- Profits from BTL have been falling for years
- But there are several ways BTL landlords can fight back
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, which 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 or, if you are operating on small margins or under existential threat, what can you do to survive?
This blog looks at 2 hot-right-now, realistic, practical and relatively affordable ways you can protect and even boost your property income:
1. Convert to a HMO
2. Shift to serviced accommodation
1. Convert to a HMO
Instead of renting a property to a single person or family you can often double or even treble the 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 and, if necessary, take legal advice to make sure that you can operate your property as a HMO.
HMOs must meet safety and quality standards enforceable by the local authority and some HMOs must be licensed (premises licence). You as the landlord may also need a licence (landlord licence).
The rules are complex and therefore speak to the council before doing anything; take 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 – as you will be dealing with more tenants.
You may have the time and skills to do the management yourself but, if not, you will need to engage a managing agent skilled at managing HMOs.
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. Shift 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”.
If your property is a flat, study the lease with care and, if necessary, take legal advice to make sure that you are allowed to provide serviced accommodation.
If your property is 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.
If your property is outside London, check with the local council to establish if there are any restrictions on short-term letting. Also 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. You will need to carry out thorough due diligence to ensure that there is adequate demand for serviced accommodation in your area, and 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 – but 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