1. Get The Right Structure
Section 24 tax changes have made purchasing and letting property as an individual less profitable. This is because you will be taxed on your turnover – tax relief on mortgage interest at 40% is being phased out over the next 4 years. So it may be more tax efficient to buy using a limited company from now on, that way you will be able to set all of your finance costs against your profit before calculating your tax liability. However this is not straightforward. You will still pay tax on dividends at 7.5% over £5,000 and 32.5% over £43,500. So it will be expensive to withdraw funds from the company. Limited companies can only get commercial mortgages which tend to charge interest around 4%, whereas buy to let mortgages for individuals start from 1.39%. Create a spreadsheet and speak to your accountant to work out which is the best arrangement for you. It may be more tax efficient to get married (if you are single!) and co-own properties with your spouse so that you can take advantage of both of your tax allowances.
As well as getting the right legal structure, make sure you have the right structures in place to run your business efficiently. Write policies to cover key aspects of your work like dealing with rent arrears, swapping tenants when sharing, allowing tenants to redecorate, pest control, pets and so on. It just means that you will be able to deal with tricky situations promptly, having thought through all the repercussions. If you haven’t already, set up systems for monitoring rent payments, when gas safety, deposit protection and energy performance certificates and tenancy agreements need to be renewed and replaced. Make sure you use a separate bank account for your property business and put any extra that’s left over at the end of the month into a savings account so that you can build up funds for another deposit or to pay off capital.
2. Become A Finance Expert
You need to understand mortgages back to front. Don’t be too over reliant on brokers, they will often take your business to their favorite lenders, who may not necessarily offer the best deal. Find the best rates on NLA Mortgages search engine and then tell them which product you want. Buy to let lending is becoming increasingly complex so you may need to find a specialist. Manage your credit file carefully. For example don’t do more than three applications in any rolling six month period and keep your credit card balances low, otherwise this will impair your credit score. You can use noddle or credit expert to monitor and improve your file. Keep a rolling list of when your mortgage products end so that you are ready to find the best product to switch to. I prefer two year fixes because I don’t like being tied in for too long, but five year fixes are the best they have ever been at the moment.
Big changes to finance have taken place this year. The Bank of England’s Prudential Regulation Authority provided new guidance for lenders in January 2017 and most now stress test applicants’ properties at 145% x 5.5%. That means that the rent must cover 145% of the monthly mortgage payment as though the interest rate is 5.5%. That has hugely reduced the size of loan you will be able to get. In London, where 5% rental yields are tough to come by, expect to get a 63% loan to value mortgage rather than the previous 80%. You will need a much higher deposit than in the past. From 30 September 2017, landlords with 4 properties or more are deemed ‘portfolio landlords.’ A limited number of lenders are operating in this market. The big three TMW, Coventry and BM Solutions will still lend to portfolio landlords, as will Accord, Shawbrook, Aldermore and Kent Reliance. A number of them will stress test your whole portfolio at 145% x 5.5% and expect an LTV of less than 65% across all properties. Some developers are exploring alternative sources of finance, like crowd funding.
3. Business Plan For Higher Yields
Given the new lending conditions and higher property prices, there is pressure to look for better yields. You need to provide an excellent quality product to attract the best tenant. Make sure it is close to transport and amenities and the area where your target tenant wants to live. Markets that tend to result in higher rents are young professionals, students and housing in multiple occupation (HMOs). Be aware that these categories – particularly if you let by the room tend to require more management input and expect greater turnover. So you may be getting higher yields but you will be putting more work into the management. Working families may provide lower yields but they often stay longer and require minimal management. You could increase your profitability by managing the property yourself and avoid agent fees. You could even use discount online agents to find tenants for a fixed fee, though be aware you will need to take enquiries and do the viewings yourself.
4. Business Plan For Capital Growth
Ideally you want to buy properties where you will get a good rental yield and capital growth over time. Research into areas that are on the up, in particular look for infrastructure improvement like new rail lines. You need to be prepared to buy in grotty areas that are up and coming. Your aim is to buy at the right price and ideally add value. I have tended to buy properties that need updating, so adding instant equity. Typically people would then refinance to raise funds for another deposit to buy a further property. This will be much harder in the future, given new lending criteria. To accumulate funds to buy more property you may well need to save surplus rental profits and perhaps invest them in a shares ISA to get the best possible return. In the past, growth has been strongest in London and the South East and yields have been highest in other areas.
5. Get On top Of Regulation
There are 22 discretionary licensing schemes either in consultation or in force across London; 67 across England. You need to understand the difference between selective and additional licensing. The latter often requires properties that we would not normally consider to be HMOs, to be licensed as HMOs. Rent Smart Wales requires all properties there to be registered and property managers, be they landlords or agents, must be licensed and accredited.
In London there are 7 Article 4 directions that place restrictions on letting to sharers. In order to serve a no fault section 21 possession notice in England, you must have issued the tenant with gas safety, tenancy deposit and energy performance certificates, plus a copy of the license (if required) and the government’s latest how to rent booklet.
As well as proposals for caps on deposits and banning fees to tenants, the government has just announced the regulation of letting agents, landlords must register with a redress scheme, section 21 notices may require 3 months notice instead of 2 months in future and there will be measures in the budget to incentivise longer tenancies plus consultation on a new housing court. Regulation is coming thick and fast and you need to stay on top of it.
