Are you planning on moving home, but you’re unsure as to whether you actually want to sell your property or become what is referred to as an accidental landlord? If you are in the luxurious position of being able to move to a new property & afford the deposit without selling your home then you may be considering renting your old one out instead of selling it to generate a bit of extra income.
In this article we go into depth on which option may be best for you & everything you should consider before making your decision.
What you’ll find in this article
- If becoming a landlord is a good option for you
- Whether renting out your property is going to be profitable
- Selling it might be the easier option
- If you’re worried about the speed of the sale, we have a solution
Table of Contents
- Should I sell, or rent out my property?
- Things to consider if you’re planning on becoming a landlord
- The pro’s & con’s of becoming a landlord
- When does renting out make sense?
- What factors should you consider if you want to rent out
- How do you go about renting out your house?
- What kind of profit can you expect from renting your house out?
- Would selling be easier?
- What are your onward plans, can you afford to maintain two properties?
- The pro’s & con’s of selling instead of renting out
- We can buy your property quickly
It’s a position that a lot of homeowners consider when it comes time to move, but more time than not, it’s something that is forced upon them.
An accidental landlord is when someone is forced to rent out there property instead of selling it, this can be due to having to move for work, or it simply won’t sell.
Other people opt to rent out as it’s a good way of starting a buy to let portfolio, as long as you can afford to do so.
What we’re saying here is the answer to whether you should sell or rent your property out completely depends on your personal circumstances. If you need the money generated from a sale, then that is clearly the best way to go, however if you can afford to wait and rent out, you’ll generate a regular extra income and can wait to sell when it best fits, but becoming a landlord comes at a cost.
On the face of it becoming a landlord sounds fantastic, because who doesn’t want an extra bit of income whilst also increasing the equity in their property? There’s quite a bit more too it than that, and several other things you need to consider before just jumping in, which we’ve detailed below:
- Hard Work
- house repayments issues
- Income tax issues
- Capital Gains Tax
- House Health & Safety Rating System (HHSRS)
- Extra Insurances
It’s not easy being a landlord. People think as a landlord you’ll be able to sit back & watch the money roll in, but that couldn’t be further from the truth, in some cases, which mostly hinges on what kind of tenant you have.
Some tenants can be fantastic, and over the duration they stay in the property you may hear very little with only having to do the minimum on-going maintenance and repairs. This is the perfect scenario, but still means you will have to dedicated some of your time to maintain the property.
On the completely other side of the scale however you could get tenants that expect you to change a lightbulb, which you don’t have to do, but you get the idea! Constantly being called by the tenants to fix minor problems with the property can take up a lot of time & resource.
If you’re very unlucky you can have severe tenant issues who withhold rent, damage & trash the property leaving hundreds or even thousands of pounds of damage in their wake. This is obviously extreme, but when you’re preparing to become a landlord you need to be ready to handle the worst-case scenario.
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When you decide to let out your property you can’t do so with a standard house repayments, you need to make your house repayments company aware, changing your house repayments to a buy to let. Some house repayments companies will let you do this with no problem, but some won’t, which may mean that you have to change house repayments companies which could come at a cost.
If you have a house repayments on the property you are letting out then you also need to keep in mind that if for whatever reason you don’t receive rent for a period of time with the property either being untenanted or the tenant withholding rent then you still need to pay the house repayments, regardless.
The government has recently tried to make becoming a landlord less appealing, the amount of tax has recently increased and it’s also become a little more complicated. If you earn more than the maximum personal allowance you will have to pay tax at the rate you normally pay, unless it pushes you into a higher tax bracket.
When your tax is calculated it’s based on your total earnings for that financial year, and unfortunately from 2021 onwards you won’t be able to deduct some financial costs that you previously where able to such as house repayments interest.
If you decide to later sell your property you may be subject to Capital Gains Tax often referred to as CGT, which is a tax on the profit made on the property. If the property is a secondary property for you and has increased in value since you’ve purchased it then you will have to pay the tax on this increase, you can find out more about it on our Capital Gains Tax blog.
As a landlord you have to maintain your property to a higher standard of rules and regulations, as enforced by the Housing Health and Safety Rating System or HHSRS for short. You will have to take into a count a variety of things & adhere to certain standards to allow you to let the property out, this includes:
1. Fire hazards
2. Poor hygiene
3. Damp, condensation or mould problems
4. Inadequate heating system
5. Trip or slip hazards
6. Security issues
7. Gas safety
8. Electrical safety
You can find out all you need to know about HHSRS on the Gov.uk website.
When you become a landlord there are a few extra outgoings you need to consider, and one of those is insurance. As a landlord you have a few extra insurances that you may want to consider, although there are no legal requirements, you should definitely consider them.
We won’t dive into each of them, as that’s a blog in itself! However, here’s an idea of the insurances you might want to consider as a landlord:
1. Liability insurance
2. Contents & Buildings insurance
3. Loss of rent insurance
4. Tenant default insurance
5. Accidental damage insurance
6. Alternative accommodation insurance
7. Unoccupied property insurance
8. Home emergency insurance
9. Legal expenses insurance
A lot right!
