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What are the risks of owning rental properties?
Earning income from, and the near-certain appreciation of property investments are two benefits that make being a BTL landlord an attractive proposition. But there are risks with owning investment property as well, which you are right to point out, these include:
Property standing empty
An empty property and loss of income while it’s vacant is a major risk factor, especially if the mortgage still needs paying in the meantime. Properly maintaining and following up on repairs can mitigate the issue somewhat by keeping tenants happy and hopefully keeping them for the duration of the agreement and beyond. There are a few other things that can be done to mitigate the risk, such as, like in any business, having some reserves so that if the property is standing empty for a period of time you can bear the costs. There are landlord insurances that will cover vacant periods, some up to 36 months.
Tenants not paying
Tenants that don’t pay the rent or are consistently late paying it is another risk factor that should be built into the calculations of running a rental property. An amazing 40% of landlords have experienced tenants who don’t pay or are late paying their rent. Having a reserve to cover the eventuality of unpaid or late rent is advisable, but a number of insurance companies offer a specialist rent-guarantee protection. The insurance will be invalid, however, unless the appropriate checks (with banks and referees to ensure that the prospective tenants are good for the rent each month and have not previously defaulted) have been carried out to the letter.
And these checks include from 1 February 2016 that all new tenants in England must go through Right-to-Rent (Immigration) checks to determine their “right-to-rent” or “right-to-reside” in the country before they can take up a tenancy. Responsibility for doing this lies with the landlord as does the penalty for non-compliance (up to £3,000 per tenant).
There are several agencies that will do the checks for you and these are easily found online.
Tenants destroying the property
Unpaid rent and damages to property costs landlords over £5bn every year, eating into profits and causing untold stress. Of course, wear and tear and routine maintenance is an inevitable expense of renting out property; tenants should inform the landlord of damages, breakages and breakdowns, the landlord should respond promptly, with some things probably covered by landlord insurance and other things easily fixed and replaced. However, while landlord insurance may cover some unexpected costs, some items may not be covered. Smart landlords put aside some of the profits into a contingency fund to cover unexpected maintenance and repair bills.
The landlord cannot withhold any of the tenant’s deposit unless there has been financial loss suffered. The deposit can be claimed back to the cost of the damage to the property, missing items, cleaning, or unpaid rent. However, sometimes the deposit won’t cover the extent of the damage, which is where the courts step in and which will get very expensive, so landlord’s insurance with legal protection is advisable.
Value of the property falling
No one can predict a downturn in the economy or in house prices or property taxes of UK residential market, and there is no insurance against it: who could have predicted the 2008–13 recession? The effects of economic ups and downs can be felt most keenly by second-property owners, but hopefully the investment was made with a view to the long-term, and the investor weathers the storm confident that the price of their property will rise and fall like any other investment.
The Department for Communities and Local Government How to Rent Guide includes some useful tips for landlords and tenants. The risks of owning rental property are quite numerous, but owning a second property and letting it out can be quite profitable and is worth the effort and the risk, providing investors are prepared. An accountant with expertise in rental property business can help you make the most of your investment and ensure you’re running it as profitably as possible.
A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.