What can I do as a landlord to ‘future-proof’ my business?

Buy-to-let is a medium to long-term investment. To maximise your returns and really see the benefit of capital gains - allowing for the market’s natural cycle over time - you should be aiming to hold property for around 15 years or more.

That means you’ve got to plan as far ahead as you can and take steps to ‘future-proof’ your business to ensure it will continue to be successful and profitable over the lifetime of your investment.

Here are five key things you can and should do to protect your rental business:

1. Know exactly how much your buy-to-let is going to cost

Property is different from most other financial investments because it requires you to keep spending and investing money. Buying, refurbishing, fitting out and getting it ready to rent is just the first financial hurdle – you then have to manage the tenancy/occupation contract and keep the property up to date and in good condition, so it’s vital that you budget ahead for both regular maintenance, periodical bigger works and void or arrears periods when you have no rental income coming in.

The other cost to factor in is tax. In addition to annual income tax, there is likely to be capital gains tax due when you sell or pass on the property, and inheritance tax if it forms part of your estate. So it’s well worth consulting a property tax specialist and wealth manager or estate planner – ideally, before you buy - to ensure you factor in all these tax costs, and set your rental business up in the most tax-efficient way. It’s well worth having these experts on hand to advise you along the way through legal changes and budget announcements, which can affect the ‘best’ way for you to be operating.

2. Have a good rental profit margin and equity cushion

The second thing is to be as sure as you can that you’ll always have a good enough profit margin to cover your costs and cushion you financially.

While it’s impossible to predict exactly what’s going to happen with the market, the one thing that is certain is that there will be fluctuations in prices, rents and interest rates over time. So you should have two goals:

1. To buy a property at less than its true market value, or add value and therefore equity at the start through renovation and refurbishment
2. Ensure the rental income is sufficient to cover all your related outgoings – and make sure you would at least still break or if needed, subsidise the let for a period of time, even if interest rates went up to 7 or 8%.

If you can do those two things, that should protect you against having to subsidise your investment or being forced to sell during a market dip.

3. Secure a good management team

A successful rental business relies on good management of both the property and the tenancy/occupation contract. For that, you need:

1. A good team of professional, reliable contractors who can carry out maintenance and repairs as well as checks required to secure gas safety and electrical certification. Because there are so many specific rules governing private lets, particularly when it comes to health and safety, it’s important that the people you use are familiar with buy-to-let and used to carrying out work for landlords.
2. The knowledge and skill to administer a legal tenancy and communicate effectively with the tenant/contract-holder.
3. Insurance policy which protects you from key rental problems.

The most reliable way to ensure your property is always legally let and managed is to use the services of a qualified agent that has their own experienced team of letting agents, inventory clerks, property managers and approved contractors. While this is of course an extra cost for you, landlords who do outsource may find that it pays them back many times over in terms of the time, effort and stress it saves them.

4. Have a reliable way of keeping up to date with the law

Legal changes are not always well publicised, especially local ones relating to licensing. The penalties for falling foul of the law can range from light action by your local council to being hit with a civil penalty of up to £30,000 (rising to £40,000 under the Renters’ Rights Bill in England), being prosecuted in court and even receiving a ban on letting property. In short, any breaches could have a serious impact on your business, so a big part of protecting it is making sure you are always fully compliant with the law.

The Renters’ Rights Bill currently making its way through Parliament is expected to pass and could come into force as early as next spring. This will be transformative for the industry and landlords will need to know exactly what changes need to be made and how to communicate them to tenants (this is not relevant in Wales which has the Renting Homes Wales Act).

Again, having a qualified agent managing your property that is a member of ARLA or RICs means you can be confident that these and any future legal changes are properly implemented, today and into the future.

5. Have an exit plan

Just as you need to make sure your business is set up in the most tax-efficient way, it’s also important to know from the start how you intend to exit your investment. For example, are you planning to simply sell up and cash in your gains in 15-20 years, or would you like to pass on your property or portfolio to your children?

The way in which you own, run and exit your property business can make a significant difference to the level of financial benefit you or your family get. Discussing your whole investment plan with a wealth manager, a property tax adviser and a legal specialist should ensure that you don’t get any nasty surprises at the end.

If you’d like to discuss any aspect of your buy-to-let business or how our services could help you, just get in touch with your local branch and one of our lettings experts will be very happy to have a chat.