Investing in buy-to-let property continues to offer an excellent return for millions of people in the UK. Most are ordinary folk who earn extra income from renting out one or two properties, with few having larger rental property portfolios.
There are about 2.75m unincorporated private landlords in the UK. They're don't rent property via a limited company, rather, they report rental income via self assessment (the system that HMRC uses to collect income tax).
Many people become accidental landlords, for example, after inheriting a property or moving in with their partner or spouse, leaving their former home vacant. Some relocate, often because of a new job. But it's less accidental for many others, who invest their savings or inheritance money in a buy-to-let property to provide additional income now and gain an asset that they'll sell one day – hopefully for a tidy profit.
Maybe you're already one of the above or perhaps you soon plan to become a private landlord. So, how can you maximise your returns?
New tax year, new you!
You can file your Self Assessment for the tax year 2023/24 any time from 6 April 2024, don’t leave it until 31 January!
For self-employed individuals, sole traders, or those with non-PAYE income, GoSimpleTax provides direct Self Assessment filing with HMRC, offering helpful hints and savings tips throughout the process. Let GoSimpleTax handle all calculations.
Buy property in the right location
If you can afford it, it makes sense to buy rental properties in areas where property prices are likely to increase significantly over time. Before investing, thoroughly research current and historic property prices, as well as average rental yields, to help you decide on a location. If you can identify up-and-coming areas, properties will be cheaper, which means your long-term returns could be far greater.
Look for areas that offer good rental yields that have risen in recent years or places where they have potential to do so. You'll want to receive good rental income, but it's also about the return you'll get on your investment asset over the medium to long term.
Did you know? To work out a property's percentage rental yield, deduct all annual expenses and costs from the annual rental income, divide this by the property's purchase price and times by 100. A rental yield of 5%-8% is considered good, with average rental yields varying widely from location to location.
Target the right tenants
Targeting well-paid, young professionals will obviously bring you greater rental income, but you must offer a property they'll want to live in. If you offer a nice property in the right location close to good local transport links, you'll be able to charge a premium rent. Your property will probably need to be part if not fully furnished, which will add to your initial costs.
Alternatively, if your target tenants are families, they'll want more space and bedrooms, possibly close to local schools and shops. They are also more likely to want an unfurnished property. This may also give you a decent rental income, although you may not be able to charge a premium rent. To maximise your rental income, think carefully about which tenants you plan to target.
Carry out yearly rent reviews
You should keep up to date with rents for similar properties nearby and review your rent from time to time to cover your increasing costs. As reported by the BBC (quoting ONS figures), the rent paid by UK renters rose by 5.3% on average in the year to July 2023 – the biggest rise since 2016. This was fuelled by strong demand, fewer rental properties and landlords faced with significant price rises, especially mortgage costs.
Before any rent increase, consider whether your tenants will be able to afford a higher rent. Put the rent up too much and some tenants may move out, which can lead to void periods for you. Good tenants are worth keeping hold of, but you also need to cover your rising costs. While demand remains very strong, signing longer-term tenancy agreements can be a way for landlords to ensure a regular rental income and avoid void periods. Finding new tenants can also be expensive, so caution is advised.
Landlord in England or Wales?
Created to ensure fair treatment for tenants, landlords need to be aware of the rules when it comes to increasing rent. Your tenancy agreement should explain how and when you'll review the rent.
Landlord in Scotland?
Created to ensure fair treatment for tenants, Landlords need to be aware of the rules when it comes to increasing rent. From 6 September 2022, there has been a temporary cap on private rent increases. The cap is set at 3% and is expected to remain until 31 March 2024 at least.
Conduct thorough tenant checks
Nightmare tenants can prove extremely expensive, wreck your property, waste your time and make your life much more stressful. Carrying out thorough tenant credit and reference checks (including references from previous landlords) can help ensure that your tenants look after your property and pay their rent in full when due. This can help avoid the time-consuming and expensive headache of having to evict them.
Your tenancy agreement should detail provisions for deposits, payment of rent, late-payment fees and other key details, so there's no confusion over rights and responsibilities.
Make sure you're fully insured
Having landlord insurance isn't a legal requirement, but it can give you peace of mind and ensure that you're not left out of pocket should something happen to your property or tenants. It usually includes buildings and contents insurance, but it can be wise to also get property owners' liability insurance, as well as loss of rent and tenant default. Although you will have to pay a monthly premium, rent guarantee insurance can protect you against loss of rent if a tenant defaults. Such a scenario can prove very expensive, especially if you have to pay legal costs. Don't leave anything to chance.
Always minimise your costs
Controlling costs can be a huge challenge, as landlords have found out in the past few years, but you must minimise your costs if you are to maximise your rental income. Make sure that you're claiming all of your allowable expenses as a landlord. It will help to reduce your tax bill.
One way to reduce costs is to do more yourself, which can include managing the letting and maintaining your property, doing your own simple accounting and tax returns. Carefully assess all your landlord costs, at least every six months. Try to negotiate better deals with all your existing suppliers. If you can't, explore other options. Always look for better value, because every penny you save could boost your rental income.
Need to know! You claim your landlord allowable expenses by summarising them within supplementary tax return form SA105, together with your taxable rental income. This is submitted with your main annual self-assessment tax return (SA100), which details your other income, allowances and any other tax reliefs. The online filing deadline is midnight on 31 January following the end of the tax year on 5 April.
Copyright 2023. Sponsored post by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self assessment.