InvestmentsJun 21 2018

Becoming an accidental landlord

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Becoming an accidental landlord

Those fortunate enough to be given a property might feel like going down the rental route as a way of generating an income or if they do not want to sell the house outright.

But becoming an ‘accidental’ landlord is a job that should not be taken lightly.

Moreover, recent government changes which have specifically targeted the buy-to-let market have made it harder for ‘amateur’ landlords to make a profit.

David Hollingworth, associate director at London & Country, points out that clients who inherit a property may want to keep it for the longer term as an investment property, while others could find themselves struggling to sell the property at all and therefore deciding to become a landlord.

“Accidental or otherwise, it will be important to consider the situation carefully rather than only focusing on the potential for income and capital appreciation over time,” he says.

The buy-to-let sector has been hit by a number of punitive changes to the tax system.Sam Mitchell

“They will take on the mantle and responsibilities of being a landlord so will need to understand the expectations and costs of the role. 

“They may not have a mortgage to contend with but if the property is not local, for example, they will need to have an agent not only to let the property, but also to manage any issues arising, which will come with a cost.”

He adds: “They should certainly look carefully at the likely income and outgoings. But, even before that is the question of whether the property is likely to be a good rental property and attract tenants.”

Changes bite

Before making the leap to renting, potential landlords will need to be aware of the recent changes which directly affect buy-to-let properties.

One of these is the stamp duty surcharge on additional properties owned by the landlord, at the same time as changes to mortgage relief are being phased in.

“The buy-to-let sector has been hit by a number of punitive changes to the tax system,” explains Sam Mitchell, chief executive of Housesimple.com.

“The additional 3 per cent stamp duty charge on second homes has put off many landlords who would have entered the market. And then the government cut mortgage interest tax relief, slashing rental profits overnight.”

According to the latest figures from Arla Propertymark, April saw the highest number of landlords selling their buy-to-let properties since 2015, with five landlords per branch of letting agents leaving the market, up from four in March this year.

Those who are staying in the market continue to hike rents.

Arla Propertmark reports the number of tenants on the receiving end of rent increases rose to 26 per cent in April – the highest since September 2017, when 27 per cent of landlords put rents up for tenants.

David Cox, chief executive at Arla Propertymark, says: “The barrage of legislative changes landlords have faced over the past few years, combined with political uncertainty, has meant the BTL market is becoming increasingly unattractive to investors. 

“Landlords are either hiking rents for tenants or choosing to exit the market altogether to avoid facing the increased costs incurred.”

But Lucy Pendleton, director at estate agents James Pendleton, takes a slightly different view.

“Despite the impression there has been an exodus of landlords from the rental market over the past couple of years, their population is still robust, representing one in every five homes,” she explains.

“On the ground we are not seeing landlords abandon the private rental market but shift their focus to smaller rentals, including those known as ‘pocket living’, which might be one-bed studio apartments.

“It is already the case that most flats are privately rented, so this suggests that is unlikely to change any time soon.”

The gradual shift to basic rate relief will have an impact on higher or additional rate taxpayers that are intending to mortgage the property, so that will need to be factored into calculations.David Hollingworth

What does this mean for anyone thinking of renting out their inherited property in the immediate future? 

Mr Mitchell acknowledges: “These changes have well and truly put the brakes on the buy-to-let market and have certainly put off amateur landlords. This slowing of supply is likely to raise rents in the medium term, so could be good news for savvy investors.

“But for someone inheriting a property there is no stamp duty to pay, although there might be an inheritance tax bill to pay. 

“Also, you will still have to pay tax on the rental income, which could be significant if you're a higher rate taxpayer.”

However, Mr Hollingworth notes: “Rental income is taxable but if there’s no mortgage then the changes to tax relief will be less of an issue. 

“The gradual shift to basic rate relief will have an impact on higher or additional rate taxpayers that are intending to mortgage the property, so that will need to be factored into calculations.”

He also points out that anyone planning to let to a family member will find their mortgage choices are more limited “as it will be a regulated BTL and most lenders will not offer mortgages on that basis”.

Ongoing maintenance

Becoming an accidental landlord may mean doing up the property before letting it out but also being prepared to oversee any ongoing maintenance.

Mr Mitchell points out: “You can hand over the responsibility to a management agent, but bear in mind they can take up to 10 per cent of the monthly rent. 

"Also, don't forget there are ongoing costs as well. Things will always go wrong, like a boiler breaking down or a leaky tap. And you could have tenant issues or void periods.”

All the advice for accidental landlords so far has seemed rather cautionary.

Fortunately, there is plenty of advice and guidance out there which financial advisers can point their clients in the direction of if this is the route they want to take, having inherited a property.

Alan Collett, a fund manager at Hearthstone Investment, flags: “There are many guides for landlords but a good place to start is gov.uk/renting-out-a-property or the Residential Landlords Association.

“You can appoint an agent to carry out many of the tasks for you, but the landlord is still ultimately personally liable. If you do use an agent, make sure that they belong to a professional body such as the RICS, or a reputable trade body such as Arla.”

He asserts that demand for rented homes remains strong across the UK, although he does acknowledge that the rental market is seeing a shake-up.

“A new breed of professional investors is entering the private rental market, spearheaded by pension funds, but now in funds available to the public for their Isas, savings and personal pensions,” he explains. 

“These new investors are supplying thousands of newly built, professionally maintained and managed, homes to rent.” 

Mr Collett observes: “In some areas small landlords, who tend to own older properties, are starting to face stiff competition for tenants. This effect will grow over the next few years, especially in major towns and cities.”

There will, of course, still be prospective tenants who are looking for an older property to live in and who don’t want to live in an urban area - so it is advisable to get clients to consider all their options before making a decision.

eleanor.duncan@ft.com