The Homyze Landlord's Guide
Section 1: Choosing your Property
For many, being a landlord is a pretty appealing prospect. Sitting back, collecting rent cheques, having someone else pay off your mortgage whilst you benefit from the increasing capital values. This is a best-case scenario. There are many questions that you need to ask yourself, to determine whether investing in rental property is right for you. This guide is here to help you think through some of the relevant questions, get some ideas on what is required of you if you decide to purchase a rental property, decide on what basis you want to rent out the property and generally better prepare you for what the potential benefits and drawbacks are for each option.
Homyze works with many of London’s leading lettings agents and rental platforms, so we have a pretty good insight into the maintenance side. We have partnered with some other companies to get additional insight into some of the other areas such as finance; and we will try and keep this guide up to date as the data change so that it will prove timely as well as helpful.
So, with that in mind, let’s get started on what the issues are that need to be considered when owning and operating rental property.
What do you want from your property?
Capital Appreciation & Yield
Capital appreciation refers to the increase in the value of the underlying asset - the property. For example, if you buy a property for £500,000 and it is now worth £600,000, you have got capital appreciation of £100,000.
The true capital appreciation can be affected by the amount of leverage (your mortgage or borrowing) on the property, transaction costs, the rate of inflation etc. but I’m sure you get the idea.
In short, capital appreciation is good, and it means that your home is worth more than you paid for it.
Yield, on the other hand is the money that you receive from renting out the property. This is normally expressed as a percentage of the current value and the most easily calculated number is your gross yield which can be defined as [Weekly Rent x 52] / Current Market Value of Property.
As an example, let’s say you own a property worth £500,000 and you rent it out for £325 per week. Your gross yield would be defined as £325 x 52 / £500,000 or 3.38%.
The other commonly-referred to number is your ‘net yield’ which relates to the amount you earn after deducting expenses such as financing costs, letting agent fees’, service charges, maintenance costs etc..
Both capital appreciation and yield are of course affected by tax but we will talk more about that later (now there’s something to look forward to!). For a fully-worked example, take a look here.
As you can see from the below, there is a reason why property investment seems ‘easy money’. The House Price Index below indicates that prices have gone up 750% in Inner London and 590% in Outer London since January 1995!
Yields tend to be a function of interest rates, and so unsurprisingly, as interest rates have declined, so have estimated rental yields. The graph below is representative of the whole of England and Wales, which tends to overstate returns relative to yields available in London but gives you an idea of where they have been over time. These numbers also reflect average long-term rental yields. Short-term rentals may differ considerably from these levels, depending on the area in which your property is located and the impact of any regulatory constraints (more on this later!).
Source: Homyze, LiveYield
As far as rental yields available in London, below is a table that gives an idea of the current* levels:
|Clapton||4.3%||London Fields||3.9%||Hackney Wick||4.2%|
|Shepherds Bush||3.4%||Brook Green||3.2%||Ealing||3.3%|
Source: Homyze Proprietary Data
Something for the Weekend, Madame?
Capital appreciation and yield as reasons to invest in property are obviously the easiest to cover because they are quantifiable and comparable. There are a number of other reasons why people buy rental properties, and indeed you may not even see them as rental properties. Such investments can be ‘deferred gifting’ to children, such as when parents buy a property that their children can use (now or in the future).
Alternatively, perhaps it Is something that you will use yourself. Rental properties can make sense in holiday or seasonally-driven locations, and if you are using short-term rental platforms such as Airbnb or oneFineStay, then perhaps you can use the property in the shoulder or off-season.
On the whole, however, for cities such as London people tend to buy properties for rental that can be rented year-round whether that be on a long-term basis or as a result of multiple short lets*.
In-house or Outsource?
Another question to consider before deciding how you would like to approach any potential property investment is “Will you be managing it yourself?” This will obviously affect the net yield on your property since (surprise, surprise!) these other companies charge for their services, but this still may be the better option since some of them offer value-add services that can offset the cost and the required time commitment may just be too much for you.
Depending on whether you do short or long-term lets, you may find yourself spending anything from a few minutes to a few hours per week. Short-term lets tend to require you to check the guest in yourself (or have one of the agents below do it) in order to get a high guest rating, and therefore have a greater likelihood of rebooking (and featuring in search results).
