Landlords: how to cut your buy-to-let costs and fees
Landlords are selling up in their droves as the Government crackdown on the buy-to-let sector truly starts to bite. If you're a landlord who's feeling the heat, here's how to cut costs.
The buy-to-let market is shrinking rapidly as landlords offload almost 4,000 properties a month.
Official figures from the Ministry of Housing show the exodus has resulted in the first fall in the number of homes available to rent in 18 years.
The huge shift is being driven by tough new regulations and tax changes introduced by the Government to either halt the relentless rise of greedy landlords or cash in on an easy target (depending on your point of view).
The sell-off is perhaps unsurprising – as our poll of landlords conducted earlier this year showed, more than two-thirds believed 2018 would leave their portfolios worse for wear.
This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.
But what is somewhat more surprising is the impact this sell-off is having on tenants.
With fewer rental properties available to compete for (and remaining landlords facing higher costs), the Government crackdown has inadvertently caused a spike in rents, putting pressure on tenants budgets.
How to cut costs if you're a landlord
Without going into the politics of whether the Government rules are right or wrong, what's clear is that the outlook for landlords is undoubtedly more challenging than it was even a year ago.
However, it is possible to at least partly offset the financial impact of recent changes. Here are our top six tips for cutting your buy-to-let costs.
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Ditch the lettings agent
Lettings agents can help save the time and hassle of finding tenants and managing a property such as collecting rent and dealing with repairs.
But fees can vary from fixed rates to a percentage of the rent, which in some cases can be more than 10%, a chunky share of your income to give up.
One option is to reduce the costs by downgrading the service they use. For example, you could use a lettings agent to help find tenants but then do all the property management yourself, or even consider online-only firms that charge flat fees.
For example, No Agent allows you to sort out all of the essentials. For £35 a month (or £55 in London), you'll get a whole host of services.
It will find tenants, do credit checks, manage repairs, collect rent and make sure your property is compliant with current property laws.
From the base flat fee, you can build up your package with other services like marketing photography, rent guarantee insurance and gas safety checks. Extras vary from £10 to £250 so it's up to you to juggle how much time you have with how much cash you want to spend.
Alternatively, you could forego any outside help and manage the whole process yourself. This would obviously be more time-consuming but would work out cheaper.
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Consider incorporating
There are two ways landlords can run a buy-to-let portfolio.
You could be a sole trader and report any income through a self-assessment tax return, or the buy-to-let business could be run through a limited company.
Using a company could be cheaper as you would pay Corporation Tax, currently 19% and reducing to 17% by 2020, compared with Income Tax that can be as high as 40% or 45% if you are a higher rate or additional rate taxpayer.
Additionally, the clampdown on mortgage interest relief only applies to individuals, so a company can still get the full relief.
You would be joining a growing group. Limited companies have outdone landlords in buy-to-let lending for the first time ever. Now incorporated landlords make up 51% of lenders by volume, according to lender Mortgages for Business.
However, there are more reporting obligations with being a company and if you are already a sole trader you would need to weigh up the costs of making a capital gain by transferring your portfolio into a company structure.
Read more about this at Buy-to-let: what to consider before setting up as a limited company.
Review your portfolio
The key to a successful buy-to-let portfolio is income. You need to make sure you are getting a decent rental yield.
This means snapping up a bargain property where you can charge decent rents.
Keep an eye on areas where rental yields are on the up and property prices are more affordable.
There are plenty of areas outside of London and the South East where house prices have stabilised. Areas often tipped to benefit are those on the commuter belt into London or where infrastructure projects are scheduled.
Manchester
At the moment, Manchester is the best place for buy-to-let in England and Wales, according to the LendInvest Buy-to-Let Index Report. It ranked highest for rental yields at 5.55% and rental price growth at 5.76%.
Colchester in Essex and Luton in Bedfordshire are in second and third position, with rental yields of over 3.78%. Colchester had the strongest capital gains over 2017 and Luton remains a popular commuter town within easy reach of London.
Keep your eye on the Midlands, with Leicester and Birmingham coming 9th and 11th place respectively.
