, you’ll combine your income and expenses to reach a final, taxable figure. A portion of the interest from any mortgages you hold can also be added to your expenses.
What Counts as Rental Income?
Rental income is the amount your tenants pay each month, right?
Yes, but it’s more than that. In certain situations, tenants pay additional fees for things like utilities, cleaning services, and repairs if you charged a non-refundable deposit.
All of these figures count toward rental income. Money left over from the returnable deposit at the end of the tenancy agreement is also factored in.
Taxable Rental Income
Any related expenses are considered tax-deductible. Let’s look at an example.
If you charge £1,500 a month in rent, this entire amount is considered rental income, including related monthly bills and expenses (for now).
If you collected a £500 deposit at the beginning of the tenancy agreement and the renter agreed to apply this amount to repairs, this would also count as rental income.
Now, your rental income for the entire year would be £18,500 – £18,000 in rent plus the £500 deposit. Here’s where it gets a little tricky. You’d also be able to deduct the £500 deposit as an expense if it’s spent on repairs.
How Much Tax is Due on Rental Income?
Rental income is taxed the same way as unemployment or any other business income, depending on your tax bracket.
Landlords pay anywhere from 0% all the way up to 45%. You may find yourself in a higher tax bracket once you combine your rental income and any other revenue.
When Are Rental Income Taxes Due?
The tax year starts on 6 April and ends on 5 April. Landlords are legally required to declare all income for the previous year, regardless of when you receive the funds. You can also deduct all approved expenses connected to the property, regardless of when you pay the bill.
The Difference Between Rental Income and Trading Income
If you’re a landlord that goes above and beyond, you need to consider trading income.
When you run a hotel, B&B, or guesthouse and accept payment for services like meals, laundry, or cleaning, this is considered trading income.
Anyone collecting trading income or providing a furnished property can claim rent-a-room relief on their taxes.
Rental Income for Multiple Properties or HMOs
Landlords who own multiple properties can lump their rental income and expenses together.
This means you can deduce the expenses from one property from the income from another. It’s important to note that there are certain situations where rental properties are considered separate entities.
If you own shares in a business or rental company, these cannot be combined with your other residential rental properties. The same holds true for international and overseas properties. You can’t combine profits from rentals in one country with those in another or offset expenses as such.
Your tax return will have a separate section for declaring income on overseas rental properties.
How to Complete a Rental Income Tax Return
All taxes on your rental income are due by 5 April or no later than 5 October after the end of the tax year. If you don’t receive a regular tax form to report income, you need to contact the HMR on your own and fill out a self-assessment tax return.
This form is due no later than 31 October unless you complete an online tax return which has a deadline of 31 January.
There are several types of tax returns for rental income.
Main Tax Returns
Main tax return forms are used for any income over £10,000 from the previous year. After deductions and expenses, if your income is above £2,500 you’re also required to fill out a main tax return form.
The HMRC automatically deducts taxes for anyone earning under £2,500 using what’s known as a PAYE system.
This is a simple and common practice, especially if you’ve been taxed through your pension or other similar salary system in the past.
UK property pages are reserved for rental income made from UK holiday lets and similar properties, whereas Foriegn Pages are used on all international properties.
Hotels and guesthouses are considered self-employment ventures and require self-employment pages. Each unique form of rental income requires its own tax return form.
Calculating and Declaring Losses
You can also declare losses on some UK rental properties. These losses can even be applied to future income.
For example, if your expenses totaled more than your income for the 2018-2019 year, you can apply these losses to next year’s tax return (2019-2020), saving you money. The only thing you can’t do is offset these losses against other income.
Paying Taxes on Sold Rental Property
When you sell your rental property, you’re required to pay taxes on the gains or profit. This tax is known as a capital gains tax (CGT).
If the rental property is sold as an asset, you’re required to pay taxes on between 18% – 28% of the income.
Different rules apply if the rental property is also your main residence. As of April 2020, all CGT must be paid within 30 days of the property sale. This is a significant change from the previous requirement which was payment by 31 January the year after the sale or between 9 and 18 months later.
7. Preparing Your Rental Property
Once you find tenants and secure funding, it’s time to prep your rental property for the new renters.
You may want to make certain upgrades and renovations to make your property more desirable and attract higher paying renters.
Things like new carpets, paint, windows, and appliances can all add volume to your rental property. While these upgrades cost money upfront, they’re often a worthwhile investment for the future. You can use Rentround’s renovation cost calculator
Not only does your property need to be aesthetically pleasing but also safe and secure. It must meet all regulations and guidelines. Letting agents know all the ins-and-outs of rental property requirements and can help you prepare.
