Why it’s hard to be a landlord in 2018
This article originally appeared in the summer 2018 edition of Telegraph magazine. Read it online now.
‘Being a landlord is easy’. Regardless the size of your rental portfolio, it’s likely an opinion you’ve heard before. Put simply, it’s wrong. While the rental market still offers considerable opportunity for proactive landlords who stay on top of ever-evolving rules and regulations, it has also changed immeasurably in recent decades.
Chiefly, a developing regulatory environment has made the job of being a landlord more challenging, requiring increased administrative processes, a more professional stance on renting property and an ongoing awareness of how legislation can affect both your business and your tenants.
Of course, much of this has been driven by the seismic change in the nature of home ownership in the UK. While there may be more rental properties on the market today, the number of tenants looking to rent continues to rise. For many, the concept of being a tenant has changed from being a short-term bridge to a permanent way of life.
The last two years, in particular, have seen a number of new regulatory and legislative decisions introduced that, if not fully understood, can have an impact on landlords. Last year saw a record number of government consultations on the private sector and notable changes include amendments to mortgage-interest tax-relief that will continue to be rolled out over successive years; the introduction of no-deposit insurance; and tougher standards for landlords with four or more mortgaged properties. In the latter instance, it’s now tougher to get funding, due to stricter underwriting criteria, introduced by the Prudential Regulation Authority.
It’s a trend that looks set to continue. In 2018, landlords have already seen new minimum energy efficiency standards and banning orders come into effect. Later this year, wide-ranging changes to Houses in Multiple Occupation (HMO) will be put in place, which are likely to have significant impact, as will the changes to Section 21, as decreed under the Deregulation Act.
“There are a number of changes that are hitting the statute books at the same time in 2018,” says Chris Horne, landlord, developer and creator of PropertyHawk.co.uk, an online resource for landlords. “Many landlords have existed in a benign environment over the last 20 years, so these changes will come as quite a shock. Adjusting their ways of working to accommodate the new legislation is now really important, but it will take some getting used to. Many landlords are not ‘professional’, so the increased complexity and legislation only confuses them and also increases the likelihood that they’ll make potentially expensive mistakes.
“The changes are driven by the increasing political power of the rental class,” he adds. “Many people now rent privately for a considerable period of time, or permanently – it’s become the housing tenure option for a sizeable part of the population. The latest projections are that a quarter of households will rent privately by 2021, with home ownership at a 30-year low, and that’s driving the political pressure for change.”
“It’s certainly become more difficult to be a landlord and the onus is on really keeping up with these changes,” says Tessa Shepperson of Landlord Law. “Being on top of records, processes and paperwork is now a vital part of being successful. To be safe from any action, landlords must make sure they not only comply with every rule and regulation but that they can prove that they comply with every rule and regulation.”
This year sees ongoing changes from new tax regulation introduced in 2017, which addressed the way income tax is levied on rental properties. “Landlords are no longer able to offset all of their mortgage interest costs against their rental profits,” Chris explains. “It’s a big rule that landlords really need to take note of.”
The implementation of new tax rules commenced in 2017, reducing the amount of mortgage interest that could be offset against tax to zero by 2020. This affects all residential properties, although landlords who hold their rental properties in a company are exempt. However, some higher-rate landlords, says Chris, could see “a devastating impact on their cash flow and wider business model”.
Mark Leach is a landlord with 30 years’ experience. With around 80 residential tenants and some commercial properties, he’s witnessed many industry developments. Despite that, he points to the new tax rules as “one of the biggest problems facing landlords this year”.
Some landlords I know are considering leaving the sector altogether
“Some landlords I know are considering leaving the sector altogether if interests rates continue to rise,” he says. “One method for dealing with the new tax laws is turning their property portfolio into a limited company. Doing that means you only pay 20% corporation tax and you can put all the costs of refurbishment, building and other work against your earnings.”
Two key new pieces of legislation to take note of this year are new banning laws and minimum energy efficiency standards (MEES). The former, says Chris, are essentially to “root out rogue landlords and letting agents. It is, in some respects, the regulatory price to pay for landlords not having to pay for a landlord licence, which effectively penalises the vast majority of good landlords – not just the bad ones we all want excluded from the industry.”