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We’ve gone through a few of the things to consider, and here we’ve put together a quick list of pro’s & con’s to becoming a landlord, to help you weight up your options and summarise.
|Additional source of income||Tax on extra income|
|Extra tax deductions||Your money is locked into the property|
|Long term security||It can be expensive being a landlord|
|It’s an investment (Pension)||Emergencies, maintenance & repair to consider|
|Perfect if you’re moving away temporarily||Tenants can be time consuming|
|Any legal issues or disputes|
|Finding new tenants can take time and money|
There are several scenarios in which renting out your home may make sense for you on a personal level, we’ve pulled together some of the most common reasons that renting out your property could be beneficial:
- If your move away is only temporary, such as moving abroad for work
- If it looks like the property market in your area may see some significant increases in the next few years
- If you don’t have a house repayments on the property you can use it for extra income
- If your property is going to return a high rental yield, which is annual rental income divided by property value
If you want to switch your property to a buy to let then there are a few things that you need to consider when you become a landlord, and we’ve broken it down for you below.
• Do you have the time to become a landlord
Becoming a landlord can be very time consuming, you need to find a tenant, always be contactable should anything go wrong and make sure you keep up with paying and recording your income tax. You can get an agent to handle a lot of this for you, but that will eat considerably into your profit margin.
• Switching your house repayments to Buy To Let
The other thing that you have to do is approach your house repayments company about the possibility of switching your current residential house repayments to a Buy To Let house repayments. Some lenders might not let you do this, which might mean that you have to find another house repayments provider to do so.
• What will happen to the house prices
One of the main reasons you might want to rent your property out is that overtime you might think that the property price will grow. It can be really hard to tell if that is actually going to be the case, but before jumping in, if this is your goal, then we recommend doing as much research on house price trends in your area as you possibly can.
• Income Tax & CGT
What you also need to be aware of is that you need to pay income tax on your earnings and CGT or Capital Gains Tax when you come to sell it. This can be a considerable chunk of your profits when you come to sell, for example if you buy a property for £200k, and sell it for £250k, there’s a £50k profit there. You have a capital gains tax allowance of £11.3k leaving you with £38.7k which you have to pay tax on, which is dependant on your personal tax rate.
• Is it going to be profitable?
Ultimately the question you should ask yourself after assessing all of these factors, is it going to be profitable? Will it be worth your time. There are a lot of factors here, and it’s completely dependant on your personal situation.
The next step is to look into how you’ll actually rent the property out. Unfortunately you can’t just go, find a tenant and rent the property out, there are a few things that you need to do to prepare the property for tenants. Here’s a quick step by step guide to get you started:
1. You’ve got to switch your house repayments to a Buy To Let
We touched on this earlier, but you’ll have to approach your house repayments company, or get a new house repayments, to switch your current residential house repayments to a Buy To Let one. This obviously doesn’t apply if you own the property out right.
2. Choosing whether you should let yourself, or choose an agent
You need to choose whether you want to do the hard work yourself, taking the property to market and managing the tenant yourself, or if you want someone to handle it for you. This will eat into your profits, but will save you a lot of time.
3. Prepare the property
Just like if you where to sell the house, letting it out, you need to make it look appealing. Fix any cracks in the walls or flaking paint. You also need to ensure the property is safe, as you’ll be responsible for the safety of tenants whilst they are in the property.
4. Get your insurance in line
As a landlord you need to get additional insurances, such as Landlord’s insurance. This specialist insurance will cover you should a tenant stop paying rent, cause any malicious damage, refuse to leave, the tenant suffers an accident or is damaged by storm, flooding or fire.
5. Know your responsibilities
As a landlord you have a lot more responsibilities than your standard property owner. You need to ensure the property is safe and free from any health hazards, all gas and electrical equipment is safely installed, you have an up to date EPC, the deposit is kept on a government scheme and you have given the tenants a copy of a how to rent checklist.
6. Time to find a tenant
Now you’re ready it’s time to find a tenant. The typical way of doing this is to approach an estate agent, although you can take the property to the market yourself and save some money, Facebook has been a platform growing in popularity for landlords looking to rent their property out.
Before jumping in, you want to ensure that you’re not going to be paying more on a monthly basis for the house than you’re getting back, and that’s where working out the rental yield comes into it.
As you already own the property, working out rental yield is slightly different than it would be if you where looking to buy it.
Rental yield is the percent of the overall value of the property that you get back every year.
Rental Yield = (Monthly rental income x 12) / property value
The difference here however is that you wouldn’t be looking at dividing it by the property value, instead you’d want to divide it by what you still owe on the property.
That really depends if you have the time & capital to be able to comfortably become a landlord. Selling a home is generally a lot quicker, easier and you get a large amount of equity much quicker, where as becoming a landlord is a much longer-term investment.
Just keep in mind that selling may still take a considerable amount of time & money if you choose to go through a traditional sale method, although we offer a sell house fast solution that may be beneficial if you are concerned about this.
Depending on your onward plans, you might have to prove that you can afford to have both properties if you plan on buying another property. I know what you’re thinking, you’ll have a tenant and be turning a profit on the house your renting out, but have you thought about the times in which you might not have a tenant or if you need to pay for maintenance? Because your house repayments provider(s) will!
You need to be able to afford payments on both properties at any given time, which is what you’re house repayments company will be looking at.
So, what are the pro’s and con’s of deciding to sell instead of renting out? We’ve pulled together a table for you.
|It’s much less hassle and stress||Your property is likely to grow in value over time|
|You can spend more on the property you live in||You’ll miss out on the continual equity stream|
|If you use the additional money to improve your current home, this won’t be subject to CGT||The property could have been part of your plans for a future pension fund|
|No unexpected bills|
|Not as much risk involved|
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