The infrastructure, heating, gas, and electric are just a few examples of rental property safety feature must-haves. Electric and gas features also need to be certified by a professional inspector before the tenants move in.
8. Landlord Regulations for Legally Letting Out Your Property
Landlords are held to a certain standard. That means performing your job both legally and ethically. While cutting corners is tempting when looking to save money, it’ll come back to bite you in the end.
Not only will you be held liable legally, but it could tarnish your reputation and you could even lose your license.
To remain compliant, it’s important you know the current laws, regulations, and obligations that you’re required to follow.
Obtaining Your Landlord License
All landlords must follow a landlord licensing scheme which was introduced as the Housing Act of 2004.
Before letting out your property, you must obtain a landlord license from the local council in your selective licensing area.
Qualifications include proof that you’re acting within local laws and properly manage all properties. Your local council will provide these guidelines for your review.
Trying to let out your property without a proper license can result in fines as great as £30,000.
Starting a New Tenancy
Once you have the required landlord license, you can start letting out your property and collecting rent.
You’re also required to provide certain information and paperwork to your tenants before they move in.
Any tenants that choose an assured shorthold tenancy (or AST) are entitled to have their money protected in a government-backed scheme within 30 days of payment. Other items you’re required to provide the tenant include:
- An up-to-date copy of the “How to Rent Guide”
- An Energy Performance Certificate (EPC)
- A gas safety certificate
Not providing this necessary paperwork can result in fines as much as three times the amount of the tenant’s original deposit, so failing to do your due diligence isn’t a smart financial choice.
In the event that you have to evict your tenants, failure to comply with these regulations could cause you more headaches.
This is especially true when serving tenants with a Section 21 notice, which we’ll get into more detail about later.
Ending a Tenancy
All good things must come to an end. Sometimes, tenancies don’t end cordially and result in eviction proceedings.
Evictions, like every other step of the letting process, must be done legally. If you choose to end the tenancy early due to noncompliant tenants, there are 2 ways to proceed.
One is by serving a Section 21 notice and the other involves a Section 8 notice.
Section 21 Notice
In order to legally serve your tenants with a Section 21 notice, you have to perform specific tasks before the tenancy begins.
This includes providing the tenants with all necessary paperwork and information including:
- A valid EPC (Energy Performance Certificate)
- A valid Gas Safety Record
- A copy of the government’s most recent “How to Rent Guide”
If you collect a security deposit, renters must also receive detailed information about how the deposit is protected.
You’re required to protect all tenant deposits within 30 days of receipt using one of three acceptable schemes.
Tenants must also receive a certificate proving that their deposit is protection and a deposit protection leaflet. Tenants who file a legal claim that the living conditions of the property are unsafe, the Section 21 notice might be deemed invalid.
Section 8 Notice
There are several instances where serving a Section 8 notice is applicable. Sometimes, they’re based on a judge’s orders while other times they’re served on mandatory grounds.
One example is if your tenants fail to pay rent for 2 or more months. Check with your local council to find out exactly what grounds Section 8 notices apply to.
One of your most important roles as a responsible landlord is to provide safe living conditions for your tenants.
Not only are you legally required to do so, but ethically and morally. Maintaining a safe property and grounds helps guarantee the tenant’s safety.
There are guidelines and regulations in place to help support these safety standards.
All rental properties must have both fire alarms and carbon monoxide detectors that are in working order.
Fire extinguishers are also recommended. Properties with multiple levels are required to have a smoke detector on every floor.
Any rooms with solid fuel-burning devices must have a carbon monoxide detector installed. All detectors must be inspected and in working order before any tenants move in.
Electrical safety is next up on the list and an important part of letting out your property. All electrical wiring and outlets must be inspected and up to code. This includes both hardwiring and any portable appliances.
Updated laws require that a professional electrician perform routine tests and inspections every five years. Landlords are required to keep these reports on record as a reference and proof of compliance.
All properties with a gas supply must have a gas safety inspection performed annually. This inspection ensures that all installations, pipework, and vents are in safe, working order.
Once the inspection is complete, you must provide the tenants with a copy of the report and a Gas Safety Certificate.
Laws and Regulations
The laws and regulations surrounding being a licensed, valid landlord are constantly changing, which is why many landlords hire letting agents for help and guidance.
Either way, you should be aware of the most recent laws and how they impact your role as a landlord.
