January 6, 2022
What are the pros and cons of being a landlord?
Being a landlord can be complex and frustrating. But also potentially hugely rewarding and profitable when done in the right way.
It’s important to know, before you start out as a landlord, what the upsides and downsides are to ensure you are making the correct decision for your circumstances. You need to go in with your eyes wide open. To ensure you know what you’re getting into and the steps you can take to improve your landlord experience.
Here, we lay out some of the pros and cons of being a landlord. Using our years of experience to come up with all the info you need to know.
Steady, reliable income
One of the main reasons people invest in property is to generate a second income. Or create an extra pension pot for their retirement.
Luckily, bricks and mortar has remained one of the most stable asset classes. Despite, or perhaps because of, Brexit and Covid.
Those events have meant people have looked for safe havens. And property, and more so property in London, has been that safe haven. Demand in the capital is pretty much guaranteed all-year round. Making filling homes with tenants an easy task.
This wasn’t the case during the worst days of the pandemic – when students and young professionals returned to their family home.
But since society has been unlocked again, demand has bounced back in a big way. Average rents are high in London, which means a steady stream of rental income is a given in most locations. And particularly in rental hotspots like Brixton, Balham, Hackney, Kennington, Bow, Shoreditch, Stratford, Clapton and Dalston.
This, in turn, means good yields can be achieved. Even though house prices are much higher in London than elsewhere.
Strong capital gains
Capital gains – in essence the amount by which an asset, including property, has risen in value between it being bought and sold – are especially strong in London because of ever-increasing house prices.
There is a good likelihood that, if you come to sell your property further down the line, it will go for more than you paid for it. And in many cases significantly more.
Such profits are a big attraction to landlords with one eye on long-term return on investment. Capital gains are taxed, as part of Capital Gains Tax, which is a tax on the profit you’ve made when you sell something that has increased in value.
It is the gain that is taxed, not the amount of money you receive. While this tax can have an impact on capital gains over time, it’s not usually significant enough to outweigh the capital gains made.
As an example, if you purchased a property for £250,000 and then sold it a few years later for £400,000, your gain would be £150,000 – and this is the amount that would be taxed.
You can find out more about Capital Gains Tax here.
Rent arrears and void periods
No investment is risk-free, and this is certainly true of property. Being a landlord isn’t a one-way ticket to great profits. It requires planning, research, compliance, a little bit of luck, instinct and good timing.
Even if you manage all of the above, there is still the chance you could be affected by rent arrears and void periods. The former is where tenants get behind on their rental payments and therefore owe you more than their current month’s rent. The latter is where your property is empty – either because you are transitioning between tenancies or struggling to fill the home for one reason or another – but is still costing you a fair bit to run, pay for and maintain.
Void periods are less likely in London, because demand in the capital is so high. But you could find yourself up against rent arrears from time to time, which can be difficult to resolve.
Landlords have faced a raft of new legislation in recent years – ranging from the additional 3% stamp duty surcharge introduced in April 2016 and the phasing out of mortgage interest tax relief, to new rules on everything from energy efficiency to HMOs and electrical standards. There has also been a ban on tenant fees and an increase in landlord licensing across the UK.
A lot of the legislation appears to have been designed to make buy-to-let less profitable. While there are ways round certain aspects – such as incorporating a property portfolio for ultimate tax efficiency – there is a lot of legislation to contend with. And this is only likely to continue.
Rules on tougher minimum energy efficiency standards are expected to be introduced. Section 21 may still be abolished as part of the government’s rental reform agenda. And, also as part of planned rental reform, a mandatory landlord register could be implemented.
None of this is insurmountable, though, and despite an increasing pressure on the bottom lines of landlords, most still make a good profit out of their rental properties.
In general, the pros nearly always outweigh cons when it comes to being a landlord, but you need to take a realistic, pragmatic approach. Do your research. Know what you’re getting into. Invest wisely and shrewdly. And, perhaps more than anything, work closely with an experienced, reliable letting agent.
A good agent can make your life a whole lot easier. Ensuring you are up to date with all compliance obligations, filling your home with good tenants, abiding by all current legislation, and being on top of any future changes.
Working with an agent can take the hassle and stress away. Leaving you to enjoy all the good parts of being a landlord.
Here at Atkinson McLeod, we can help you to get the most from your rental properties. If you have any questions about letting a home in the London area, we’re here to help.
To find out more about our services and current operations, please get in touch with our expert team today. You can find out how much your home could be worth on the current market by requesting a free and instant online valuation here.