Also, rather than using your own cash savings, consider building your portfolio and using any increase in property values to remortgage and use this to boost your spending power.
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Remortgage
The Bank of England base rate is currently at a historic low of 0.5%. This has helped buy-to-let interest rates fall to record levels and landlords can now snap up some astonishingly cheap deals.
This could save money by lowering your monthly repayments, meaning you could hold on to more of your tenants' rent. You could also release some equity to build up your portfolio with new purchases.
Take a look at our roundup of the top deals in our guide to the best buy-to-let mortgages.
If you're planning on remortgaging it's best to get in there now as, despite recent falls, rates are starting to rise again.
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Shop around for insurance
Insurance is important for landlords to protect their property and ultimately the returns on their buy-to-let portfolio, but make sure you aren't overpaying for the right cover.
Insurers tend to make the most of apathy and inertia so check your renewal quote against previous years to see if you are paying more. Often insurers will offer better rates to hold on to customers.
Check what your policy covers to ensure you are not over- or under-insured.
For example, are you and your tenants both paying for contents cover? If you are just using buildings insurance, check the rebuild value is accurate to ensure you are paying the right premium.
Installing security measures such as alarms and window locks can help push premiums lower. You should also consider your target tenant, as certain professions or age groups may be deemed riskier.
Another way to cut costs is to increase the excess you are willing to pay as this could reduce the monthly premium.
Expenses
The perks of mortgage interest relief may be getting scaled back, but don’t forget to claim for other expenses.
Any fees associated with running your buy-to-let can be offset against your tax bill as can mortgage arrangement costs, insurance premiums and lettings charges.
Don’t forget items that may seem small at the time but can add up, such as stationery travelling to and from the property for business purposes or your phone bill when dealing with queries.
This article contains some affiliate links, which means we may receive a commission on any sales of products or services we write about. This article was written completely independently.
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@AABBCC_CCBBAA Look like I left one off that list, the logical fallacy of The False Equivalency. But still, let's compare: When I buy shares I'm effectively investing in a company and in return getting a market determined dividend on that investment. This is a win-win deal; the company can use that investment to (hopefully) create more money, more jobs and more value for society and in return I get a return linked to the company's performance. This in turn encourages me to seek out and invest in those companies which create the most value and hence most return, a win-win deal. Now using LoveBTL's two mentioned strategies, let's compare this to BTL: "This means snapping up a bargain property where you can charge decent rents. [...] Areas often tipped to benefit are those on the commuter belt into London or where infrastructure projects are scheduled." So in the first case they are suggesting that you consider buying in areas where you can price out FTB'ers and then rent to them those same properties, properties which already exist and which if it were not for you would be brought by the same FTB'ers you're renting to. The FTB'ers want those properties specifically because they are cheap, near employers who need skilled workers and because the transport system affords them somewhat easier access. None of this has been created by you and so in forcing people to rent you are not creating value but rather reselling what the taxpayer has already created, something which is by definition a win-lose deal. Next they suggest you should buy in areas where society and crucially *not you* is creating value though the expenditure of taxpayer money to make things better. But if the taxpayer is paying and you are reaping the rewards and without returning to society any equivalent or even significant value of your own then how are you not a freeloader? This would appear to once again to be another win-lose deal, both for the tenants and society. Now it's often argued that your tenant(s) want to rent, and that's fine except in that case where is the quid pro quo for society? You're still basically reselling the taxpayers' investments and if you do it right can pay even less tax than someone who actually creates value for a living ( 20% + 11% NI = 31% for the worker vs. only 17% tax for BTL).
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I would argue that BTL is absolutely fine when supply meets demand for housing from both renters and owner-occupiers. Though, that can hardly be said to be the case for the past many years with prices rising above inflation. In the current scenario there is a bias toward asset rich people being able to raise more money to use toward BTL. It's not okay.
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@LandofConfusion Would you regard someone as a parasite if they invested their money in something like stocks and shares to yield 5% a year or is it only those BTLs which make 5% or more who you regard as parasites? It just seems that you begrudge the BTL making any money from tenants at all? What are they supposed to do. Buy the property and let it at a loss?
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07 June 2018