For more on this check out Airbnb’s page on hosting here.
These two primary ways in which rental properties are maintained are called self-managed or managed (they sound similar, but are in reality the opposite).
Self-managed properties are those for which you, the owner, take responsibility. What exactly this entails is detailed further below, but basically you are responsible for the maintenance of the property.
Managed properties, on the other hand, are those for which someone else has the responsibility of dealing with the maintenance. Whether this be companies such as Airsorted, White Rabbit or Easy Rental on platforms such as Airbnb or your high street agent for longer-term lets.
Short-Term Agents & Platforms
Below you will see a few of the options of platforms and operators who can assist you in advertising or managing your property for short-term (normally less than 90 days) lets.
Airbnb is the Airbnb of .... short-term rentals. For those who want to manage their rental properties themselves, this is the option to go direct to the largest platform out there.
Airsorted is an Airbnb rental management service including yield maximisation, guest communication and check-in and property maintenance.
Plum Guide provides a curated selection of design-led London properties emphasising, locations and amenities such as food, wi-fi and shower pressure.
White Rabbit Management offer short-term rental management services, minor refurbishments, yield maximisation, guest communication, inventory, check-in/out and property maintenance.
Hostmaker is a short & medium-term rental management company providing services including interior design, yield maximisation, guest communication, check-in/out and property maintenance.
Easy Rental Services provides Airbnb rental management services including yield maximisation, guest communication, inventory, check-in/out and property maintenance.
HelloGuest are a London-focused Airbnb rental management services including yield maximisation, guest communication, check-in/out and property maintenance.
High-end properties, often the principal residence of the owner. Full-service offering including insurance and maintenance.
Longer-Term Agents & Platforms
As for the long-term rents, below are some of the options of operators within, and alternatives to, long-term lettings (normally 6 months plus).
It wouldn’t really be a London property guide without Foxtons. Now throughout London, Foxtons offers let-only and fully managed rental services to landlords on both a short-term (normally 3 months’ minimum) and long-term basis.
Where you find Knight Frank, you will often see Savills. Again, more usually at the higher-end of the London market, Knight Frank has a full-service offering from investment to management.
In select parts of London including Shoreditch, Camden and Notting Hill, Marsh & Parsons offers short (normally minimum 3 months’ minimum) and long-term lettings services from let-only to full-management.
Lavanda bring a data-driven approach to both short and longer-term rentals. Their core offering includes the ‘Service Let’ which offers assured income and potential for yield enhancement.
Housesimple is another of the digital-first agents offering a platform that can help you with tenant finding and appointment scheduling.
The UK’s largest online letting agent, uPad offers primarily let-only services via their integration with the primary property portals - Rightmove and PrimeLocation. For those looking to self-manage their property.
Typically associated with the higher-end of the London market, Knight Frank has a full-service offering from investment to management.
Purplebricks are part of the new breed of digital-first agents, Purplebricks offers tenant finding, part-managed and fully-managed services for a flat monthly fee.
Section 2: Guide to Neighbourhoods
It is not always obvious which areas are going to have strong rental demand, and some areas offer greater opportunity for short-term rental than long-term rental (hello, tourist hotspots such as Soho). Below is a quick look at some of the common areas considered by investors (and in which Homyze work) to give an idea of rents and returns available.
Section 3: The Financial Aspects of Being A Landlord
A lot has changed in the financial world of rental properties. We won’t comment on any of the political or macroeconomic justifications for, or the resultant effects of, these changes but it is safe to say that rental properties have seemed a target for both votes and pounds and it is leading to increasing corporatisation within the rental space.
And just like we would never discuss politics with customers and clients, tax is a similarly personal area (not just because we are British, but also because it is a unique influencer) so we won’t go into detail on the that front. That said, although we are not accountants, here is a quick snapshot of the current situation in abbreviated form.
