In the first of this buy-to-let masterclass series, investor and presenter of The Property Podcast, Rob Bence, looks at how to handle becoming an accidental landlord.
For some people, property investment is a well-thought-out choice but for others, becoming a landlord happens by accident.
If you find yourself with a bricks-and-mortar investment that wasn’t in your plans, here’s what you need to do.
Switch to an appropriate mortgage
I know what you’re thinking. You haven’t decided exactly what to do with the property just yet, so what harm is there in making a bit of cash from a tenant while you do so – who is going to find out?
Yet this is a risk you don’t want to take.
If your mortgage lender finds out you’re renting out your property despite having a residential mortgage on it, it’s well within its rights to call in the loan.
And trust me, it will.
Lenders can take various steps to check whether or not you’re living in the property – including checking the electoral roll – so if you’re acting in an underhand way it will find out.
To let the property out you’ll either need to get consent to let from the lender or you’ll need to remortgage to a more appropriate product, essentially a buy to let mortgage.
‘Consent to let’ is a good option if you only plan on renting out the property for a short time.
But both options will incur costs so be prepared.
Buy to let deals tend to be more expensive than residential products and with ‘consent to let’ you’re likely to face an admin fee.
Decide if being a landlord is for you
If you didn’t plan on getting into buy to let, you’ll now have to decide what to do with the property.
Being a landlord can be as hands-on or as hands-off as you like, but obviously still requires some level of commitment.
It may be that you’d rather sell up as soon as possible. However, just because being a landlord wasn’t part of your plan, doesn't mean you can’t make a success of it.
Indeed, I often hear from landlords who have found themselves unintentionally renting out a property.
That could be because they’ve struggled to sell or because they’ve inherited a house from relatives and are not sure what to do with it, who suddenly decide they want to have a go at a property business.
Following several tax changes, the future of buy-to-let landlords is being questioned. Read opinions from those who think that smaller buy-to-let landlords are doomed, and those who see a healthy future for the sector.
Report the rental income on your tax return
Whether you’re letting the property for a short amount of time or you’ve decided buy to let is right for you, you’ll have to let the taxman know.
If you’re making money from the property you need to declare that income to HMRC on your tax return. It’s a criminal offence not to and the HMRC is not messing around on this one.
I’ve heard plenty of cases where letting agents are being asked to supply lists of all the rent being paid out to landlords each month, as well as where those properties are and whose name they’re in.
As well as HMRC recouping all of the tax you owe, you could also face a hefty fine.
Remember, you can become a landlord as an accident, but you can’t continue to run the property in an accidental, ad hoc manner.
Make sure your insurance has you covered
Chances are you currently have residential home insurance for the property in question.
However, your insurance company may not pay out if they discover you’ve had tenants living in the property.
The simple thing to do is contact your insurer and find out if they can adapt the policy or if you need to switch products.
Conduct a financial audit
Take a look at your finances by conducting a financial audit. Look at your current circumstances and work out things like the market value of the property, the mortgage outstanding and any savings you may have.
You should also have a read of these handy tips to cutting landlord costs.
You can then use this information to decide what to do next. It’s time to start thinking of the property as an investment.
If the numbers don’t stack up (when a property isn’t bought for investment purposes you may find that the rental income numbers don’t make sense) put a medium-term plan in place to sell up and acquire a different property.
Establish your goals and build a strategy
You may not have planned on becoming a landlord, but that doesn't mean you can’t work it into your long-term financial goals.
Ask yourself where do you want to be in ten years and how can property help you get there?
Then make a plan to take action. This could involve selling the property, taking the money you make, splitting it and investing another property or properties in more suitable buy to let locations.
It could mean taking some equity out of the property, keeping hold of it but using the equity as a deposit on another.
Having a plan in place will help you to start seeing your property as a business.
Rob Bence is a buy-to-let investor and presenter of The Property Podcast. The views expressed in this article do not necessarily represent those of loveMONEY.
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