When it comes to property management, there is no such thing as ‘passive income’.
Renting out your house is a major decision, and you need to consider all the potential side effects.
Here are 6 key considerations before renting out your house.
1 – Clarification of clauses
If you have a standard residential mortgage, you will need approval from your lender.
Depending on the circumstances, this may involve switching to a ‘buy-to-let’ mortgage.
To rent out a leasehold flat, you will typically need permission from the freeholder.
Similarly, if you are a renter, the tenancy agreement will typically have clauses about subletting.
(It would help if you spoke to your landlord before doing something that could get you evicted).
2 – Securing other accommodation
Renting out your property is only viable if you have another place to stay.
This second home must be reliable because if you are evicted immediately, moving back into your rented property may not be an option (see more below).
For example, if you have a mortgage on the second place that you are staying in, then make sure that you can comfortably afford it.
Otherwise, if the house is repossessed because you have not met your mortgage repayments, you could be in a very difficult position.
In this context, the type of tenancy contract you have in place will make a difference.
Some agreements allow you to evict them at a moment’s notice, but other contracts allow them to stay for one year, two years, or indefinitely.
3 – Property management details
Managing a property that you are letting out is not a ‘passive’ lifestyle: there are many headaches involved with letting out a house, and you must be prepared for them.
Firstly, decide on your monthly rent payment. If you have a mortgage on the property, this fee needs to cover your repayments.
You should also leave a margin for error to cover replacements, as a boiler or shower can break down at a moment’s notice.
Another critical decision is whether you will hire a property management company to handle the ‘legwork’.
This can make your life much easier, as the business will handle vetting your tenants, collecting rent, and performing regular visits.
However, it comes at a cost – usually several hundred per month.
You must have a list of go-to experts to contact if you have a problem with the electrical wiring, plumbing, or gas network.
Hiring a handyman who covers everything – or simply the cheapest professional you can find – is not always the best idea. They may do a poor job and cost you more in the long run.
4 – Ensure you have all the necessary paperwork
Although paperwork is not the most exciting part of leaving your house, it is arguably the most important.
Energy efficiency regulation impacts on property values. You will need a valid Energy Performance Certificate (EPC) and a minimum ‘C’ rating in the years to come.
You might need to make fixes if your house doesn’t meet these criteria.
Electrical and gas safety checks require a certificate confirming that they were completed, and that everything is safe.
Smoke and carbon monoxide systems usually have documents outlining how to operate them, as well as confirming that they are functioning properly.
You will need to check fire safety—in other words, have a ‘fire escape route’—and ensure that any furniture you provide is fire resistant.
If you are letting out a flat, it can come with other paperwork, such as:
- A copy of the leasehold
- Documents related to cladding (if it exists)
- Details about the freeholder
5 – Insurance
If you’re looking to rent out your property, then a standard Home Insurance policy won’t cover you. There are additional types of insurance you need to consider if you’re letting out the house.
Landlord Building’s Insurance is the most common type of insurance. It provides more protection than Home or Contents Insurance.
That said, Contents Insurance is worth taking out as well. This is especially true if you furnished the house and therefore are at risk of having your belongings damaged.
You might also want to consider Rent Guarantee Insurance to cover your rental income should your tenants fail to pay.
As a final consideration, Landlord Home Emergency Cover assists if your property’s heating system, plumbing or electrics fail.
6 – Screen Tenants Carefully
Vetting your potential tenants is a major part of renting out your house.
Finding people who are happy to live there is one thing. But making sure they pay their rent and don’t destroy the property is another.
Property management companies can be useful in the process of screening your tenants.
They should have experience in this area, meaning that they are aware of the common pitfalls and can avoid them.
Most importantly, your tenant has a right to rent from you by legally being in the country.
If you are found to have knowledge of someone being illegally in the UK – without reporting it – then this can have repercussions for you, too.
There also needs to be a margin for error in your tenants’ finances, as they could be made redundant at any moment.
If they provide evidence of savings that they could use, you might feel better about selecting them.
Likewise, if they earn a lot of money or work in a steady industry, this is also likely to sway your decision.
Should I sell or rent out my house?
There are lots of factors to consider when deciding whether to sell or rent your house.
Market conditions can have a significant impact on the choices you make.
High interest rates or low demand in your area might cause your property to sell for low figures. So, it may seem counterintuitive to sell your house during a slump.
Furthermore, your current circumstances will make a big difference.
If you are young and wish to pass your property onto your children, renting it out in the meantime is the smarter option.
However, if you are older (or don’t have children) then selling it for a lump sum, which can then be used to enjoy your retirement, may be preferable.
You should seek independent advice from an expert before you decide either way.
You may not have considered certain factors, and it is always a good idea to have a professional ‘sense-check’ your thought process.
