Confessions of an Accidental Landlord

When I say that I get why people are obsessed with property, you have to remember that back home in Ireland, we are obsessed with two things – property and carbohydrates. 

And I can recognise that as an asset class property has some real advantages.  It is the only widely available asset that the average punter can leverage (i.e. obtain borrowing against) and over the long term buying an asset using someone else’s money usually serves to amplifies returns. 

If you put a £20,000 deposit down to buy a property for £100,000 and it rises in value to £120,000 – you haven’t just made a 20% return, you have doubled your money.

Property is also a great behavioural investment.  There isn’t a big ticker on the outside of the house that shows you the value moving around day in, day out. 

It’s also difficult to get your money “out of the walls”, you can’t exactly quickly and easily sell a property.  This friction means that most people will hold property for a significant period of time and, as we all know, the longer that you hold an asset – the better the chances that you will see good price appreciation. 

Although, while UK residential property has done well over the long run it hasn’t quite performed as well as the best businesses in the world (i.e. the global stock market) has.

Source: Gov.uk, MSCI. Past performance is not indicative of future returns.

I have found myself in the position of becoming an “accidental landlord” recently and I have to say, its not been a pleasurable experience.  It’s just a lot of hassle, and there are costs on costs on costs.

But I am conscious that I have a bias towards stocks.  I perpetually find it amazing that we can easily, and cost efficiently, own a share in the best businesses on planet earth with almost zero friction or effort. 

It’s what I know and understand, and I’m sure that some of you who are well established property investors will be tearing your hair out at some of the following, but if I was speaking to someone who was thinking of buying a property to let out for the first time – this is what I would suggest they consider.

What is the point?

The first priority is for you to understand what it is that you are trying to achieve.  Are you aiming to absolutely maximise the rental yield that you make?  Or are you, like me, looking to cover your costs for a temporary period of time, while having as easy a life as possible?

The answers to these questions will affect what sort of a property you buy in what area, what sort of tenant you decide on and whether you appoint a managing agent to look after the company during the tenancy. 

Be realistic about costs.

I spoke to five estate agents in South London (kill me), and was quoted between 8% -17.5% of monthly rent for full property management.  However something that I didn’t realise is that this is not an “all-in” figure and there are a number of additional costs e.g. for pre and post tenancy cleaning, for taking inventory, check-in/check-out etc. 

Don’t ask me why these costs aren’t included in the up front figure, just recognise that there are likely to be associated costs on top and that they can be chunky. 

In the same way that a wedding cake costs ten times as much as a regular cake, prepare to be baffled by what it costs to clean your flat when there is a tenancy starting shortly after.

As well as agency and management fees, as a landlord you are responsible for keeping the property in a good state of repair and you may have to carry out regular maintenance.  If you aren’t working with a letting agent you will also have to deal with any issues reported by your tenants promptly.  It is inherently difficult at the outset to predict when and how frequently issues will arise, and so it is important to keep a cash float set aside to cover “emergencies”. 

There is also the slight issue of mortgage costs to consider.  Unless you’ve been living under a rock for the past year, you’ll know that mortgage rates have exploded higher.  “Buy to let” mortgage rates are typically 1.5%-2% or so higher than standard “primary residence” rates, so the issue of rising interest rates is even more acute for landlords.

The days of offsetting your mortgage interest against your rental income for the purposes of calculating your tax bill are also gone, and have been for a few years.  A less generous system is now in place where a landlord will receive a tax credit amounting to 20% of their mortgage interest payments, meaning that for higher and additional rate taxpayers – renting out a property is far less tax efficient than it once was.

This is a consistent theme.

Consider your tax position.

We have an issue with getting first time buyers onto the ladder on this country, and whether you like it or not, a way to increase supply is to force private landlords to sell up. 

Current tax rules make it pretty clear that the government does not want people buying second or third or fourth properties to let out:

-        Stamp duty on the purchase of second homes, or rental properties, is 3% higher than the rate due when buying a primary residence.  By way of an example, if you are buying a home in England or Northern Ireland which is worth £250,000 or less to live in – you would pay no stamp duty on the transaction.  If you are buying it to rent out, you will have to pay 3%.

-        Any rent that your property generates will be taxed at your marginal rate of income tax, and income tax rates are significantly higher than other tax rates.  You can however offset maintenance costs, insurance, agency fees and other expenses against your taxable income for the year – so keep your receipts!

-        Finally, if you decide to sell your rental property any gain that you realise in excess of your annual capital gains tax allowance (£6,000 this year, reducing to £3,000 from April 2024) will be taxed at either 18% or 28% depending on your tax bracket.  For context, the equivalent rates on share sales are 10% and 20% and no capital gains tax is due on the sale of your main residence.

Receipt of rental income also means that you have to report to HMRC through self-assessment.  And if you don’t feel comfortable doing that yourself, you will have to find an accountant – more fees.

Yes, I can hear you at the back, you can set up a company to buy your rental properties through and corporation tax rates are more favourable than personal income tax rates.  But you still potentially have to pay tax personally if you want to take money out of the company, and setting up a company to hold your buy to let investments involves another level of complexity and fees.

Get up to speed with regulation.

If the tax kicking that you receive isn’t enough, the government have imposed much stricter regulation on landlords in recent times.  There are a whole list of actions to take, and certificates to provide.  Again, you can always pay the agent to sort these on your behalf – but failing to comply with these requirements can result in fines, penalties, or even legal action.  Which I’m assuming that you’re not keen on.

As I said, I am biased.  I have worked in the asset management industry all of my life, and have only ever invested in stocks.  I get that there are people out there who are professional property investors, who do it for a living and who have cleaned up. 

The whole experience so far has made me want to stick pins in my eyes, but hey that’s what makes a market.

I suppose that my point is that it’s important to go into these things with your eyes wide open (at least before you stick pins into them).  No relatively complicated transaction is ever going to be completely painless, and there are definitely pros and cons.  It is important to have a full and honest idea of the costs involved in renting out a property, because it all has an impact on your financial return at the end of the day.  Don’t kid yourself.

Any tips for me as a newbie landlord?  Hit me up in the comments.