The Immigration Act of 2016
Background and credit checks for tenants have always been in place and are a safeguard for landlords against unreliable and irresponsible renters.
But the Immigration Act of 2016 which was created on 1 December 2016, requires all landlords perform tenant checks that guarantee potential renters have the right to legally live and rent in the UK.
There are a few ways to go about this, including checking the tenant’s passport, visa, and other legal, identifying information. If you accidentally let out your property to an illegal or unqualified tenant, you’ll be held responsible.
Punishment may include 5 years in prison and exorbitant financial fines. Don’t be alarmed, though. If you take all the necessary steps and legally terminate the tenancy within a certain amount of time (within 90 days of discovering the tenant can’t legally rent in the UK), you have a good chance of defending your case and avoiding both financial penalties and jail time.
GDPR rules apply to landlords but were put in place on 25 May 2018 to protect the personal information and data of EU citizens.
As of this date, all landlords are also considered data collectors, which means they’re obligated to handle all confidential tenant information properly and securely.
Additional Landlord Obligations
Not all of your obligations are legal or financial. In some cases, these obligations are moral and ethical. You’re required to provide safe, healthy living conditions which is most often done by performing routine maintenance and repairs.
These jobs can be done by you or by the letting agent you hire.
Providing safe living conditions means performing routine maintenance to ensure everything is in safe, working order. This goes for both the interior and exterior of the property. Interior checks include heating and hot water installations, baths, sinks, heating and cooling systems, and all sanitary areas including the kitchen and bathrooms.
Any tenants with a fixed tenancy that extends over 7 years inherits the responsibility for these issues, which means you can’t be held responsible for any damages caused by the tenant to the above mentioned areas of the home.
Accidents and damage happen, and as the landlord, you’re legally responsible for performing necessary repairs to both the inside and outside of the structure. Major repairs include any damage to the walls, roof, chimney, drains, or gutters. As part of the routine inspections, you must ensure that all gas, electric, and water are in safe working order.
Obviously you’ll need to gain access to the property to perform these repairs. Landlords must give tenants adequate notice before showing up or entering the property.
You can choose to list how much notice you’ll give in the tenancy agreement or work it out with each individual tenant.
9. Understanding Landlord Insurance
Ask with any risk, insurance is a safeguard against exorbitant expenses and accidents. Becoming a landlord isn’t without risk.
Even with the best tenants, things can go wrong – and landlord insurance can help protect you and your finances. Are you tempted to skip on landlord insurance?
While the monthly payment may seem daunting, in many cases, the investment is well-worth the bills you might face if you don’t have it. Think of landlord insurance as a long-term investment, rather than a short-term expense.
Similar to letting agent fees and services, there are several types of landlord insurance to choose from, which gives you plenty of affordable options.
What Does Landlord Insurance Cover?
Different policies protect against different accidents and damages. Some landlord insurance policies even cover lost rent when tenants fail to pay.
Without landlord insurance, you’re forced to pay out of pocket for any damages to the property, even accidental ones. This can put you in a bad financial position, especially if the damages prevent you from accepting tenants.
Most policies even protect against weather damage, fire, theft, and other unforeseen events. Some policies protect both the property structure and its contents. This is a must-have if you’re letting out a fully furnished property.
The best part about landlord insurance is that you can pick and choose certain line items. Here are just a few popular options.
- Replacing fittings and fixtures
- The cost to replace locks and keys
- Intentional damage or theft
- Water leaks
When choosing a landlord insurance policy consider things like the value of the home and it’s contents, maintenance and upkeep costs, location, and how reliable your renters are.
Even with reliable renters, letting out your property without landlord insurance is a risk we don’t suggest.
Is Landlord Insurance a Necessity?
No, there’s no law that states you have to obtain insurance as a landlord. It is, however, strongly recommended.
The truth is, most people don’t have enough money in savings to cover serious damages to their rental property.
Certain damages are out of your control like natural disasters, theft, and unreliable tenants (even with extensive background checks).
Landlord insurance gives you both a financial safety net and peace of mind when letting out your property.
What Type of Landlord Insurance is Best?
There’s no one-size-fits-all choice for landlord insurance. Each situation and property is unique. The more you know about the different landlord insurance policies available to you, the more informed a decision you can make.
Consider things like your budget, the value of the property, where it’s located, and if you’re letting out your property with contents.
Start by choosing a basic policy and then add different line items where appropriate. Just remember that the more coverage you choose, the higher your premiums will be.
This is the most basic type of landlord insurance. Building insurance covers the cost of repairing any structural damage caused by either the tenant or weather.
