What can I do as a landlord to ‘future-proof’ my business?
Here Allison Thompson, National Lettings Managing Director, Leaders Romans Group gives some pointers on how to future proof your lettings investments.
What can I do as a landlord to ‘future-proof’ my business?
Buy-to-let is a medium to long-term investment. To maximise your returns and see the benefit of capital gains – allowing for the market’s natural cycle over time – you should aim to hold a property for around 15 years or more.
That means you’ve got to plan as far ahead as you can and take steps to ‘future-proof’ your business to ensure it will continue to be successful and profitable over the lifetime of your investment.
Here are five key things you can and should do to protect your rental business:
- Know exactly how much your buy-to-let is going to cost
Property differs from most other financial investments because it requires you to keep spending and investing money. Buying, refurbishing, fitting out and getting it ready to rent is just the first financial hurdle – you then have to manage the tenancy/occupation contract and keep the property up to date and in good condition, so it’s vital that you budget ahead for both regular maintenance, periodic bigger works and void or arrears periods when you have no rental income coming in.
The other cost to factor in is tax. In addition to annual income tax, there is likely to be capital gains tax due when you sell or pass on the property, as well as inheritance tax if it forms part of your estate. So it’s well worth consulting a property tax specialist, wealth manager, or estate planner – ideally before you buy – to ensure you factor in all these tax costs and set your rental business up in the most tax-efficient way. It’s well worth having these experts on hand to advise you through legal changes and budget announcements, which can affect the ‘best’ way for you to operate.
- Have a good rental profit margin and equity cushion
The second thing is to be as sure as possible that you’ll always have a good enough profit margin to cover your costs and cushion you financially.
While it’s impossible to predict precisely what will happen with the market, the one certain thing is that there will be fluctuations in prices, rents and interest rates over time. So you should have two goals:
- To buy a property at less than its actual market value or add value and, therefore, equity at the start through renovation and refurbishment
- Ensure the rental income is sufficient to cover all your related outgoings – and make sure you would at least still break even or subsidise the let for a period of time, even if interest rates went up to 7 or 8%.
If you can do those two things, that should protect you against having to subsidise your investment or being forced to sell during a market dip.
- Secure a good management team
A successful rental business relies on good management of both the property and the tenancy/occupation contract. For that, you need:
- A good team of professional, reliable contractors who can carry out maintenance and repairs as well as checks required to secure gas safety and electrical certification. Because there are so many specific rules governing private lets, particularly when it comes to health and safety, it’s important that the people you use are familiar with buy-to-let and used to carrying out work for landlords.
- The knowledge and skill to administer a legal tenancy and communicate effectively with the tenant/contract-holder.
- Insurance policy which protects you from key rental problems.
The most reliable way to ensure your property is always legally let and managed is to use the services of a qualified agent with their own experienced team of letting agents, inventory clerks, property managers, and approved contractors. While this is an extra cost for you, landlords who outsource may find that it pays them back many times in terms of the time, effort, and stress it saves them.
- Have a reliable way of keeping up to date with the law
Legal changes are not always well-publicised, especially local ones relating to licensing. The penalties for falling foul of the law can range from light action by your local council to being hit with a civil penalty of up to £30,000 (rising to £40,000 under the Renters’ Rights Bill in England), being prosecuted in court and even receiving a ban on letting property. In short, any breaches could seriously impact your business, so a big part of protecting it is ensuring you are always fully compliant with the law.
The Renters’ Rights Bill is currently making its way through Parliament and is expected to pass. It could come into force as early as next spring. This will be transformative for the industry, and landlords will need to know exactly what changes need to be made and how to communicate them to tenants (this is not relevant in Wales, which has the Renting Homes Wales Act).
Again, having a qualified agent managing your property who is a member of ARLA or RICs means you can be confident that these and any future legal changes are properly implemented today and into the future.
- Have an exit plan
Just as you need to ensure your business is set up in the most tax-efficient way, knowing how you intend to exit your investment from the start is essential. For example, are you planning to sell up and cash in your gains in 15-20 years, or would you like to pass on your property or portfolio to your children?
The way in which you own, run and exit your property business can make a significant difference to the level of financial benefit you or your family get. Discussing your whole investment plan with a wealth manager, a property tax adviser, and a legal specialist should ensure that you don’t get any nasty surprises at the end.
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