Of significant importance is that, when it comes to buying a rental property … it is now more expensive to be a rental (second) home buyer since additional stamp duty is levied compared to ‘principal-residence’ buyers as follows:
|Standard Rate||Secondary / BTL property|
|Less than £125,000||0%||3%|
|£125,000 - £250,000||2%||5%|
|£250,000 - £925,000||5%||8%|
|£925,000 - £1,500,000||10%||13%|
|More than £1,500,000||12%||15%|
If you want to check out what the stamp duty levied on your potential property purchase would actually be, you can do so on the Knight Frank website here. [Spoiler alert: it’s quite a lot]
The second change that came into effect in 2016 relates to the ongoing cost of buy-to-let property ownership, and that is the ‘wear and tear’ allowance. Up until 6th April, 2016 landlords who rented their properties on a fully-furnished basis were able to deduct 10% of the net rent received (taking account of things such as council tax and utility bills).
But there is no point dwelling in the past (but there is some benefit in learning from it!). As of now, this deduction has been removed and replaced with one that allows you to deduct the costs of letting a fully furnished property only when those costs are actually incurred.
You can get some more detail on these tax changes on the Residential Landlords’ Association website here.
The other BIG change that came into effect in the 2016/7 tax year (as if the other two were not enough!) was the change in treatment of financing costs, namely the deductibility thereof. This is to be phased in over 4 years and reduces the deductibility of financing costs to zero over this time period.
There are exceptions (well, a change and a 4-year phase in would be too simple wouldn’t it ... after all, this is tax!) such as whether the property is a ‘Furnished Holiday Letting’ which could maintain the deduction of financing costs (and affect the wear and tear allowance) but obviously this involves other trade offs.
We will let you determine for yourself whether your property rental on oneFineStay or Airbnb qualifies as a holiday let but for the definition of a ‘Furnished Holiday Letting’ check out the HMRC website here.
The phase in of these changes to tax deductibility will be as follows:
- 75% deductibility for the tax year ended 5th April 2018
- 50% deductibility for the tax year ended 5th April 2019
- 25% deductibility for the tax year ended 5th April 2020
- 0% deductibility for tax years commencing after 6th April 2020.
See, we told you the tax aspects were complicated. They are, and can have a large impact on the net returns on your investment. However, simplistically, if you are making a solid investment the effects of tax are going to be on profits which is a good position from which to start. Financial engineering and tax avoidance is not an investment strategy.
We strongly recommend speaking to a tax professional about unwittingly exposing yourself to tax. None of the above impacts should be dealt with in isolation since they will often have knock-on effects on other parts of your property (or broader) tax position.
So, for those of you still with us, let’s move onto some of the other, and hopefully more straightforward parts of your potential property purchase.
How much can you borrow?
Obviously, there are myriad factors that impact the ability (or amount) you can borrow for a buy to let property (didn’t I just say this was going to get more straightforward!). These include, whether the borrowing is done within a SPV (special purpose vehicle) such as a LLC or LLP; whether there are additional assets pledged as security; your employment status; the type of property being purchased and the way in which it will be rented.
As a rule of thumb, mortgage rates tend to be around 2.0 - 3.0% higher than principal residence mortgage rates. Also, as a standalone investment (i.e. with no other collateral) the level of rent that would be expected in order to cover interest payments would be 1.25x and the level of borrowing available would be 75%.
Given the above, you may want to have a look at Dwell’s Universal Mortgage Calculator - it should at least give you an idea of whether you should be looking in London or Lincoln given the amount you want to invest.
If you were looking to buy a rental property for £500,000 you could expect a mortgage rate of around 4.75%, the possibility of borrowing up to £375,000 (75% of £500,000) and a requirement to have monthly rental of £1,855 (4.75% * £375,000 / 12 * 1.25). These are obviously simplified assumptions and will be affected by things such as interest rates, property prices and the economic cycle more broadly.
There is a great degree of variability in this sector - hence the existence of these startups to make the process more transparent - so feel free to update these figures for yourself. As can see above and below, for example, this (gross) rental yield may not be possible in this environment.
What are mortgage rates at the moment?
As you can see from the above, mortgage rates have hovered at historically low levels, around 4%, since the financial crisis in 2009. Most would consider these to be ‘abnormally’ low levels, so you should stress-test your purchase decision analysis for ‘normal’ levels around 6%.
Also, as you can saw in the Yield section above, this is still above the rental yields (which are gross) and so are not going to be a positive source of cashflow in the immediate term assuming you borrowed the entire purchase price (see How Much Can You Borrow?).
