In the past, landlords who came into our office had actively chosen to invest in property, either as a full-time career or to benefit from long-term capital growth. It isn’t like that anymore. Now, many of our landlords are so called ‘accidental landlords’ who never intended to become a landlord but have found themselves needing to rent out a property they own.
The London rental market remains strong, with 30% of Londoners living in the private rental sector. So, renting out your London property can be a great way to generate a regular extra income and benefit from capital growth when you come to sell.
Here we look at when renting out your home makes sense and what you should consider before taking the plunge.
Should you sell your house or rent it out?
Most people expect to sell their current property before buying a new one. But another option is to hold onto the existing property and let it out. For some people, renting out their property could boost income and bring increased security in retirement.
Some people have no choice but to rent out their property. For instance, people who are temporarily working away but want to return to their home, or those who have been unable to sell but had to relocate for work.
When does renting out your home make sense?
Renting out your property, rather than selling it, could be the most sensible option if:
- You can afford to buy without selling
- You want to move back into the property in the medium to long term
- Your type of property rents well in the area
- You think property prices are likely to rise in the area
- You have the time to dedicate to being a landlord or you are willing to pay a letting agent
Here’s a closer look at some of the questions to consider.
Can you afford to own & maintain two properties?
Firstly, you need to decide whether you can afford to keep your property and buy a new one at the same time. Do you have enough cash for a deposit for a second mortgage as well as stamp duty and legal fees?
Unless you own one of the properties out-right, you will need to be able to afford repayments on two mortgages, one paid by your salary and one from rental income.
Will renting your old home be profitable?
Talk to local letting agents in your area and research similar properties to yours on Rightmove and Zoopla to understand tenants’ demographic in your area and the monthly rental you can expect. Do the maths, will the rent cover all your costs and allow for void periods? It may help to calculate your rental yield.
Consider whether your home needs any renovations to make it more appealing to tenants, this may mean you can charge more rent, but you will need to pay the upfront costs.
What do you think will happen to house prices?
If you own a great property and believe that it will rise in value in the future, holding onto it can be an excellent investment.
Are you ready to become a landlord?
Renting out your home isn’t as simple as finding a tenant and waiting for the money to roll in. Residential landlords have many obligations and responsibilities, which can result in hefty fines if not adhered to. This includes:
- Gas and fire safety
- Electrical safety
- Right to rent checks
- Obtaining a license to rent your property
- Meeting minimum energy standards
- Tenant deposit protection
Unless you hire a letting agent to manage your property, you will also need to be on hand 24 hours a day, 7 days a week, if your tenants have an issue. Some tenants can be very demanding and expect you to fix minor problems with the property, which will take up a lot of your time and resources.
Mortgage issues when renting out your home
If your property has a mortgage, you will need to check with your mortgage lender that you are allowed to rent it out on your current mortgage. Your lender may grant you a Consent to Let, which allows you to let your property for a maximum of 12 months while maintaining your current mortgage. Otherwise, you will need to switch your residential mortgage to a buy to let mortgage. In this case, you will incur an arrangement fee, and the rate of the mortgage may differ from your current rate.
Income tax issues
You must pay income tax on any profit you earn from rental property you own. This is the rental income you receive less any allowable expenses.
You should inform HMRC when you start renting a property, as you will probably need to complete a tax return. Keep a record of how much rental income you receive and allowable expenses you incur in each tax year. Click here for a list of allowable expenses, from 2020 none of the interest on your mortgage payments can be considered an allowable expense.
Capital Gains Tax (CGT) issues
If you decide to sell your property later, you will be subject to capital gains tax on the profit you made on the property since you rented it out.
Stamp duty tax issues
Owning a buy to let property means that when you purchase another property, it will be classed as a second property, and you will be subject to higher rates of stamp duty tax. Stamp duty on additional properties is payable at the basic rate plus a 3% surcharge on each band.
Pros and cons of letting your property
If you’re still unsure whether renting out your home is for you here are some of the benefits as well as the pitfalls of renting out your home.
- You can make a profit from renting out your home and secure capital growth from being able to retain your property
- You can outsource the day-to-day work of letting your property to a lettings and management company
- Most tenants pay their rent on time and will look after your property
- If you are only moving away temporarily, renting out your home will cover your mortgage costs
- Being a landlord can be a hassle, although you can hire a lettings agent to rent and manage your property for you
- You will probably need to spend money to ensure your property is ready for tenants
- If your property is expensive to maintain, you may not be able to charge enough rent to cover all your costs
- If your tenants don’t pay their rent, or your property may be empty for periods, you will have to cover your mortgage payments without any rent
- Tenants can cause damage to your property
- You will have to pay capital gains tax when you sell
- You will have to complete a self-assessment each year and pay tax on your rental income
We can help
Robert Holmes have over 25 years experience in residential lettings in Wimbledon and the surrounding area. We offer an unrivalled service for our landlords, many of whom are long-standing customers. We provide both let-only and fully managed packages savings you precious time and giving you peace of mind that your property has great tenants and is well looked after. Contact us now to find out more.