4 buy-to-let pitfalls to avoid

Find out about the risks of being a buy-to-let landlord

Felicity Hannah - Virgin Money Living Mentor

by Felicity Hannah | Independent Money Mentor

Award-winning personal finance and consumer affairs journalist


Buy-to-let has never been easy money. You’ve got those distraught midnight calls from tenants who have somehow managed to both flood the kitchen and set part of it on fire. You’ve got those awkward conversations about overdue rent filled with dog-ate-my-homework level excuses. Then you’ve got a mountain of paperwork and number crunching to get through to keep everything shipshape and above board. It can be rewarding – but it's really hard work.

And now a flurry of tax changes have put pressure on property investment margins, meaning it’s more important than ever to understand the risks. Only when you’ve budgeted for every potential cost and understood every possible pitfall can you work out if a buy-to-let investment is the best way to grow your wealth.

So in the interest of keeping you ahead of the game, these are some of the most common ways new landlords fail to keep on top of their buy-to-let ventures.

Failing to keep up with the tax changes

There has been a lot of publicity about the changes to the tax regime for landlords but it hasn’t got through to everyone.

Research from the Council of Mortgage Lenders (CML) shows that although 65 percent of landlords are aware of the stamp duty changes, only 52 percent know that there are mortgage interest tax relief changes on the way, which could have major implications for how profitable buy-to-let becomes.

Between now and 2020 mortgage interest tax relief is being gradually phased out.

That means that landlords will no longer be able to offset their full mortgage interest costs against their income tax bill.

Previously, if a landlord earned rent of £10,000 a year but their mortgage interest costs were £7,000 then they would pay tax on just the remaining £3,000 profit.

However, that changed in April 2017. Now the tax relief is a flat rate of 20%, meaning that landlords who pay basic rate tax won’t see a change but those on higher incomes will lose out.

The change is being phased in gradually between now and 2020. It can be a bit much to get your head around, so HMRC has some useful tax bill case studies of how it will affect different people’s tax bills.

The tax office estimates that 82% of landlords will be unaffected because they are not higher rate taxpayers, so there’s a good chance you won’t be affected.

However, for higher-rate taxpayers who are using a buy-to-let mortgage, this is going to potentially add a great deal to their bill.

That’s not the only change that landlords don’t know about, the CML also reports that just 41 percent know that the 10 percent annual wear and tear allowance has been scrapped.

It’s vital to look at what return on investment you are likely to make and that means knowing every relevant number.

Stamp duty for investors is now the standard tiered rate plus an additional 3 percent of the property’s value – i.e. if you bought an investment property worth £300,000 then you’d pay £5,000 in normal stamp duty PLUS £9,000 via the extra 3 percent charge as that’s a slab surcharge on the entire purchase value. That means the total would be a hefty £14,000.

Not vetting your tenants

Most landlords and tenants have a great relationship; a recent survey carried out by Homelet showed that 96 percent of landlords questioned said they were either ‘somewhat happy’, ‘quite happy’ or ‘very happy’ with their current tenants.

But there are always a few bad apples so it’s important to check tenants’ references carefully to try and avoid a future problem such as non-payment or even damage to your property.

Even with seemingly reliable tenants there is always the risk that they will be hit by redundancy or relationship breakdown and struggle to pay so you need to be confident that this wouldn’t hurt your own finances too badly while you resolve it.

You can take steps to protect yourself, for example, by taking out landlords’ insurance, but you need to factor any potential costs into your planning.

Not thinking through all the costs

Rents are high, house prices seem to be steadily rising and so buy-to-let looks very attractive, despite the additional tax costs.

But there are many other additional costs that need to be considered if you are to truly understand the cost of investment. For example insurance, maintenance and letting agent fees if you’re using an agency.

And there’s always the chance of your property lying empty for a period, meaning there would be no rent but still a mortgage to pay.

Typical costs for landlords

1. Set up costs
  • Buying the property
  • Stamp duty
  • Mortgage fees
  • Refurbishment and decorating costs
  • Advertising for tenants
  • Gas certificate
  • HMO licence (if needed)
2. Running costs
  • Letting agency fees (if applicable)
  • Landlord’s insurance
  • Repairs and maintenance
  • Income tax
  • Annual gas certificate
  • Service charges
  • Marketing or advertising costs
  • Cleaning costs between tenants

Platinum Property Partners, a nationwide investor network, worked out that the average annual running and upkeep of a buy-to-let property, including mortgage interest, amounts to an average of £8,259.

That’s why it is so important to do the sums for your prospective property and tax situation, to make sure it is the right decision for you.

Needing to get at your money fast

Buy-to-let is not the kind of investment where you can get at your capital in a hurry. If you needed your cash back then you would have to go through selling the property and paying the associated costs of doing so.

That means it’s really important to only invest money that you can afford to lock away for years. If you need it in a hurry then you might end up selling the property for less than it is worth.

Also, don’t forget that if you own just one buy-to-let property then all your eggs are in one basket. If you have trouble with your tenants or there’s a dip in the housing market then you may find yourself out of pocket.

These, then, are the essentials. Do your sums, work out all the angles, and if you still think it’s right for you, brace yourself for those midnight phone calls…

Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.