Who pays which bills?
Responsibility for the bills primarily depends on whether you let your property out on a short-term or long-term basis. If you are just letting your property out on a short-term basis, things such as the council tax, utilities, buildings and contents and communications bills will remain your responsibility. If you are renting the property on a longer-term basis most of these will shift over to the tenant, with the exception of the buildings insurance (contents would most likely transfer e.g. unless you rented the property out fully furnished). You may also top this up with landlords’ insurance.
Bear these in mind, as they can have a big impact on your potential yields in aggregate.
Are you living in the property?
If you are living in the property, the income that you derive from short-term letting is likely to be additional money that you can use to fund ‘your lifestyle’, for example (going on holiday) or offset your mortgage costs. As per above, the majority of the costs will remain your responsibility and of course, please check that you are in accordance with your mortgage, building’s management (for a flat), lease and insurance requirements!
Section 4: The Regulatory Requirements for A Landlord
There are a number of requirements on a landlord when considering letting out a property. They should not be considered onerous since they effectively are confirmation that the property is in good order, but failure to comply can result in heavy fines of up to £25,000.
The primary requirements in this regard are as follows:
Gas Safe Checks
Let’s start with this one, since if you are found in breach it can mean a fine of up to £25,000. As a landlord, you are required to have an an annual inspection of the gas supply and any gas appliances you may have. This must be carried out by a Registered Gas Engineer (often referred to as Gas Safe).
You should receive a copy of the report and provide a copy to the new (or existing) tenants within 28 days of the inspection being done. If there are any defects or repairs required, you should also keep note of the remedial works completed.
Slightly less financially painful in terms of non-compliance with a maximum fine of £5,000 (but one that can also lead to 6 months’ imprisonment), the next requirement on landlords relates to their electrical wiring and equipment.
An electrical safety check must be commissioned prior to the commencement of a tenancy, and must be carried out by a competent person (for kitchens and bathrooms this means a Part P qualified electrician) to ensure that the electricity supply, and all appliances, are legal (good working order). Perhaps less obvious, this also includes supplying instruction books where needed for safe use.
The requirement for an electrical check falls under the Consumer Protection Act 1987 and means that Landlords have a legal obligation and a duty of care to tenants to ensure that the electrical installation and the electrical equipment supplied is safe. The Electrical Equipment (Safety) Regulations have been mandatory since 1st January 1997 and state that all electrical appliances provided with let accommodation must be safe. This applies to both new and second-hand appliances, and covers all electrical items supplied for intended use by the Tenant. The regulations also cover fixed appliances such as cookers etc. The only method of insuring that these appliances are safe is to have them tested by a trained electrical engineer using the portable appliance testing equipment, known as a ‘PAT test’ (industry term, not ours - don’t blame us for the duplicated ‘T’!).
To break it down, the requirements with regard to electrical items are as follows.
All electrical systems and items must be:
- Certified safe when a tenancy begins
- Maintained in a safe condition throughout the tenancy
- Maintained only by ‘competent persons’
- Fit for purpose and free of defects.
What should you as a landlord do?
At a minimum, have an annual electrical safety inspection - an Electrical Installation Condition Report (previously known as a Periodic Inspection report) and ensure any installation or maintenance works are done by Part P ‘competent persons’.
If you are supplying electrical appliances as part of the property, these should be confirmed as ‘safe’ at the start of the tenancy by a qualified electrician undertaking something known as PAT (Portable Appliance Testing) testing (as above … yes, we know the T is redundant, but we don’t make the rules).
Energy Performance Certificates
It is a legal requirement that any property marketed either for rent (or for sale for that matter) has an up-to-date Energy Performance Certificate and that this is made available to all prospective tenants.
There are a number of ways in which you can improve the energy efficiency of your property, but to get it into a ‘reasonable range’ if it is not already there, the most common ways of enhancing a home’s energy efficiency are as follows:
- Insulate your loft, but allow ventilation to circulate around it.
- Insulate your hot water cylinder and all pipes.
- If renewing, fit a new, highly efficient boiler (see the Homyze Guide to Boilers for information and costs on this)
- Install cavity wall insulation
- Install high quality double glazing
- Consider fitting a water metre (if there is not already one there).
