Property News

There's plenty in the news about how difficult it is to be a landlord and how thousands are leaving the sector. However, what if you end up feeling you have no choice but to rent out a property? Why might this happen and how should you handle the situation?

It's worth mentioning that you should be prepared not to attract much sympathy from other people. In a way - especially if they're renting themselves - this is understandable. Just as it's hard to be a landlord at the moment, it's a very different sort of hard to be a tenant.

According to a recent news report from the BBC, over the last 18 months, the number of available rental homes has dropped by a third. This is a significant reduction and has meant that many people find themselves struggling to secure a home.

For landlords, this can obviously be good news: more people looking for rental homes means fewer rental voids and makes it easier to secure new tenants.

Accidental landlords: how it might happen

In certain circumstances, almost any homeowner can end up contemplating becoming a landlord. For example, a temporary relocation might mean an empty property and a mortgage that still needs paying. Equally, a permanent move might come at the wrong time for a sale; perhaps sold property prices are too low for the homeowner to want to sell.

Pros and cons

While feeling forced into becoming a landlord can seem an unwelcome prospect, there can be positives. For example, a short period of letting out the property might allow the housing market to stabilise and perhaps even for prices to rise. It might also allow the owner to take stock of their own financial situation. Finally, if the owner decides to sell and the property is rented out on a short term let, there's no need to wait for a long tenancy to elapse before marketing.

On the other hand, as we've already alluded to, anyone renting out a property needs to adhere to all the relevant legislative and regulatory requirements. Mortgage payments may also be higher, and insurance generally costs more. Then there's the day-to-day administrative and practical burden of managing a rental property - or the cost of paying a managing agent to do the job. Finally, there's also the (hopefully small) risk of a tenant damaging the property or its contents, failing to pay rent, or refusing to leave when given due notice.

Let's take a closer look at some of these points.

Mortgages and landlords

A homeowner with a normal residential mortgage cannot rent out their property, whether on a short or long-term basis, without first speaking to their mortgage provider. Most mortgage providers will insist that the mortgage is converted to a buy-to-let mortgage. This may cost more in monthly payments as it reflects the lender's perception that the owner of a rental property is more likely to default. What's more, if a new mortgage is needed, the arrangement fee is typically higher - usually by about 1% - than the fee charged for a residential mortgage. Arrangement fees for a buy-to-let mortgage can be around 3.5% of the property's value.

Insurance and landlords

A property is obviously a significant financial capital asset. In the case of a rental property, it may also need to pay its way. Both of these aspects need considering when it comes to insurance. Any landlord needs to take out specialist landlord insurance. As a minimum, this should cover the building itself and any of the landlord's own contents contained within it. A wide variety of "extras" are also available and most landlords choose to add some or all of them to their insurance package. For example:

- Property owners' liability insurance (e.g. to cover claims by any third party injured in the property);

- Employers' liability insurance (e.g. to cover claims by anyone who is injured during the course of working on the property);

- Rental protection (to cover loss of income if the tenant is unable to live in the property due to damage as a result of, for example, a flood); and

- Rental void protection (to protect against periods when the property is untenanted).

Note that landlord insurance will not provide cover against general wear and tear to the property or deliberate damage caused by the tenants. General wear and tear needs to be factored into the ongoing running costs, and the risk of a tenant deliberately damaging the property needs to be reduced by careful vetting of prospective tenants.

Managing a rental property

Managing a property involves time, expense and labour from the outset. From preparing a property for tenants and any necessary refurbishment and redecoration, to finding the tenants and ensuring that everything in their home remains in good repair, it can take up more time than anticipated. Some landlords choose to undertake the work themselves. Others outsource it entirely (for a fee) to a managing agent. A third group might outsource some of the work, typically finding new tenants and drawing up the contract.

Anyone contemplating not using the services of a managing agent needs to be prepared to be the tenant's first point of contact in an emergency. This can be difficult to balance with a job or, indeed, if the landlord is not living close to the property. Taking out service contracts with, for example, boiler repair companies, can remove some of the strain. So, too, can ensuring that the tenants are furnished with a list of preapproved tradespeople to deal with minor issues.

The risks of letting out a property

1.      Especially in the current economic climate, there is no guarantee that renting out a property will provide sufficient income for the landlord to pay all the costs, including mortgage, insurance, and repairs associated with that property.

2.      Renting out a property on a short-term basis - which often seems most attractive to an accidental landlord - is hedged with restrictions. For example, in London, short-term lets are restricted to a maximum period of three months per year. To exceed this limit, a landlord must apply for "Material Change of Use" from their local authority.

3.      Rental properties that are not properly cared for can deteriorate surprisingly fast. This can cost more to remedy than might have been the case had the work been undertaken in a more timely fashion. At their worst, neglected rental properties can drop in value and, ultimately, fail to meet their owners' expectations when it comes to speed of selling and the sold property prices achieved.

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