2019 will witness many changes in the letting industry that many fear could end up increasing rents.
Can landlords find a way to avoid passing costs onto tenants? What are those alternative strategies?
Landlords are constantly juggling with finding the right rent balance. You ask too little and you end up hurting yourself, you go too high and you might end up dealing with a long void period. One of the main things you need to take into account when it comes to deciding rent is the expenses you’ll need to cover.
Expenses when you’re a landlord come from a range of sources and sometimes, the Government puts out legislation that has a direct impact on your expenses and crucially, on your bottom line. When landlord expenses go up, what tends to happen is that they pass on the cost to tenants. Our CEO James Davis often cites Government legislation aimed at landlords – but that only ends up increasing the burden on tenants – as “robbing Peter to pay Paul”.
While landlords need to cover their expenses and make a profit, constantly increasing the rent could have a detrimental impact on your income in the long-term. You might find it hard to maintain long-term tenants, leading to longer void periods, and finding one in the first place can be tricky.
Crucially, many landlords themselves when asked have said that it will be difficult for the market to sustain another rent increase, and are already increasingly looking at ways to cut their expenses to maintain yields without passing future cost increases onto tenants.
What’s happening this year that will put further pressure on landlords’ yields?
Tenant Fees Ban
Parliament recently passed a Tenant Fees Ban that’ll come into effect on 1 June 2019. This, means that landlords and letting agents cannot charge a range of tenant fees, and there are also reductions in the maximum deposit cap (see below). The fees ban includes a ban on any fees or charges on top of rent and tenant default fees, which include things like breach of the tenancy agreement. Tenants also can’t be made to pay for third-party services – such as reference checks.
This ban applies to all shorthold tenancies and licences, excluding long leaseholds, social housing, holiday and company lets, and non-Housing Act tenancies.
Reduction in Maximum Deposits
As mentioned, the Tenant Fee Ban will also change the cap on the maximum deposit that landlords can ask from tenants. Security deposits must not exceed the equivalent of five weeks’ rent – currently six weeks - and holding deposits will be capped at a maximum of one week’s rent.
There have also been ongoing tax changes, which don’t necessarily increase expenses but rather limit the amount of profits landlords can achieve. The amount of mortgage interest landlords can offset against their tax bill will be reduced even further. When you’ll file your tax return for 2018-2019, you will only be able to claim tax relief on 50% of your mortgage interest and get 20% tax credit on the rest.
How Can Landlords Deal with the Changes and Avoid Passing Costs Onto Tenants?
These are all major changes that are having an impact on landlords. In a recent Upad survey, some landlords were openly considering selling their properties and stepping away from the business altogether. Interestingly, previous research we conducted indicated that fewer Upad landlords were selling up in comparison to the national average, partly because using an online letting agent leaves them in a more resilient position when legislation bites and high street letting agents ramp up their costs.
There are alternative strategies that work as an alternative to selling or raising rents. Landlords don’t have to pass these additional costs onto tenants. What options are available?
Become a Self-Managing Landlord
Landlords’ high expenses have been partly down to expensive, traditional letting agents. In our survey, one landlord after another complained about the costs of using letting agents and many said the costs were a primary reason to become a self-managing landlord.
Being a self-managing landlord is a great way of saving money, especially at the start of tenancies. When you meet your prospective tenants face-to-face and conduct the viewings yourself, you won’t be wasting time paying an agent to do that. You get to talk to the tenants in person, which can lead to a better tenant/landlord relationship and help you find a good, reliable tenant in the first place!
You should still should always conduct a tenant reference check. Upad can reference your tenants for just £75, so you will still be saving money and won’t need to make your tenant pay excruciating fees. This is also partly because you won’t end up paying the referencing for nothing. Since you’ve met the person face-to-face and had a chat with them, you already have some kind of understanding of who’s worth referencing and who isn’t.
Remember that from June 1st you’ll need to pay the referencing fee as it will be illegal to charge the tenant for it!
Self-managing landlords will have more power in determining other things that could impact expenses and thus, rents. You can pick or do your own repairs and improvements, meaning you don’t have to worry about the quality of work – you find the handyman so you can consider the cost and quality outright. You won’t suddenly receive a bill from your letting agent asking for payments for work that they’ve signed off, probably without having looked at it!
Opting for Alternative Deposit Options
A reduction in the deposit cap can feel like it’s leaving landlords more exposed, but this is a good time to consider alternative arrangements. One popular option is to consider deposit ‘insurance’ schemes, which allow the tenant to pay in regular instalments rather than having to pay a lump sum at the start.
Another popular scheme is Zero Deposits, which is available from Upad. With Zero Deposits, the tenant only pays for a Zero Deposits guarantee worth one week’s rent, but you’ll still get the same protection as a six week’s deposit. Your tenant remains fully accountable for paying rent whilst you don’t have to worry about having to increase rents!
Our data for advertised lets accepting Zero Deposits tenants shows a great 92% let rate.
Improving Void Period Management
Aside from these sorts of legislative changes, many landlords see long void periods as a time when rents must go up. If your property is empty for a long time, the costs won’t stop running and you might think it’s easier to recover these by raising rents. This can often become a vicious circle for landlords who raise the rent to protect against voids but end up with longer voids than they normally would because their rent price is uncompetitive!
The answer shouldn’t really be this but rather an honest look at how you could better deal with these void periods. How to keep your void periods to a minimum?
The best option is to ensure your tenants want to stay long-term rather than leave as the contract runs out. This means taking good care of the relationship – communicating regularly, sorting out issues within the property as soon as they arise, and showing flexibility in terms of rent payments when you can, especially if the tenant is facing difficulty, while of course acknowledging you have the mortgage to pay and your own expenses to cover.
The last point is important because you don’t want a tenant that runs into rent arrears but you also don’t want to be looking up how to deliver a Section 8 notice the first time they’re a few days late in paying. Upad’s Rent Manager enables you to use a direct debit rent collection system that keeps you updated on rent payments, making it easier to sort out issues as soon as they happen.
It’s impossible to keep a tenant still forever. But when you have a good relationship with the tenant, you can be open about things like AST renewal. If you know ahead of time if and when they will be vacating the property, you can start looking for a new tenant even before the property is empty.
In the modern world, online advertising is crucial. Most tenants look properties online and the more detailed your advertisement is the better candidates you’ll receive. Make sure to use photos, describe the property clearly and mention the important things right from the start. This includes things like if you can accept Universal Credit recipients, deposit amounts, reference check requirements and so on.
The process from advertising to signing the contract can be smoother with an online agency. You can have the contracts ready and updated throughout the year, meaning you don’t have to spend time drafting them when your tenants leave. Upad’s Tenant Sign-up Service makes it quick and simple to go from looking to signing contracts – without having to worry about compliance issues.
The more prepared you are, the easier it will be to avoid void periods.
Asking for Advice
Finally, a simple and useful strategy to avoid passing costs onto tenants is to become better at managing your property and income. To do this, asking advice is the number one thing to do.
For example, the new tax changes don’t mean that you have to raise rents. A tax adviser could look at your situation and help you find ways to maintain a similar income or find cuts from your other expenses.
Instead of just raising rents, check with advisers first. A good place to start is to join the Upad Landlord Club that gives you access to tax and legal advice, along with other helplines, guides, and resources.