There have been moves by successive Governments in the form of grants to help homeowners fund these works. To date these grants have not been available to the Private Residential Landlord, but there are plans in place to make EVERY building more energy efficient in the future and hopefully that will change.
In addition to the above, landlords need smoke alarms placed on every level of the property. For properties that use “a solid fuel burning combustion appliance” including boilers and fireplaces, you will also need to ensure carbon monoxide alarms are installed too.
If the property you own or buy is a ‘House of Multiple Occupation’ (HMO) you will also be required to install fire extinguishers. On a similar note, if the property you are renting out is to be offered furnished, the furniture should be ‘fire safe’ and confirmed as such on labels.
In a more administrative vein, landlords must also get a copy of their tenants’ ‘Right to Rent’. This can take the form of a government-issued document confirming their ability to live in the UK. This applies to long-term tenancies only, but you should keep copies just in case there happens to be a request for this documentation.
You will be required to lodge any deposit from your tenants with a Government-backed deposit protection scheme such as the Tenancy Deposit Scheme or MyDeposits. Failure to do so can result in fines of up to 3x the amount of the deposit and can also affect your ability to claim for any reduction in the unfortunate event that damage is incurred. This should be done within 30 days of the start of the tenancy.
You will also need to provide long-term tenants with a copy of the Government’s ‘How To Rent’ guide at the start of the tenancy. This can either be provided in printed form, or you can email them a link to the guide online which can be found here. If you don’t provide this guide, then this will complicate or preclude the serving of a Section 21 notice in relation to repossession and that is a complicated enough process without these hiccups.
Last, if for whatever reason you need to attend the property, for example in regard to maintenance (see below) you need to give your tenants 24 hours’ notice.
Summary: Your requirements as a landlord
So, if the financial news was already somewhat less than upbeat, the increasing regulation of the rental sector may seem like a red rag to a bull. The good news is that for landlords who are looking to manage their property in a professional manner - which by default one would assume readers of the Homyze Guide to Landlords woulpd be! - the increasing intervention by regulatory bodies and local authorities is really designed to catch unscrupulous actors in the sector. If you are looking to make an intelligent investment decision and maximise your return on investment through prudent management then most of these things are a checkbox exercise.
Section 5: The Maintenance Requirements of A Rental Property
It should be implicit but landlords are required to provide accommodation that is fit for inhabitation. This includes being structurally sound, having adequate access to water and free from serious disrepair or damp.
- Repairs to a property’s structure and exterior
- Heating and hot water systems
- Gas appliances
- Electrical wiring
What are the most common problems and How much do they cost to fix?
Here is a list of some of the works that you may either be required to undertake, or that are pretty common in regard to tenanted properties. You can also see estimates for the costs of the associated works which are based on the average cost for these jobs when done by Homyze.
- Gas Safe Certificate: £84+VAT
- EICR: 1-bedroom property: £120+VAT, 2-bedrooms: £180+VAT, 3 bedrooms: £220+VAT
- New Electrical Consumer Unit: £500+VAT
- PAT Testing: £79+VAT for up to 10 appliances
- Unblocking of toilet: £82+VAT (but variable)
- Installing new toilet: £250+VAT
- Touching-up hole in wall: £140+VAT (inc. materials)
- Repainting a living room: £400+VAT (walls only)
- Fixing leak from property upstairs (including redecoration works): £350+VAT
- Tidy of garden for marketing: £95+VAT
- Major tidy of garden at end of tenancy: £125+VAT
- New shower mixer (including parts): £250+VAT
- Replace a tap (including parts): £135+VAT
- Toilet not flushing: £90+VAT
- Problem with boiler: £105+VAT (but variable)
- New bathroom extract fan: £120+VAT
- Kitchen door not closing: £70+VAT
Section 6: Short versus Long-term Rental (Costs)
So, as you can see above, there are a number of ways in which you can approach buying a property for rental. There are pros and cons to each, and often these will be translated into the returns available and the work required. As a recap, and to summarise, below are some of the ways in which you can approach generating income from your property:
The three biggest platforms for renting your property out on a short-term basis are Airbnb, oneFineStay and HomeAway. Airbnb has recently agreed to implement the requirement in London that properties are not let on a short-term basis (i.e. for less than 90 days) for more than 90 days in total per year. This will have a big impact on the returns available from using this strategy, and whilst it may still work for example as supplemental income where you are using the property at other times yourself, this may make this option considerably less attractive.
