The days of so-called ‘armchair investing’, where you could buy a rental property, outsource all the management and just let the profits roll in are long gone! With increased legislation and taxation for landlords, and the future property market highly unlikely to see the kind of price booms investors enjoyed in the late ‘90s and early 2000s, landlords today have to be much more financially savvy and ensure they plan well ahead.
One of the key things to budget and plan for is what will happen if there’s suddenly no rent coming in – whether that’s because a tenant has stopped paying, you’ve got a void period between tenancies or the property has been damaged and is currently uninhabitable while repairs are carried out. Properties require ongoing maintenance to stay legally compliant and mortgages still have to be paid, and if you don’t have a financial back-up plan, you might have to subsidise your investment from your personal savings. Worse still, if you don’t have the resources yourself to cover the costs of keeping the property going, you may be forced to sell.
Here are four key things you can and should do to protect yourself:
1. Set money aside each month for maintenance
According to Checkatrade, it’s recommended you budget around 1% of a property’s value for maintenance costs. So, if your rental is worth £250,000, that’s £2,500 a year and around £210 a month you should be putting towards maintaining the property. So, set aside whatever proportion of that £210 hasn’t been spent on actual works each month so that you build up a fund over time.
However, the cost of individual maintenance works can vary hugely – for example, fixing a tap might only be £50-100, whereas a boiler malfunction could be several hundred pounds – and if you haven’t had time to build up a decent fund from rental income over time, a big job could catch you out, especially if you don’t currently have any rent coming in.
It’s therefore advisable to set aside much more for the first few months of a tenancy to ‘kick start’ your maintenance fund. Exactly how much is up to you, but make sure it’s enough to let you sleep at night without worrying about being able to keep your property up to the minimum legal standards.
2. Take out rent protection insurance
This will ensure you continue to receive the full rental amount each month if your tenant defaults, commonly for up to 12 months until they can be evicted. The product we offer covers you for up to 15 months of the contract (to a maximum of £50,000) and includes up to £50,000 of legal expenses for regaining possession of your property. For more information and to make an enquiry, just visit our website.
3. Make sure your landlord insurance policy covers loss of rent if the property is uninhabitable
If the property suffers severe damage and your tenants have to move out into alternative accommodation, they won’t be paying you any rent. So, check whether your landlord insurance covers you for loss of rent following an insured event and what the extent of that cover is, bearing in mind that it may be an optional extra to your standard policy.
4. Aim to have enough equity in the property so you can remortgage if necessary
In a worst-case scenario, if you’re without rental income for an extended period of time, it’s good know that you could remortgage and release some equity to cover ongoing costs. If possible, try to buy with borrowing of no more than 65% LTV to give you a decent equity cushion.
If you’d like to find out more about protecting yourself and your property with insurance, you can make an enquiry online via our website. And if you need any advice about maximising your rental income, just get in touch with the team in your local Reeds Rains branch, who will be happy to help.