Beginner's Guide to Letting

Read our helpful guide with hints and tips to get you started and succeed in the buy-to-let market, and how to make it work for you.

How to make buy-to-let work for you

 
This guide is designed to help you understand:

• What the lettings process involves

• The pros and cons of letting a property

• The costs involved with letting a property

• How our letting agents can help you.   

How much money do I need to start buy-to-let?

If you’re a cash-buyer, you’ll need the amount that the property is worth. If you plan on taking out a loan to buy your buy-to-let, most lenders will require a minimum deposit of 25% and the amount you can borrow is based on the monthly rental you can charge.

What are the pros and cons of letting and selling?

The first step in determining the viability of letting or selling is to compare the pros and cons of each. We picked out the most pertinent points to help you understand what letting or selling could mean for you.

Selling

Pros

• It’s a single (albeit involved) transaction that can release capital gain without any ongoing commitment.
• Property may still sell regardless of its level of repair.
• Allows you to release equity and reinvest.

Cons

• Depending on the market at the time, you may end up selling for a lower price than expected.
• It can be difficult to sell a home with sentimental value.
• Selling may take longer than expected and could delay other investments.
• No rental income, which could have contributed to financial security in later years.
• Capital gains tax may be a consideration.

Letting

Pros

• Provides a steady and consistent income.
• The potential for capital appreciation.
• Property can be kept in the family.
• The process of finding a tenant is usually quicker than the process of selling.
• You can choose to sell (or move back in) at a later date, when personal and market conditions best suit you.

Cons

• You may need to invest money to ensure legal requirements are met.
• There is a risk that tenants may not meet their contractual obligations e.g. payment of rent and looking after the property.
• Having to pay additional taxes on the extra income.

Do I need a buy-to-let mortgage to let out my property?

Yes – if you’re on a residential mortgage, the majority of lenders will require that you switch to a buy-to-let mortgage. Moving to a buy-to-let mortgage is not uncommon, but acceptance does depend on a number of factors, including:

• The term and type of your current mortgage.
• What you intend to do with your property.
• Any other mortgages you may have.
• Your current and future living arrangements.

As a short term solution, you may be able to get something called a Consent to Let policy, which allows you to let your property for a certain period of time (typically up to 12 months) while maintaining your current mortgage.

Do I need a license to let out my property?

The Housing Act 2004 states that a property that is let to three or more unrelated sharers, who share a kitchen and/ or a bathroom, is a House in Multiple Occupation (HMO). If there are less than five sharers the property may not be subject to mandatory licensing, although some local authorities implement selective and additional licensing and you should familiarise yourself with their policy.

Is my property suitable for letting?

Properties must be brought to a certain standard before you can let them out, and once you have found a tenant, you need to maintain the property to ensure it’s safe and legal for someone to live in.

Prior to letting, you will need to:

• Install a smoke alarm on each floor of the property.
• Place carbon monoxide detectors in rooms with open fires or wood-burning stoves.
• Ensure that electrical installations are tested and certificated as being safe, for example by having a trained professional carry out inspections. Also ensure that portable appliances are PAT tested.
• Protect tenants from legionella by having a risk assessment conducted.

A comprehensive list of your legal obligations is set out in our Terms of Business. Talk to our friendly branch staff to find out more.

Landlords also need to commission an Energy Performance Certificate (EPC) for their properties – a rental property must have a minimum rating of E, or it will be illegal to let it out. Breaches can result in substantial fines.

Making sure that your property meets compliance standards will keep you and your tenants safe and legal. You will reduce the potential for any issues at the outset or later on, such as tenant complaints or unwanted fines. Saving your time and money is key to being a successful landlord.

What about furnishings?

You need to decide whether your rental property will be furnished, part-furnished or unfurnished.

A furnished property will usually include every necessity, e.g. beds, curtains and light shades. Some properties even include cutlery, towels and appliances, like ironing boards and toasters. Upholstered furniture must comply with the relevant safety standards.

An unfurnished property should still include basic items like appliances such as dishwashers and washing machines. Part-furnished properties sit somewhere in the middle, so may include furniture like tables and chairs, as well as the basic furnishings. Part-furnished and unfurnished properties offer tenants the chance to use their own furniture.

• Remember that less can be more – certain items will need to comply with regulations, such as upholstered furnishings.
• Think about your possible tenants. A family may well have their own furniture they may prefer to use, but a student may need a property to come ready-furnished.
• Make sure that upholstered furniture complies with fire safety requirements.

Whatever approach you decide to take when furnishing your property, you should be able to demonstrate the condition of any furniture at the beginning and end of the tenancy.

Getting an inventory carried out by an independent third party is a good idea. Also, asking the tenant to sign to confirm the property’s condition at the outset is also advisable, as this can help mitigate the risk of disagreements later on.

The type of approach you take with furnishings could depend on factors such as location and type of tenant you are aiming to attract, a good letting agent can help you decide on the approach.

Types of tenants

You will need to think carefully about what type of tenant your property will best cater for. If you market your property to the wrong audience, you may struggle to attract interest or waste time dealing with unsuitable tenants.