Other platforms have not looked to implement this restriction - or at least not in so robust a way - but this may change at some point in the future. Probably as a result of this, we have not yet seen any real impact on properties, particularly in areas that have historically seen significant utilisation of Airbnb such as Westminster and RBKC.
As a reference, short-term rental platforms such as Airbnb charge 6 - 10% of the rental income as a fee (oneFineStay charge slightly more but offer additional services) whereas traditional, high-street estate agents charge 20 - 30% of the rental rate (Any wonder they have been ‘disrupted’?)
Long-term agents tend to charge around 8 - 12% for let-only services (just finding a tenant and collecting the rent) and 4 - 7% for property management (responding to issues that arise during the tenancy).
Why would a landlord rent out long-term?
Whilst you can see from the numbers below that long-term may look slightly less attractive, it is by far the more common. The reasons for this are multiple, but include factors such as:
- Set it and forget it: You do not have to do anywhere near as much ongoing maintenance if you have a tenant in place for long periods of time
- Regulatory risk: There is always the risk that Airbnb and other such platforms may be subject to increasing scrutiny and reduced accessibility for owners. As such, the returns may look more attractive in the short-term
- Absent landlords: Linked to the above, foreign or absent landlords typically take advantage of the more institutionalised nature of long-term tenancies
Is it better to Use Airbnb or Rent Out Long-Term
Yes, the above contains a lot of words … so, to make things perhaps a little clearer, let’s look at a worked example with some illustrative (if not prescriptive) numbers to give you a sense of which one might be right for you, in financial terms. You can then weigh the other issues involved to decide if the ends justifies the means.
Obviously, there are a number of assumptions in the below, but all are based on real-world figures for the various components.
Airbnb versus Long-term rental: Case Study
Example: A 2-Bedroom Flat in Fulham, purchased as an investment property and self-managed (let-only agent)
|Short-term Rental||Long-term Rental|
|Property Purchase Price||£725,000||£725,000|
|Total Purchase Price*||£774,250||£774,250|
|Rental||£130 per night||£1,850 per month|
|Council Tax||£1,226||£ -|
|Phone / Cable / Internet||£960||£ -|
|Gross Yield / on Total Costs||3.80% / 3.55%||2.91% / 2.72%|
|Equity Requirement (25% of Purchase Price plus Costs)||£230,500||£230,500|
|Mortgage (% of Total Costs)||70.2%||70.2%|
|Mortgage Costs||£1,518 per month||£1,382 per month|
|Net Yield / on Total Costs||0.61% / 0.58%||0.21% / 0.20%|
|Return on Equity||1.95%||0.67%|
*Based on higher-rate stamp duty and purchase costs of £1,250 for surveys, conveyancing etc.
**The above calculations are based on realistic occupancy levels for short-term rentals. If one were to assume that the property could only be rented for 90 days, the Net Yield would reduce to 1.08% (1.01%) with an Annual Profit of £7,834
***Maintenance costs are generally higher with short-term rentals, but you do not need to pay for e.g. EPC to list (rightly or wrongly)
We hope that the above does not seem daunting. Forewarned is forearmed as somebody, somewhere once said. A lot of the problems are passed onto others if you choose to go the letting agent route, and whilst the other aspects may seem somewhat onerous, it is to everyone’s benefit that the industry is regulated and operating smoothly.
Here at Homyze, we try and take as much pain out of property maintenance as possible. We have a team of professionals who specialise in all aspects of property maintenance, from putting your property into its most marketable state through to making repairs at the end of a tenancy (and everything in between). So if you need a gas or electrical certificate or some painting and decoration, just make a booking via our website or call us on 0203 808 5466.
Plus, we are always happy to speak about any property projects you may be considering so if you have any questions at all, please get in touch.
Whilst we believe that all the above information is correct at time of publishing, and we will endeavour to keep it current, please do make your own enquiries (particularly if they relate to any tax and financial aspects) to ensure that you are aware of all the relevant issues.