You might be wondering how to become a residential landlord and what actual obligations come with being one. This article covers the key requirements and some challenges around them.
What kind of landlord will you be?
Depending on the type of property you are renting out, you fall into one of three categories of a landlord:
- A room in your home – you are legally permitted to rent a room in your home to a lodger. This would classify you as a live-in landlord. Lodging is governed by its’ own set of rules and if you’re renting to just one lodger, you might be able to take advantage of tax break schemes such as Rent a Room scheme.
- A self-contained property – if you are renting out a flat or a house you own to a family or up to 3 separate renters, you are in the most private landlords category.
- An HMO – if you are renting a property out to more than 3 unrelated people, the property will be classed as a House in Multiple Occupation and be subject to special licensing.
For the purposes of this article, we are going to focus on the second category as that one includes the most accidental landlords – people who purchased their property and then through change of circumstances needed to move but did not want to sell the property on.
Make sure you can rent the property out
If your property is mortgaged and/or is a leasehold, you will need to make sure that you are able to rent the property out under the conditions of your mortgage (and your lease, if relevant).
Some purchase schemes such as shared ownership will often have clauses in the lease preventing you from renting any part of the property out until you have staircased your share to 100%. If you own your property’s lease through the traditional ownership, you will still usually need to reach out to the freeholder and ask for a written consent to rent it out. Freeholders usually give such consent readily unless you are in arrears on service charges and/or ground rent.
If your property is an ex-local-authority leasehold, you will also be asked to submit a form notifying the council about the letting and pay a small registration fee (usually around £50). The form is to be submitted after you have found the tenants.
Your next port of call will be your mortgage company, if your mortgage is a residential and not a buy-to-let mortgage. The mortgage company will want to see a written consent from the freeholder before agreeing to allow you to temporarily rent out your property.
Most mortgage companies will increase your mortgage interest when giving consent and can refuse to consent if there is any additional borrowing against the property, you have missed a payment in the past or are in arrears on your service charges or ground rent. Most will also prevent you from switching your deal while the letting is ongoing. If that turns out unnecessarily expensive, you might want to consider remortgaging to a buy-to-let mortgage.
In an ideal scenario you’d be renting out a mortgage-free freehold but since property in England is eye-wateringly expensive, just ensure you’re in good standing financially with the above bodies.
Prepare the property for being tenanted
Your property needs to be a safe environment for people to live in. Therefore, unless you’ve already done this work, you’ll want to install carbon monoxide and fire alarms in any rooms that contain any furnaces/boilers/fuel burning heaters or in central locations such as hallways.
Additionally, you will be required to obtain an EPC (energy performance certificate, usually around £50, valid for 10 years unless you make improvements to the property), a CP12 (boiler safety certificate for gas boilers, usually £50-£70) if your home uses dual fuel, and an electrical installation safety certificate (usually around £130-£150). Inspections, once carried out, will help you keep tabs on any repair work needed before potential faults become problems and ensure that your tenants are in fact safe in the property from your perspective.
Find the tenants
There are two key ways to finding tenants in my experience. The first one is through traditional estate agents. They can either work as tenant introduction services or provide so called management service. If you are hoping to avoid dealing with the challenge of finding and vetting the tenants yourself, using an agency is a good, alas not inexpensive option.
However, if you are comfortable dealing with people and have some time and goodwill, you will be able to market your property and find tenants without the input of an agency. Common free places to advertise homes for rent directly by the landlord include spareroom.co.uk, Facebook Marketplace and gumtree.co.uk. As with any free platform, exercise caution and avoid posting the full address of the property. Instead, indicate the location, nearest public transport and schools (if you’re hoping to rent to a family with school age children).
Despite most of the UK still being in a lockdown, you are permitted to show prospective tenants around your property. Please exercise caution when doing so and follow relevant government guidance on and common sense in relation to Covid-19 prevention.
Once you have shown your property to prospective tenants and they are interested in, conduct a background search on your prospective tenants.
Agree a letting with prospective tenants
First things first, you will want to make sure that the prospective tenants are able to afford the rent and willing to take good care of your property. It used to be possible for the landlords to pass the cost of referencing back to the tenant to pay, however this has since been banned. Luckily, vetting of tenants in England is relatively straightforward.
There is now a whole host of companies able to check the prospective tenants’ credentials. The searches usually include checking their financial history for events such as bankruptcies, voluntary payment agreements and county court judgements. None of these are desired on your prospective tenants’ files. These checks are usually done for as little as £20 per tenant and are carried out promptly. In addition to credit history, you will also want the prospective tenants to provide the following, for each tenant:
- proof of identity
- workplace references (letter from the employer stating how long they’ve been working there, their annual salary and contract type)
- current landlord’s reference (this should include information on how long the tenants have been in the property they’re looking to move from into your one and if they are paying their rent on time)
- copy of at least last 3 payslips or a P60
- a proof that they can legally rent in the UK
Lastly, if the prospective tenants are hoping to secure the property while you are conducting the background checks, you can agree to take a holding deposit no higher than an equivalent of one week’s worth of rent.
If you are satisfied with the references from the tenants, it’s then time to draft the rental agreement.
Note, it is within the prospective tenants’ rights to ask for a proof of ownership of the property from you. Just like you will be checking their credentials to rent the property to, it’s within their right to ensure you can legally rent the property out to them.
Sign the documents and get paid
Once you are happy to rent to the prospective tenants and they are happy to rent from you, you will be responsible for drafting a lease document known as Assured Shorthold Tenancy Agreement. You can find a template of this document on the Government’s website.
In addition to this document, you might wish to create an inventory, especially if the property is being rented out part- or fully furnished. Inventories are useful in situations where your belongings go missing or are maliciously damaged by a tenant in occupation.
You will need to provide your tenants with a copy of the EPC, CP12 and the electricity safety certificates on signing of the tenancy agreement. In return, your tenants will be obliged to pay the safety deposit, capped at a maximum of equivalent of 5 weeks of rent. You will be required to place the deposit in the deposit protection scheme. There are currently three accredited schemes available in the UK. Some landlords are tempted to forego this step opening the door for a relatively unlikely litigative action from the tenant. Don’t be one of these landlords.
Lastly, you will want to purchase landlords’ insurance. It might sound like just another seemingly unnecessary cost, but you’ll want to ensure that if something goes wrong, you have a helpful company backing you.