6. Network & Education
A good way to keep abreast of changes is to join a landlord association. Go to landlord meetings and events to network with and learn from others. It’s a good idea to complete the one day landlord foundation course run by the National Landlords Association. Subscribe to journals like Property Investor News, podcasts like Inside Property and have a look at websites like Property tribes and Property 118.
7. Be Values Driven
It sounds obvious but to be successful, you need to care about what you do and take pride in your work. Treat tenants with dignity and aim to have a positive relationship with them. Get to know neighbours in adjacent properties and take an interest in the local community. You will be more likely to hear about or predict future issues. Some landlord’s don’t care who lives in the property and whether it’s the messiest in the street as long as they get their rent. That’s a miserable existence and they are blighting other people’s lives. The misery will come back and bite them at some point in the form of enforcement action, arrears or abuse of the property. Show you take pride in your work by getting accredited. You will need to do 8 hours of continuous professional development every year, like attending meetings and events. Some services and licensing schemes offer discounts to accredited landlords.
8. Customer Service
Don’t buy the cheapest fixtures and furnishings, your old tat is not appropriate for a let property. The message it sends to the tenant is that’s how much you care about the property and they may treat your asset with corresponding disdain. Don’t patch up repairs, maintain their home properly. Put in low maintenance solutions in the first place: for example don’t chase water pipes into the wall in showers, you’ll only have to rip out the tiles to get to the pipes when there’s a leak. Put access points under shower trays, pay a bit extra for a decent boiler and to get the electrics brought up to date.
I always have an induction meeting with tenants on their move in day. Ask them to allow an hour prior to moving in their belongings. Run through security issues and minor repairs. Encourage them to report repairs promptly with a thorough explanation and photos so that you can respond quickly and send the right tradesperson. Set clear ground rules around subletting and moving people in. Creating a good rapport with tenants and being clear about what behaviour is expected sets the right tone for your relationship. What kind of customer service will you provide? Ryanair? Tesco? Waitrose? BA? M&S? I think M&S is about right, apologising for anything that goes wrong and quickly putting it right.
9. Emotional Intelligence with Tenants
The way you prove your worth as a successful landlord is by handling tricky situations with tenants successfully. Situations such as subletting, noise issues, failure to report repairs, untidiness, ending a tenancy tactfully, décor requests, pest control and rent reviews. With issues like subletting and noise control, the challenge can often be identifying what’s actually going on. Be prepared to carry out an investigation and put specific concerns to the tenant. Agree clear ground rules and state the consequences if they fail to comply. Ultimately you want to restore your relationship to good terms but if a tenant is in breach of contract you can end the tenancy.
Tenants have the right to live untidily within reason. If it is accompanied by uncleanliness, there could be extra wear and tear. One option is to note concerns at periodic inspections and make it clear that costs to professionally clean the property at the end of the tenancy could be high if the tenant carries out minimum or no cleaning for the duration of the term. Sometimes tenants fail to report repairs because they think the landlord is too busy or may respond negatively, so they need to be reassured that they are your eyes and ears in the property and you want them to report repairs promptly.
It is always valuable to build a good rapport with tenants. When you visit, make observations and try and get a feel for what is going on. Let them speak and listen to what they have to say without interrupting. Open questions are a better way of eliciting the facts than asking leading or closed questions. Be clear about what you provide and what you expect. Losing a tenant and having to find another carries risks and costs. It is often more cost effective to be flexible and invest in changes or improvements to keep the tenant.
10. Avoid The Void
The lettings market has slowed in many areas and you may find it is taking longer to get a new tenant. Void periods can be expensive and are a particular concern for landlords who are starting out or have a small portfolio as they may have little cash to cover periods when they are not receiving rent.
Avoiding the void starts with setting the right tone at the start of the tenancy. Let the tenant know that you are in the business long term and hope they will stay as long as the property suits them and they are happy. I prefer 12 month contracts and don’t allow contracts to go periodic because this makes it harder to plan. Carry out any works whilst the tenant is in situ, rather than waiting for a void period and make sure that you take good marketing photos when the property is unoccupied so that you don’t have to advertise it with the tenant’s abundant belongings in the picture.
I aim to talk to the tenant about renewal in month 9, just to ask them what their plans are with a view to confirming in month 10. That then allows month 11 for viewings and increases the likelihood of a new tenant moving in as soon as the old one moves out. I send the tenant a check out letter about 3 weeks before they are due to leave, confirming the check out date and time and offering advice on the condition they should leave the property in, particularly around cleaning. Sometimes I visit the tenant and talk through what issues would need to be resolved to avoid a possible deduction from the deposit. Be sure to line up contractors immediately after they check out. I like to resolve any deposit issues quickly. I don’t recommend quibbling over small amounts as it is barely worth ending on poor terms. I will list deductions and ask the tenant if they think they are fair. I often make a change in their favour as a gesture of good will.
If you are using an agent to find the next tenant, make sure they have keys as soon as possible. If I instruct them mid week, I will post keys to them immediately so that they can conduct viewings on the all important Saturday. At slow periods, be prepared to be flexible on price and furnishings. Generally I let properties unfurnished now, but I will provide part furniture like beds, a sofa, a dining room table and chests of drawers if requested by the right applicant