Building a buy to let property portfolio
If you wonder how to build a buy to let portfolio, here are
5 mistakes you should learn how to avoid as a buy to let landlord.
Lengthy void periods
Your property is only making you money through rent if there are tenants living in it. Landlords still have to cover their mortgage regardless of whether they are getting any rental income. So, avoid a vacant property and be careful when you draw up a tenant agreement.
If you are allowing students to live there for just nine or 10 months, and not charging for a full year’s rent, consider renting it with Airbandb for the short period that the property is empty.
Remember happy tenants stay longer and will cost you less in terms of void periods and cleaning bills. So, make sure you maintain the property and communicate with your tenants regularly.
Being tax ignorant
As a landlord, you need to pay tax on the money you receive from tenants if your total income for the tax year is above the personal allowance threshold of £10,600.
Failure to do so is against the law, and it could result in fines or even a prison sentence.
Landlords also need to be aware landlord tax has recently changed
Since April 2017, this mortgage interest tax relief is being stepped down to a maximum of 20 per cent basic tax rate.
Mortgage interest repayments are likely to be one of the biggest costs incurred when buying to let. So, this change is significant and needs to be budgeted for.
Making life even harder for landlords, the ‘wear and tear’ allowance will be scrapped in the next few years. Currently, landlords can offset 10 per cent of their rental income against tax for maintenance, regardless of whether they had carried out any repairs or not. Since April 2016, landlords will only be able to claim for maintenance which can be proved to have taken place. That means that careful record keeping is essential.
Not accounting for hidden costs
Buying to let is an investment and initially, you will have to spend money to make money. While you know about mortgage repayments and letting agent fees, there could well be lots of extras you haven’t thought of.
You may need buildings insurance and potentially contents insurance and even landlord insurance to cover any rent arrears or damage to the property, although not all tenants will qualify for this. You will also need to provide a gas safety certificate and pay for annual checks.
In addition to these initial costs, you will be expected to maintain the property to a reasonable standard. For example, if the boiler or washing machine breaks, you will usually be responsible for fixing or replacing it, if it wasn’t the tenant’s fault.
It is possible to sign up to landlord specific plans that will cover repairs and maintenance.
These costs add up. You will also need a contingency fund in case of emergencies.
Choosing an unpopular location
Location, location, location; you need to select a location where void periods are low and there are high rental demands.
If you choose an area with a bad reputation or is in the middle of nowhere, you will struggle to charge a decent rent and find good tenants, regardless of how appealing you have made the property.
It can be hard to predict which areas will appeal to tenants, but there are ways to protect yourself.
Visit the area in the day and also in the evening to see if it’s safe and a desirable place to live. It is also vital to check average rent in the area. That way, you can calculate your likely rental income versus the cost of the property.
There are a number of important questions you should be asking before you go ahead. Does the property have good transport links? The location will also determine what kind of tenants you attract, so consider; is it close to a university, so students will like it, or a local school, to appeal to families?
Finally, if you are a DIY landlord it is also worth considering a property that is relatively close to where you live. Where you can easily pop in if there are any problems.
Not vetting tenants thoroughly
Putting the time in to select good tenants is key to the success of your rental business. You must carry out your research early on, you could end up with tenants who damage your property or miss rental payments – leaving you seriously out-of-pocket.
As much as you might like to hope they will cherish your property, tenants do not always treat places as they would their own home. This means that wear and tear costs will be higher. However, there are some signs to watch out……
Ask for references – and check them thoroughly. Past behaviour is a good guide to how your tenants will act in the future so this should give you a clear indication of whether they pay the rent on time and how well they will look after your property.
Take time to sit down with prospective tenants and discuss why they are moving, as this will be an indication of how long they intend to stay in the property. Be clear about what you allow.
A signed rental agreement should back this up. However, it is important to have clear lines of communication so that both parties know what is acceptable. That way, they will be more likely to contact you if anything goes wrong, rather than letting things escalate.