Knowing your audience is also crucial when it comes to setting the rental value and understanding how long someone may stay for. Here are examples of different tenants, all of which have the potential to be ideal for the right property.

Professionals

This covers a broad demographic of tenants of a variety of different ages (typically 20’s and 30’s) and marital statuses. The typical property associated with these tenants tends to be a modern flat with all mod cons. For professionals, having a well-maintained property with parking and Wi-Fi is key, with space being of secondary importance. Lets are more likely to be short-term (circa 1 year).

Students

There is high demand for student accommodation as numbers have grown significantly in recent years, with an increase in the size of educational hubs. Students can be less particular but place more importance on properties being in close proximity to campus, having good transport links and easy access to bars, cafés and other social facilities. Landlords can be added to a list of approved accommodation as long as certain standards are met, but students are generally short-term renters, with a year being typical.

Families

As you might expect, space is a significant factor for this type of tenant. Tenant’s with families tend to take into account the number of rooms, amount of storage and garden space in the search for a property. Being in close proximity to schools and colleges is also very important. Such tenants are likely to be interested in long-term lets.

Housing Benefit Tenants

Tenants using Housing Benefit or Universal Credit to pay some or all of the rent can present an option for landlords. These tenants cover a broad range, from families to single individuals.

A good letting agent can help landlords to understand their prospective tenant's own unique set of circumstances, including how such tenants might be accommodated and supported.

Knowing your tenants

We understand that your property may be worth as much sentimentally as it is financially, so it’s vital you have tenants that you feel comfortable with.

Letting agents can undertake checks on tenant suitability, including their likely ability to make rental payments and their right to rent in the UK. It’s really important that these checks are carried out, to ensure that tenants are going to be reliable and able to meet rent payments.

There are also rules regarding deposit payments, which must be protected in a Government authorised Tenancy Deposit Protection scheme.

Here are some handy tips to ensure you get off to the best start with your tenants:

• Give your tenants a welcome pack, complete with information about local amenities and when the bins are emptied.
• Give them emergency contact numbers.
• Arrange a catch-up to see how they are settling in.
• Encourage written communication to ensure conversations can be kept and referenced should any future problems occur.

Carrying out all of this work on your own is not easy and can be time-consuming, especially if you’re new to letting. To ensure you’re following all the required steps, you should seek advice from a letting agent, even if it’s just for peace of mind.

Protecting your investment

Before your tenant moves in, you are advised to take a 5-week deposit from them. Deposits must be protected by a government-approved Tenancy Deposit scheme.

What are my costs?

It is important to remember that there are costs associated with being a landlord, so it’s critical you have an understanding of what needs to be paid, although a letting agent can help with this.

Insurance

It’s important that you take out a landlord insurance policy. As well as covering the building and its contents, we also offer specialist rent and legal protection insurance. Landlord insurance can include rental protection cover, and some policies can cover legal costs in the event of a dispute. While landlord insurance does come at a premium due to the increased risk, most standard homeowner insurance policies will be invalidated if you let out the property. So to protect the building, contents and rental income, it’s a good idea to look at your options. Your local branch can help provide more information on our 5* Defaqto rated landlord insurance policy, which is underwritten by AXA Insurance.

Tax

From initial property purchase through to ongoing landlord charges to final release of a property, every stage carries a tax obligation. For instance, it’s possible you could have to pay a higher rate of income tax from letting the property out. Equally, there are expenses that are eligible for tax relief.

How much is stamp duty on buy-to-let?

If you already own a property, the stamp duty you pay in your buy-to-let will fall within the parameters of owning a second home. This means that the stamp duty will include an additional 3%.

For example, if the buy-to-let property you’re buying costs £500,000, then the stamp duty you pay is £27,000:

On the first £250,000 you pay 3% (£7,500)
On the rest of the £250,000 you pay 8% (£20,000)
Total Stamp Duty Land Tax to pay is £27,500:
£7,500 + £20,000 = £27,500

To find out more about stamp duty land tax in England, read our guide here. For Scotland, click here, and for Wales, click here.

I'm ready to let out my property. What's next?

1. Have your property valued and appraised
2. Choose the type of agent service required
3. Put your property on the market
4. Receive feedback from viewings
5. Accept an offer
6. Obtain tenant references
7. Prepare pre-tenancy paperwork
8. Ensure legal compliance and safety certificates are in order
9. Sign the tenancy agreement
10. Tenant moves in

Do I need a letting agent?

Letting agents can offer assurance that everything is being done to the highest standard and with the best possible outcome in mind. Letting agents can also give peace of mind that the all-important quality of tenant you need is provided.

The benefits of using a letting agent include:

• Marketing ability – letting agents will be able to market your property much more effectively than you will alone.
• Tenant vetting – agents will arrange for tenants to be vetted.
• Offering support and advice – events such as the coronavirus pandemic can lead to a number of legal changes. Letting agents are best placed to check and offer assurance that your property is being managed within the law.
• Maintenance – from time to time repairs may need to be carried out on your property.

We work with landlords at all different stages in their lettings journeys to help make lettings work for them. We have the experience and the knowledge to help you too.