The most common types of tenant damage are theft or vandalism. Weather and other natural disasters include flooding, hurricanes, or fires.
The exterior of your property isn’t the only thing that needs protecting. You may want insurance to cover the interior of your home and its contents as well.
Most standard landlord insurance policies offer protection for your contents including furniture and appliances.
Some landlords skip on content insurance if the tenants furnish the property themselves. If you let out your property that’s fully-furnished, you may want to consider a content policy.
Like most accidents, this type of damage can’t be predicted, which sometimes makes it tough to protect against.
Things like damaged floors and walls, burns, spills, and broken windows all fall under the category of accidental damage. An accidental damage policy can help offset some costs associated with these types of repairs.
The property and its contents aren’t the only things that can be damaged during a tenancy – you also have to protect yourself against tenant injuries.
If your renters are injured while on your property, you may be held liable for their medical bills and related expenses. Liability insurance is also known as landlord liability or public liability. Unfortunately, regardless of your relationship with your tenants, most injured parties won’t think twice about going after you for their medical bills or related expenses. Liability insurance can help offset legal costs and potential payouts.
Speaking of legal expenses, letting out your property means meeting certain legal requirements. If at any time you have to recover unpaid rent, perform an eviction, or face a personal injury claim, legal expense insurance will help cover some of these costs.
Landlord Home Emergency
Landlords are responsible for their rental property 24/7. That means you (or your letting agent) must respond to tenant needs whenever they arise.
Landlord emergency coverage can help provide your tenants with around-the-clock support, saving you the time and inconvenience.
This type of landlord insurance covers things like loss of power, a broken furnace or boiler, or broken pipes, among other things.
Unpaid rent is one of a landlord’s biggest complaints. Even if you pay letting agent fees for tenant referencing, sometimes, you may choose an unreliable tenant.
Rent guarantee coverage is a type of insurance that guarantees you get paid even if your tenants default.
After 60 days of non-payment, you can file a claim and receive as much as 8 months in back rent. This type of policy covers up to £2500 per month in rent.
Most landlords agree that investing in landlord insurance is worth every penny. Not only does it offer peace of mind, but it protects you financially and legally against a number of unforeseen events like natural disasters, injuries, and theft. Some landlords choose to cut corners in an effort to save on monthly payments.
This is your choice but we don’t recommend cutting corners when it comes to insurance protection.
Letting your property guide – FAQ
How Do I Rent My House?
Follow these steps when deciding to rent out your house. Perform market research to ensure that your home is in a desirable rental location. Talk to a mortgage lender about how best to switch your current mortgage to cover your home as a rental property. Ensure your property is safe. Obtain landlord insurance. Hire a letting agent to help you find and reference tenants, manage the property, and prepare necessary paperwork. If you choose to manage the property yourself, be prepared to stay on top of collecting rent, performing maintenance and repairs, meeting new laws and regulations, and handling all tenant issues or disputes.
How Much Are Property Manager and Letting Agent Fees?
If you decide to use a letting agent when letting out your property, you’re probably wondering if the fees are worth it. Hiring an agent to fully manage your property will close between 10-20% of the monthly rental income. Some online letting agents charge a fixed price for their services, as low as £100-£600 for finding a tenant based on a fixed price term.
Can I Rent Out My House?
Wanting to rent out your house is one thing, but can you? Before you open your home to tenants, you need to make sure that your current mortgage is adequate for a rental property. You also need to ensure that your property meets safety guidelines. You can also choose to sublet your property but need to check with your landlord first. An HMO (House of Multiple Occupancy) needs its own separate license.
How Much Rent Can I Charge?
Once you meet all the requirements for letting out your property, it’s time to set your rental price. The biggest factors when deciding on rent are the size of the property and its location. The best way to determine how much you can rent your house for is to compare it to other properties similar to yours. You can also speak to local letting agents who are knowledgeable about the current market. Websites like Zoopla can help you find similar properties and check what they’re renting out for.
Can I Rent Out My Property Using a Residential Mortgage?
This is a question for your mortgage lender. You need to let your lender know that you plan to use your property as a rental. They’ll likely add a charge fee or increase the percentage of your payments. Neglecting to inform your lender before renting out your property could result in financial penalties and in some cases, being forced to pay back the entire mortgage upfront.
Do I Need Landlord Insurance?
All landlords can benefit from obtaining landlord insurance. These policies act as a safety net against property damage, issues with tenants and rent, as well as injuries and other unforeseen events. If you have a mortgage, your lender might require that you have insurance before approving the loan.