Improve your buy-to-let income by following the steps smart buy-to-let landlords are following.
Are you worried about the falling income on your buy-to-let property or portfolio?
The game changer is Section 24 of the Finance (No 2) Act 2015. This has reduced the amount of mortgage interest residential landlords can deduct from their rents when calculating their tax liability.
The government has also removed the 10% wear and tear allowance for furnished lettings.
The outcome is higher taxation, lower profits.
What can you do to protect your profitability? If you are operating on small margins or under existential threat, what can you do to survive?
This blog looks at two realistic, practical and straightforward ways to improve your buy-to-let income:
1. Convert to a HMO
2. Shift to serviced accommodation
1. Improve your buy-to-let income by converting to a HMO
The best way to maxmise your rent is not to let your property to a single household or family. You can double or even treble rent by letting it on a multi-let basis to several tenants as a house in multiple occupation (HMO).
The government’s website gov.uk describes a HMO as follows:
A house in multiple occupation (HMO) is a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’
You can set up your HMO in 2 main ways depending on the configuration of the property, your budget and your wishes:
- Each tenant having their own bedroom and sharing the kitchen, bathroom/s and communal areas such as a living room and garden – that is typically the case with traditional student houses.
- Each tenant having their own bedroom and bathroom where possible – with a shared kitchen and, possibly, living room.
With the first option, your financial outlay will be relatively small. With the second option, the adding of extra bathrooms will involve greater expense.
However, if the plumbing and drainage is readily available, it can be relatively cheap to install bath/shower/toilet facilities.
The second option may be more desirable to some potential tenants, and may attract higher interest and rent.
If your property is a flat, study the lease with care. If unsure, take legal advice to make sure that you can operate your property as a HMO.
Issues to consider with HMOs
HMOs must meet safety and quality standards enforceable by the local authority and some HMOs must be licensed (premises licence). Depending on your location, you may need a landlord licence.
The rules are complex and therefore speak to the council before doing anything – taking expert advice whenever there is doubt about what you can or cannot do.
While a HMO will give you more rent, remember that it will involve more management time, costs and challenges. You will be dealing with more tenants.
Engage a managing agent skilled at managing HMOs if you cannot do the management yourself.
You should factor in their charges, the set-up costs and greater wear and tear on your property when working out whether the exercise will be worth your while financially.
2. Improve your buy-to-let income by shifting to serviced accommodation
Another way to boost your property income is to convert your single let property into serviced accommodation, with occupiers staying for a short or long time depending on their requirements.
The services you can provide include furnished accommodation, TV, WiFi, bedding and cleaning.
Serviced accommodation is very similar to hotel accommodation, but with greater flexibility for the user.
You will make your property available to people needing temporary or short-term accommodation away from home – for instance, business people, holiday makers, visitors and tourists.
You will be able to source guests or occupiers by using booking services such as Airbnb and booking.com.
Serviced accommodation is very similar to what is traditionally known as “holiday lets”.
If your serviced accommodation is in a fashionable, touristy or historic place, you could market it as a “holiday let” or “serviced accommodation/holiday let”.
Where you own a flat, study the lease with care and, if necessary, take legal advice to make sure that you are allowed to provide serviced accommodation.
Issues to consider with serviced accommodation
Firstly: If you own a property in London, remember that it is illegal to let it for more than 90 days a year on a short-term let basis – unless you get planning permission to do so.
Secondly: If your property is outside London, check with the local council to establish if there are any restrictions on short-term letting. Check whether agencies such as AIRbnb have imposed their own restrictions.
A key thing about serviced accommodation is working out whether your property is in the right place to perform well. Carry out thorough due diligence to ensure that there is adequate demand for serviced accommodation in the area. Check that the room rates and likely occupancy levels will allow your business to thrive.
Location is fundamental – with central locations in thriving, fashionable, interesting, touristy, historic or up and coming towns being particularly desirable.
Running serviced accommodation is running a business and you will need to plan and operate as such.
A key step is to work out whether you will be able to make acceptable profits by delegating the day to day work involved (cleaning, changing bedding etc) or whether you will need to do the work yourself to make the maths work.
If you will need to do the work yourself, you should decide whether you can realistically do so, especially if you are in full time work.
One of the biggest pluses with serviced accommodation is that section 24 will not normally apply.
The government has tightened and is continuing to tighten the screw in relation to mainstream buy-to-let.
You can lessen the impact and even get the upper-hand by exploring ways to supercharge the earnings from your property.
HMOs and serviced accommodation will involve you in more work, investment and risk. However, there is every chance you will increase your profits significantly as a result.
If you are new to HMOs or serviced accommodation, be sure to seek expert advice from a lawyer, property adviser or coach before proceeding.
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Are you running a HMO or serviced accommodation now? How has it gone? What would you say to anyone looking to set up a HMO or serviced accommodation? Please leave your observations or comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com