If becoming a landlord was easy - everyone would do it. The process of letting your home can be complex and time-consuming; you need to be serious about your investment and put in the effort.
We’ve created this guide on how to be a landlord because we want you to be successful. We go through everything you need to know about landlordship – how you earn money, determining the value of your venture, your obligations and rights and finally, what you can do to find the right tenant.
HOW MUCH DO LANDLORDS MAKE?
The amount of money you make primarily depends on how much rent is left over after expenses, mortgage payments and taxes. Your rental income is your main source of profit, but you can also make money if your rental property appreciates in long-term value, as this will increase your equity invested in that property.
You can work out your rental profit with our Rental Income Tax guide or use our buy-to-let rent calculator to work out how much rental income you need to generate to qualify for a buy-to-let mortgage.
IS BECOMING A LANDLORD WORTH IT?
Many landlords evaluate the success of their buy-to-let investment by working out their rental yield and capitalization rate.
Your rental yield is your annual rental income - or potential annual rental income - as a percentage of the total value of the property. It’s used when calculating your affordability of a BTL mortgage as well when determining the success of an investment.
Annual Rental Income ÷ Property Value = Rental Yield
You obviously want a higher rental yield, as it means you’re making back the money you invested more quickly – but expecting anything too high is unrealistic. 10% is a good reference point and the kind of rental yield you should aim for, but anything between 5% - 10% is promising.
Your capitalization rate is the rate of return on a real estate investment property, based on income that property is expected to generate. You use your capitalisation rate to estimate your potential return on an investment and therefore its level of success.
Annual Net Operating Income ÷ Current Market Value = Capitalisation Rate
To find out your annual, or expected annual, net operating income you:
- Take your total rental income
- Deduct any expenses incurred for managing the property
- Deduct any mortgage repayments
- Deduct any taxes
- The figure your left with is your annual net operating income
As a buyer, you want a high potential capitalisation rate. A seller wants a low rate, otherwise they could be missing out on a potential profit. Sellers can use their capitalisation rate to work out the best time to sell a property.
When you become a landlord, you take on a set of new responsibilities. You will be renting property to real people; they need to be safe in your property. You have an obligation to maintain your property and keep your tenants happy and secure.
- Be easily contactable for tenants, unless you’re using a letting agency as it’s then up to them to liaise with the tenant
- Arrange buildings insurance against accidental damage, e.g. fire, flooding, etc. – you may also want to arrange contents insurance if your property is furnished
- Keep any supplied furniture and appliances in good condition
- Carry out or oversee property repairs, unless you’re using a letting agency
- Ensure your property is “up to code” before tenancy starts, i.e. you need to check smoke alarms, make sure your property meets minimum energy performance standards, etc.
- Adapt to tenants’ special needs under the ‘Duty to Make Reasonable Adjustments” section of the 2010 Equality Act, if appropriate
- Look after tenants’ deposits by keeping them in Tenancy Deposit Protection Schemes – a letting agency will typically do this on your behalf
- Make sure all paperwork is in order, e.g. EPC, gas safety certificate, tenancy agreement
You need to take your obligations as a landlord seriously. However, you’re not responsible for everything.
It’s up to your tenant to:
- Organise their own contents insurance for their possessions
- Pay Council Tax
- Pay utilities bills – unless they give you money specifically to cover these bills
You earn certain rights as a landlord – it’s not just about what you owe your tenants, but also their responsibility to you as landlord.
You have the right to:
- Receive rent when it’s due - if your tenant doesn’t pay rent and there’s no foreseeable solution then you have the right to serve an eviction notice via the proper legal regulations
- Raise rent at certain points in a tenancy – this depends on the specifics of your tenancy agreement and rent must be justifiable and correlate with the rents of similar properties in the area
- Claim repair costs back in expenses for any damages
- Have a tenant who sticks to the terms of the tenancy agreement
You don’t have the right to:
- Walk in and out of properties at your leisure - landlords must give tenants 24 hours’ notice, even if entering the property for essential repairs