27 September 2021

Should I Rent My House Out?

The traditional way to buy a new home would be to sell the one you currently own to fund the purchase. That’s probably the way they did in your parent’s day and their parents before them, but in the modern world, there are so many options.

You may not have to sell your existing property to fund your onward move; instead, you could rent it out. 

So, what does that entail, and is it a possibility? Let’s take a look.

 

Why Choose To Rent?

 

Owning more than one property is an excellent source of income. You should get enough to cover your monthly mortgage costs, and all the while, your property is increasing in value. If that happens, it’s a win, win.

Perhaps you have spotted a property on the market, or that dream home has suddenly come up for sale? The traditional route would take so long; that it could sell by the time you were in a position to make an offer. 

Renting offers that flexibility should you need to act quickly. Plus, you have no chain below you, effectively making you as attractive as a first-time buyer. 

Another reason why you might want to rent instead of buying is you have a job opportunity that takes you out of the area for a period, which means you need a short-term solution. Renting fills that gap, enabling you to earn an income from your property while it remains in your possession until you are ready to return.

Perhaps you want to try the suck-it-and-see approach where you are moving to a new area or even abroad, and you are unsure whether you will like it. Renting allows you to sample a slice of your new life without committing completely to see if it is what you want. 

If you decide it’s a no, you have a home to return to. If you want to make the move permanent, you can continue renting or sell your property to fund the new purchase. 

 

Does It Make Financial Sense?

 

Before making the first step towards renting, it’s worth speaking to a mortgage specialist to see if you can financially achieve your goal. Speak to independent advisors like the experts at Beals Independent Lettings Agent, who can provide you with all the up-to-date knowledge and industry information. 

The big question is one of affordability. Can you actually afford to keep one house to rent out while raising the finance to make an onward purchase? It also affects several things other than affordability. You should consider capital gains tax, stamp duty, income tax and the costs of that second mortgage.

You also need to consider what happens in void periods or if the tenant fails to pay the rent. Can you afford to cover mortgage payments on the property if the tenant loses their job?

There are also the legal costs to consider should you need to take court proceedings to evict a tenant for non-payment of rent. With so much to ponder, while renting may seem like the magic pill to cure all ills, it is not without risks. 

 

Will My Mortgage Lender Give Me Permission?

 

While you may think you own your existing home, the lender has the final say on whether you can rent the property out until the mortgage is paid in full. It could affect the rate you pay because you are changing the nature of the agreement between you and the lender as initially set out. 

It might be that you took advantage of a special rate that no longer applies when you rent the property out. It might be that the lender agrees to let you rent the property out but ups the monthly costs and places specific demands on you. 

And then there is the mortgage lender on the property you want to buy to consider. As we said earlier, renting your home out is not without risks. And your new lender will consider this when offering you their most competitive rates. 

 

Can I Reduce The Risks?

 

There are schemes and service packages that letting agents offer to minimize your financial risks. Speak to Beals Independent Lettings Agents to get expert advice tailored to your individual needs. 

When you rent out your property, you will be offered several levels of service ranging from tenant find to Rent Guarantee. Tenant find is the entry-level service, which means the agent finds and references the tenant and then hands the day-to-day management and rent collection to you.

This is the cheapest option, but you should choose it with caution. If you are a seasoned landlord, who understands the legalities and procedures, this might be suitable. However, it is safe to assume you are probably new to renting if you are reading this. 

If that is the case, you might want to consider the next couple of service levels up, starting with rent collection. This package entails the lettings agent finding the tenant, referencing and collecting the rent. However, you will still need to maintain the property and undertake legal paperwork should the tenant fail to pay the rent and need evicting.

The most comprehensive service levels are the fully managed service or the Rent Guarantee Package. Rent Guarantee takes all of the risks away, guaranteeing you get your rent paid on the same day every month regardless of whether the tenant pays or not. 

 

What Are The Costs of Renting?

