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.
Things to consider if you’re planning on becoming a landlord
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
- Mortgage 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 mortgage, you need to make your mortgage company aware, changing your mortgage to a buy to let. Some mortgage companies will let you do this with no problem, but some won’t, which may mean that you have to change mortgage companies which could come at a cost.
If you have a mortgage 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 mortgage, 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 mortgage 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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The pro’s & con’s of becoming a landlord
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|
When does renting out make sense?
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 mortgage 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
Would selling be easier?
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.
The pro’s & con’s of selling instead of renting out
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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