Most people decide to go down the route of becoming a landlord alongside their day job. They usually have an investment property they choose to rent out as an alternative income stream – sounds like a no-brainer, right?
There are landlord risks.
Many people take on the role of a landlord with fresh eyes and minimal insights into the property market and it’s only as they start going through the motions or already have a tenant occupying their property, that they become aware of just how much there is to know and the many complications they could face along the way.
We have listed some of the most common risks faced by today’s landlords and explain how appointing a letting agent could help to manage them, or in some cases avoid them altogether.
My guess is that you’d be hard pushed to find a person on this planet who enjoys doing their own admin. However, as a landlord, this can be unavoidable, especially for those who are taking the property management responsibilities into their own hands. Not only this, but it can also become stressful trying to stay on top of the ever-changing documentation required to ensure you are compliant.
It is worth giving our article I’m A First Time Landlord, What are the costs? a read to bring yourself up to speed with current landlord compliance requirements, to help eliminate landlord risk.
As well as a wealth of information on the entire journey of renting out your property, in this article we have a whole section dedicated to ‘What costs are incurred to make my property safe to rent out‘, giving prospective and existing landlords alike the information needed to ensure they are adhering to the compliance requirements, as well as that all-important peace of mind.
One of the biggest landlord risks in the market…
There is nothing worse than chasing money that is owed to you. Imagine going into work every day as normal but when payday comes around at the end of the month, instead of the wages being automatically credited into your account – days or even weeks go by ,and still, no payment has been made by your employer and you’re forced to chase them for your wages. Meanwhile, your cupboards are growing emptier by the day and all your bills are overdue. a huge landlord risk…
That’s exactly what it can be like for a landlord who must chase rent arrears from a tenant, as many landlords rely on rent from investment properties to help towards mortgage payments and general bills, so it can become a vicious cycle.
According to a government study in November-December 2020, 9% of renters in England were in arrears, equivalent to 353,000 households across the country and up from 3% in 2019-2020. Of course, a tenant’s ability to keep up with their rental payments can be largely influenced by environmental factors, and these figures were taken at the heights of the pandemic, so they may not always be so drastic, but regardless – late rent has always been a cause for concern for landlords and is something that they wish to avoid altogether. This helps put one of the biggest landlord risks into perspective.
Working with a letting agent can be one of the easiest ways to eliminate much of the stress and potential for rent arrears.
At Abbey Property all tenants are vetted and must earn at least 2.5x the rental amount to be considered for a property. Before a tenant is moved into a property, we take copies of all relevant documentation such as 3 months’ worth of payslips and bank statements to validate their ability to afford the monthly rental payments, as well as a credit check. For a landlord this process can be overwhelming not to mention time-consuming and whilst they crave the comfort that comes with conducting these checks, they can do without the burden.
Especially if they are a landlord to multiple properties, or have another occupation to juggle, landlords prefer to offload this responsibility into the capable hands of someone else – which is where a letting agent comes in.
More information of the tenant eligibility checks we conduct can be found on our Frequently Asked Questions page.
Finding the Right Tenant – Reducing Landlord Risk
Outside of the immediate concern of receiving rent on time, landlords are largely concerned with ensuring they have found the right tenant to occupy their property in general. After all, a landlord wants to be able to rest-assured that their investment is being taken care of. Anyone can seem genuine at face value but without the necessary experience, further down the line landlords may be kicking themselves if they fail to do their due diligence when taking on a tenant.
In principle a letting agent should have a list of checks they conduct as standard to confirm a tenant’s identity as well as their reliability and ability to afford a property before they are presented as a possibility to a landlord. At Abbey Property the minimum requirements of passing our referencing are as follows:
- recent 3 month’s bank statements
- recent 3 month’s pay slips
- pass a credit check
- pass right to rent immigration check
- Your combined income before tax will need to be 2.5x the rental amount.
As an extra layer to reduce landlord risk, we can also take references from a previous employer or landlord to further ensure they are a good fit. Appointing a reliable letting agent, saves a landlord time as they can also benefit from the perks of the property being marketed across not only a letting agent’s own platforms but sites such as Zoopla and Rightmove which gives a much larger reach and in turn creates more engagement and greater choice of tenant – give our article What Is The Worth In Using A Letting Agent? a read for more on this.
Furthermore, a letting agent will also take care of the hassle of having to take time out of what – for many landlords – is often a busy and inflexible schedule, to arrange viewings.