While you make money from your tenants, there are other costs to consider when renting out your property. These costs will determine whether you rent or decide to sell your home. Here’s what you need to consider:

 

  • Property taxes.
  • Mortgage payments.
  • Landlords Insurance.
  • Property management fees.
  • Mortgage insurance premiums.
  • Maintenance costs.

 

Also, don’t forget that the money you make from your rental property gets added to your yearly income thresholds for tax purposes. Any additional revenue may push you from one tax bracket into the next one up. 

If your income is just below the 40% tax rate, be aware that the increase in earnings will push you into the higher bracket and increase your tax burden, which could leave you worse off. 

However, there are some expenditures that the Government allows you to offset. These include:

 

  • Landlords insurance.
  • Cost of services (gardeners and cleaners).
  • Agents fees.
  • 1-year or less legal fees.
  • Accountants fees.
  • Ground rent and service charges.
  • Tax relief on replacement of domestic items (excluding new), such as beds, washing machines and fridges. 

 

Selling vs Renting: The Pros and Cons

So, if you are thinking about renting instead of selling, you will need to know how the two compare. Which is the better route forward, and what are the pitfalls?

Selling Pros

 

  • You can spend more on your new home if you only own one property.
  • Release more equity to use on purchasing your new home.
  • Only have to worry about one property.
  • No fears about unpaid rent.
  • Fewer expected costs like damages and repairs.
  • Possibly a better rate on a new mortgage for the purchase. 

 

Selling Cons

 

  • Selling an asset that may grow financially.
  • No additional income from rental.
  • Slows the purchase process.
  • You may have a chain below, which creates additional pressures.
  • Risk losing your ideal home if you don’t sell in time. 

 

Renting Pros

 

  • It’s a great source of additional income.
  • Secure capital growth because you own it and get rental income.
  • Claim back some running costs in tax deductions.
  • Speedier than waiting for your property to sell if you are buying on.
  • Outsource the day-to-day running to an ARLA (Association of Residential Letting Agents) registered agent.

 

Renting Cons

 

  • Outsourcing fees can be expensive depending on the service level you choose.
  • Doing it yourself can be time-consuming, given there are over 400+ regulations, and fines can reach £30,000 if you get something wrong.
  • Possible damage to your property.
  • Risk of non-payment of rent.
  • Lose money on both houses if the market falls.

So, you can see that renting is a great option for increasing your property portfolio and getting you moved into your dream home sooner, but it is not without risks. 

 

At a Glance: The Steps To Renting Out Your Home

If you have read the above and think that renting is the perfect route to take, you’ll need to do some leg work before you actually start to make an income. Here is the at-a-glance guide: 

 

  • Make contact with your existing lender to get permission to let the property.
  • Get advice from a registered and qualified letting agent.
  • The agent will help you identify what home improvements you need to make to get your property in a lettable state.
  • Invest in landlord insurance. The letting agent can help you source the best products.
  • Prepare your property in accordance with the agent’s advice.
  • Advertise the property.
  • Find the perfect tenant.
  • Start references and wait for a satisfactory credit check.
  • Agree on a move-in day and hand over the keys.

 

FAQs

 

Can I rent my home with my existing mortgage lender?

You can as long as your current lender agrees. But suppose they impose restrictions and try to charge unreasonable interest rates. In that case, it might be worth speaking to an independent mortgage advisor to see if there are other more competitive mortgage deals out there. 

This is advisable when you conduct your research into renting, especially if you are no longer locked into a fixed rate period. 

What is equity?

Equity is the difference between the value of your home and what you owe. Should you sell your asset (your home), what you are left with is the equity once you have paid back what you owe.

Is landlord’s insurance compulsory?

It is entirely your choice if you decide to take out landlord’s insurance, but it is highly recommended that you guard against theft, damage and tenant issues. 

 

Is renting out your house complicated?

Unless you have rented out property before, it can be a bit of a minefield in the hands of the less experienced. Luckily, there are letting agents on hand ready to advise you at every step of the way. With over 400+ rules and regulations and hefty fines, if you don’t follow the correct procedures, it’s good to know there are people who can help. 

 

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