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Becoming a landlord is an exciting time which brings many new opportunities. However, it also comes with important financial commitments and implications, which are crucial to understand before making such a big decision.
Whether you are preparing for your first Buy To Let property or thinking about building a large property portfolio, our financial advisers here at Cedar House wanted to offer this short financial planning guide to you. Here, you will find five important areas of “landlord financial planning” to consider with your financial adviser.
We hope you find this content helpful. If you need further information or would like to discuss your investment strategy with a member of our team, then get in touch today to arrange a free, no-commitment consultation: 020 8366 4400 or firstname.lastname@example.org.
#1 Objectives and Strategy
The very first things to consider are your reasons for wanting to become a landlord, and how this fits into your wider long-term financial strategy.
For instance, is your primary goal to fund your retirement by eventually selling your Buy To Let property once the rental income has paid off the mortgage, and once sufficient capital gains have accrued?
Or, perhaps you have accepted a job posting overseas and see Buy To Let as a means of keeping your UK property for the next few years, by using the rental income to pay your mortgage commitments?
In the first instance, your main reason(s) for becoming a landlord might form a more central part of your long-term wider financial plan, compared to the second. Regardless, it’s important to be clear of your reasons for becoming a landlord and how important this is to your wealth and holistic financial plan. We recommend that you discuss these reasons with a financial adviser, to ensure your strategy is sound and your goals realistic.
#2 Understand Costs
Becoming a landlord isn’t as simple as taking all of your rental income as profit. Most people appreciate that there will be a range of important costs to factor in. The difficulty lies in determining what these costs are.
For Buy To Let landlords, the biggest cost to consider will be your monthly mortgage payments. These will likely be lower if you have placed down a large deposit and have a good interest rate on your mortgage. Bear in mind, however, that your mortgage payments might increase if the Bank of England raises its base rate. So it’s a good idea to plan in some contingency here.
Other costs to think about include maintenance and repairs. These costs are hard to predict as they are irregular, and could be significant (e.g. a replacement fridge or boiler) or small. Here, it’s a good idea to make a list of every possible repair or maintenance cost you might need to pay for, during your tenure as a landlord. As much as possible, make sure that you set aside enough “emergency funds” to cover these should they transpire.
#3 Account for Voids
In an ideal world, you will always have tenants in your property who pay rent on time. However, over five, ten or twenty years there are bound to be periods when your property is unoccupied (e.g. between tenancies) and you will need to cover your costs in other ways. Make sure you plan for this with your financial adviser.
#4 Plan for Management
When becoming a landlord you can either manage the property yourself or get a letting agent to do it on your behalf. There are pros and cons to both approaches which you should carefully consider. For instance, using a letting agent can free up much more of your time, which would have otherwise been spent managing your property and tenants. On the other hand, using a letting agent comes with a cost (e.g. between 10-20% of the rent).
#5 Think of the Taxes
Where there is money to be made from property, there is a government inevitably nearby ready to tax it! This is certainly true for Buy To Let and other landlord income, and it’s crucial to discuss with your financial adviser how various UK taxes might affect your income.
If you are personally becoming a landlord (i.e. you’re not investing in property via a company), then your “profits” from your rental income will be taxed according to the relevant Income Tax bracket. You can mitigate this tax by ensuring you keep a good record of your “deductible expenses” from your rental income, such as legal fees and letting agent fees.
Bear in mind, moreover, that if you eventually sell your Buy To Let property and it has increased in value since the time you first bought it, then you will likely face capital gains tax (CGT) as well. Again, make sure you discuss this with your financial adviser to ensure any possible future CGT is factored into your long-term plan.
In this article, we have touched on just a few of the key areas of landlord financial planning which are important to consider, ahead of time. It isn’t possible to cover everything one article, however, so it’s important to seek professional financial advice if you are considering this type of property investment.
Many people are attracted to the idea of becoming a landlord because property is something tangible. It feels easy to understand because we can see, smell and touch bricks and mortar. However, it’s important not to be simply swept away with romantic ideas of what it is like to become a landlord. It comes with many costs and commitments which are crucial to understand.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or email@example.com.