How to make money from renting out your home, from buy-to-let mortgages to deposits and maintenance
01-17-2020
How to make money from renting out your home, from buy-to-let mortgages to deposits and maintenance
Making money from your property is subject to a raft of regulations
By Samantha Downes
Making money from your home is an attractive prospect for many, but there are several rules and other considerations to take into account (Photo: Yui Mok/PA Wire)
Being a landlord is not for the faint-hearted, but with the number of homes available to rent continuing to fall, letting out your property can be a reliable source of income.
According to the latest English Housing Survey, the number of homes to rent fell from 4.7 million in 2016-17, to 4.5 million in 2017-18. And this at a time when house prices continued to increase, making it harder than ever for first-time buyers to get on the property ladder.
Short-term rental schemes, such as Airbnb, have encouraged home-owners to rent out rooms while many older homeowners have invested in buy-to-let properties by taking advantage of rules which allow them to access pension cash at age 55.
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Even so, renting a property comes with legal and tax implications. Peter Savage, president of the Association of Rental Letting Agent’s Propertymark scheme says: “There are 145 pieces of landlord legislation so it’s worth getting up to speed. Failure to do so can result in tens of thousands of pounds in fines and potential prison sentences.”
The mortgage must-have
UK banks approved 43,715 mortgages in November, up from 41,312 in October and the highest total since January 2017 (Photo: Joe Giddens/PA Wire)UK banks approved 43,715 mortgages in November, up from 41,312 in October and the highest total since January 2017 (Photo: Joe Giddens/PA Wire)
Not all lenders allow you to rent out your property, unless you have a buy-to-let mortgage in place.
Rosita Janulion, mortgage expert at online mortgage broker Habito, says: “Look at your terms and conditions as lenders will see this, however short-term, as a change of use.”
Habito’s research showed just one third of homeowners read their mortgage T&Cs to the end; a further third didn’t read them at all. Rosita adds: “Lenders can really differ in their approach to certain aspects, such as sub-letting, so it’s key to check the small print.”
Help to Buy mortgages do not allow sub-letting and if you are a leaseholder, there are other restrictions. Lauren Fraser, senior associate at property lawyer Charles Russell Speechlys, says: “Short-term ‘holiday’ lettings such as Airbnb are considered a commercial use, but most leases expressly say that the property can only be used as a private residence and some specifically ban holiday lets.”
Legal licence
You may need to apply for a landlord licence. This system was introduced in 2006, but it has not been adopted by all local authorities.
A 90-day maximum rental rule is also in place for short-term rentals in London. Alex Hammond of landlord advisory service Innhabit, explains: “This rule came from pressure from local councils not liking the Airbnb surge. Interestingly, Airbnb enforces the 90-day rule themselves now as the council can issue big fines.”
If you want to let out your property for longer periods, though, you will need to apply for planning permission. An application for planning permission can take up to eight weeks to determine.
Case study: Happy tenants, happy landlords
Tan Jeraj: 'Seeing happy tenants provides a different type of remuneration'Tan Jeraj: 'Seeing happy tenants provides a different type of remuneration'
Tan Jeraj, 38, from south-west London, runs TJ Residential Ltd.
“I have been managing property on behalf of family and friends for over 16 years and have done so as a private landlord for 10 years. It gives me a sense of satisfaction because I’m helping to provide decent living accommodation in one of the world’s most expensive cities.
“In the past few years I’ve moved into property development and transforming places, so it’s about creating high-end living spaces, not just renting them. I believe in making sure my tenants pay a fair price.
“It is a business, but a rewarding one. Seeing happy tenants provides a different type of remuneration, beyond just meeting monetary needs.”
The right insuranceYou risk invalidating your buildings insurance by not having the right contents insurance. Peter says you will need to take out specialist landlord insurance because most standard policies don’t provide cover.
“Many large insurers offer this type of policy and a good one will cover loss of rent, damage, legal expenses and liabilities,” he adds.
Finding and keeping tenants
Research similar properties in the local area and find out how much they are being let for. You will also need to take into consideration your target market, for example students, and what they can afford.
If you are letting out your whole home, a letting agent can help find and vet tenants. Checks to make can include credit eligibility, affordability, employer checks and any references from previous landlords.
You are also legally obliged to confirm prospective tenants have the right to lawfully live in the UK. Deposits can only be up to five weeks rent while lettings fees to tenants were banned last year. It isn’t a legal obligation to have a tenancy agreement, but it is advised.
Deposits and maintenanceIf you are taking a deposit from tenants, it must be protected in one of the three Government-authorised TDP schemes. These include the Deposit Protection Service (DPS), MyDeposits or the Tenancy Deposit Scheme (TDS).
You will need to place the deposit in one of the schemes within 30 days of receiving it. Peter adds: “If you don’t do this, you won’t be able to evict your tenant and you might be ordered to return the full deposit and be given a fine of up to three times the value of the deposit.
Making it safe
Other things you must do when renting out your property:
Your property must have an EPC band E energy certificate.
All gas appliances must be checked by a Gas Safe registered engineer every year.
Working smoke alarms must be fitted on every storey of the property and carbon monoxide detectors in any room where solid fuel is used.
You need to give tenants emergency contact details and it is illegal for you to enter the property without your tenants’ prior permission.
Paying taxMike Parkes, technical director at Gosimpletax, says the amount of tax you pay depends on whether the room you are renting out is in your main residence or not.
“If you are letting a room out of your home, you may qualify for a tax-free allowance of £7,500 per year under the Rent a Room scheme but if you are hosting an Airbnb listing in a separate property, you will be taxed on profits like business owners are.”
If your property is not your main home and qualifies as a furnished holiday letting, you will be entitled to several forms of capital gains tax relief. Mike says: “If you are serious about making money from renting, you need to be aware of your tax liability so having an accountant advise you can help.”