Many landlords don’t rely on a rental property as their sole source of income and much of their time is taken up by a career. Whilst it can be tempting to try and cut out the middleman and save some money it often boils down to a simple question of, what is worth more to a person – time or money?
Incorrectly Priced Rent – Reducing Landlord Risk
Another one of the landlord risks is getting too greedy, or not paying enough attention to get what it’s worth.
Incorrectly priced rent can work both ways, either priced unreasonably high or unprofitably low -neither of which works in favour of a landlord.
If a property is priced too high, it is off-putting for prospective tenants as they are likely to find a property of similar stature elsewhere for a more competitive price. A tenant will most likely lose interest if a landlord is unwilling to drop the price as it is above what they are realistically able to afford or agree to something they can’t keep up long-term – it can also make the negotiation process slightly more awkward as a landlord may be unable to provide a justifiable reason as to why the rent has been priced so highly.
On the other hand, a landlord risks making the mistake of trying to be too competitive and dropping the price of the rent drastically lower than necessary. This means that they are risking the possibility of putting themselves out of pocket and limiting then return they see on their investment.
Generally, its safest to seek out expert advice to be sure that a property is at the correct price-point to be both competitive and lucrative. Most letting agents offer a free valuation service that is simple and easy to use and by only providing a few basic details, a landlord can be given a good estimate of what their property is worth based on similar properties of the same size in the same area. For more accurate valuations a letting agent will come out to a rental property for free to give a more personalized and accurate estimation of what a property is worth. Thus, avoiding any confusion further down the line and ensuring maximum return on investment.
That said, some letting agents may overvalue a property to make themselves seem more competitive and stand out from other agents a landlord may be speaking with, so it is good to speak to a few different agents and look for any recurring themes with price.
At Abbey Property we’re conscious about landlord risks, we promise to give properties a realistic valuation reflective of the true market value as it will increase the likelihood of a landlord being able to find a suitable tenant to occupy their property.
Staying Organised – Reducing Landlord Risk
This point may seem obvious but it’s surprising how frequently many landlord risk this and don’t consider or underestimate this fact, as it is very easy to overlook.
As you may have gathered whilst reading this article, there are many instances where something that appears to be a simple task on the surface snowballs into something much more involved and takes up lots of time in admin hours – time that is not necessarily available to many landlords. Regardless of how much time a landlord freely has available, as situations relating to compliance, vetting tenants, pricing a property, and rent arrears arise, they need to be dealt with. This can become a lot to stay on top of, for some, it seems impossible to stay organized, and sometimes organization is simply not in a person’s nature -however for landlords, it is essential.
This is when it becomes apparent that appointing a letting agent could be the best option to put the right foot forward. Whether in need of help to advertise a property, sourcing, and vetting suitable tenants, or keeping on top of compliance – utilizing a letting agent could be the best way to manage everything without taking up too much free time better spent elsewhere or putting too much pressure on a busy schedule.
Return on Investment – Reducing Landlord Risk
Before becoming a landlord, one of the most important factors to carefully consider is ensuring that there is going to be a solid return on investment (ROI) and a vital step towards this is understanding the rental yield.
What does rental yield mean?
A rental yield is a profit a property investor is likely to make on a property by means of rent. This figure is shown as a percentage and can be calculated by dividing the yearly rental income of a property by the total amount that has been invested into the property. There are some useful tools online that can help you to calculate a rental yield to improve your understanding of what figures will give a better ROI, but broadly speaking anywhere between 5-8% is generally considered a ‘good rental yield’ on most properties.
It is worth noting that the initial capital investment a landlord risks on a mortgage for a buy-to-let property is 25%, so to gauge whether the ROI is significant, landlords will need to consider the rental yield of a property versus the mortgage repayments and calculate how long it is likely going to be before they see a return on their initial investment and if it is truly worthwhile.
Another important consideration is to leave room in the budget for any unforeseen events such as the boiler breaking down or any structural issues as underestimating these costs could mean the rental yield is significantly overestimated and the ROI is considerably lower than anticipated.
The points discussed in this article are not exhaustive, but we have touched upon what we feel are some of the key factors of landlord risks an individual should consider when embarking on their journey to becoming a landlord. We are not trying to scare anyone off going it alone, but we think that after reading this article most people would agree that becoming a landlord is no easy feat and people aren’t always completely transparent about all the work it takes to be a complaint and good quality landlord.
Click here to arrange an informal discussion with one of our property experts and to find out more about how Abbey Property may be able to assist you.