No matter how many courses you’ve attended or books you’ve read, there are challenges associated with becoming a buy-to-let landlord that you’re likely to face. There are some challenges you can do very little about – for example, if a sale falls through or a tenant goes rogue despite having sparkling references and recommendations. However, there are also challenges that you can take steps to mitigate.
These are some of the biggest challenges facing buy-to-let landlords in 2020, along with a few tips to help you overcome them.
1. The Removal of Mortgage Interest Tax Relief
We are now in year 4 of the section 24 tax changes that will see the phasing out of tax relief on the mortgage interest payments of buy-to-let investors. Worryingly, research from the National Landlords Association has found that 49 percent of landlords still do not fully understand the implications this change will have for their portfolios.
In response to the changes, landlords are continuing to change their business structures, with nearly 4 in 10 saying they will purchase buy-to-let properties through a limited company in the future. However, re-structuring your business for tax purposes can be an expensive and time-consuming process, and with no-one knowing when the tax rules might change again, you should think carefully before you take action.
2. The Letting Fees Ban
The letting fees ban, which came into force on the 1st June 2019, will have far-reaching implications for buy-to-let landlords. The new rules are designed to crack down on agents, but they’ll also have an impact on landlords, who will be left to foot the bill for tenant referencing and inventories, which are costs that were passed onto tenants. The new rules also cap deposits at a maximum of five weeks’ rent.
It’s not all bad news for landlords though. Fees can still be charged where costs are incurred as a
result of the tenant’s actions. That includes things like lost keys, contract changes requested by the tenant and the cancellation of utilities and communication services. This type of charge must now be supported by evidence such an invoice to prove tenants are being charged fairly.
3. Staying on Top of Regulation
There has been no shortage of new regulations introduced over the past 12 months – something most buy-to-let landlords will be painfully aware of. That includes the letting fees ban, a new HMO definition, Minimum Energy Efficiency Standards, electrical safety checks and more.
If you’re struggling to keep up, becoming a member of a landlords association will ensure you’re aware of any changes as and when they happen and help to keep you compliant.
4. Strict Mortgage Lending Criteria
The buy-to-let mortgage landscape has changed significantly over the last couple of years as a result of the new mortgage stress tests for landlords. For most buy-to-let mortgage applications, lenders want to see proof that the rent will cover 140-145 percent of the monthly mortgage repayment at a hypothetical rate of interest of 5.5%. That has made it increasingly difficult for landlords to secure mortgage finance.
There are a number of lenders out there that can provide more flexibility. That includes specialist lenders like Landbay, Axis, Precise, Fleet and Vida. However, you may find you have to pay more for that added flexibility by way of higher interest rates and fees.
5. HMO Licensing
Changes brought in last October mean that thousands of landlords who once let shared properties now fall under new HMO licensing rules. Now, any large flat or house that’s shared by five or more people from more than one household requires an HMO licence. If you have a buy-to-let property in London that’s let to unrelated people, it’s also important you understand what is meant by selective, additional and mandatory HMO licensing and how they all work. 22 London boroughs now have or are consulting on discretionary licensing so you’d be wise to stay up to date. London Property Licensing is a good source of reliable information.
6. Achieving a Good Yield
The introduction of strict mortgage stress tests means buy-to-let landlords are now under more
pressure to achieve strong yields. The situation has been made more difficult by an increase in the number of first-time buyers and weakening tenant demand in some areas that has pushed rental prices down. The good news is that there are signs the market is recovering. Buying in a good location, taking pride in your property and setting the highest possible standards throughout the tenancy will help to protect those yields. Letting to professional sharers and students can also help to maximise your returns.
Subletting has become a growing concern for landlords in recent years, particularly in areas such as London where rental costs are so high. As well as tenants reducing their costs by subletting their properties, there are also unscrupulous rent-to-rent operators out there who will exploit the properties of unsuspecting landlords. Landlords must make it very clear that subletting is not allowed before agreeing a tenancy. Conducting periodic inspections every 3-6 months will help to reinforce your policy and allow you to keep an eye on the occupancy of your property.
8. Right to Rent
The government’s Right to Rent initiative, which was introduced in 2016, requires landlords to check that their tenants have the right to live in the UK. Failure to do so could lead to criminal sanctions. Understandably, this has been a contentious change for many, who argue that checking a tenant’s immigration status is not the job of a landlord.
As a landlord, you must be able to prove you have complied with the rules to avoid getting fined. You should keep a record of:
- The date the check was done and the result
- The name of the person doing the check
- Details of the questions asked and the answers given
- Copies of the ID documents provided to you
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