Do your job properly and you shouldn’t be affected by the banning laws. But the key thing to take away from this is that it’s important to avoid complacency as, according to Tessa, banning laws can unwittingly catch you out. “Yes, they are targeting criminal landlords but they are worthy of fully understanding. A simple example being that if you make a mistake related to another law or regulation and get prosecuted, you could be subject to a banning order that effectively takes your business away.”
The beginning of April also saw the introduction of minimum energy efficiency standards, aimed at private landlords in possession of properties that do not meet the lowest energy efficiency standards. The legislation makes it illegal to create or renew a tenancy in homes with EPC energy ratings of F and G. From 1st April 2020 landlords won’t be able to continue letting the property at all.
This is, in many respects, easier to mitigate than other laws – for landlords it will require investment to ensure the property meets those standards. “If you wish to continue letting the property, energy efficiency improvements have to be made to meet the minimum E rating,” says Chris. “In terms of advice and the best ways in which to do this, it’s worth noting that you’re not necessarily expected to finance the changes yourself – you can use third-party resources such as the Green Deal and local authority improvement grants to get the property up to the required legal standard.”
Further changes to be aware of in 2018 are those made to Section 21 under the Deregulation Act of 2015. Section 21 serves as a way in which landlords can legally obtain possession of their property from a tenant – it’s one of the most important pieces of legislation protecting landlords, providing it is served correctly.
The new rules, brought in by the Deregulation Act, which Tessa describes as “perhaps the most significant changes to be aware of this year”, have made Section 21 more complex, introducing a number of hurdles that landlords should be aware of.
“The main scenarios where this can now be an issue,” Chris says, “are if you fail to serve a Gas Safety Certificate; fail to provide an EPC where applicable; fail to serve the How to Rent booklet; or prevent retaliatory eviction. In addition, you can no longer serve the Section 21 notice within the first four months of the tenancy, and once it is served it only lasts six months.”
To avoid, where possible, the impact of Section 21 changes, the above stipulations must be correctly put in place at the start of a tenancy; be sure to protect the deposit within 30 days, for example, and provide a Gas Safety Certificate, booklet and accompanying paperwork before tenants move in. If there is any confusion, seek professional advice to make sure you are covered.
The new rules will make gaining possession for a landlord more complex and potentially more problematic – they also make it much easier for a well-advised tenant who is looking to make a claim against the landlord and defend themselves. Preparation and a proactive approach are essential.
Later this year a key piece of legislation will come into effect, bringing changes to mandatory licensing for houses in multiple occupation (HMOs), which is expected in October. Currently, it is estimated that there are 60,000 HMOs in the UK requiring a licence – that figure could see a fourfold increase once the new rules are in place.
“Presently, only the larger HMOs – three or more storeys and five or more tenants – need a licence,” Tessa explains. “In October the law is changing to widen the scope. There will be no specific storey requirements and all properties with five or more tenants in two or more households will be applicable. Essentially, a lot more HMOs are going to become subject to licencing, and I see a fair few landlords getting quite a shock if they are not prepared.”
The widening of the HMO laws to cover more properties means many landlords will be affected. There will likely be a grace period because of the volume of new licences it will require, but landlords that haven’t sorted their licensing requirements – changes typically revolve around health and safety issues and similar – could face penalties of up to £30,000 and criminal prosecution.
While the changes discussed thus far are solely focussed on the rental market, according to Peter Littlewood of iHowz, there are wider developments that landlords should pay attention to, namely the changes to the General Data Protection Regulation (GDPR), which was introduced in May.
“Some landlords are struggling with the changes to data protection laws,” he says. “Although it is aimed at large companies, landlords have certainly been swept up in this due to the sensitive personal information they hold about tenants. We have prepared a fact sheet for our members and an appropriate privacy statement they can use, so I hope they are better prepared.”
BE A PROACTIVE LANDLORD
The nature of the rental market means that change is a constant. The key to overcoming any challenges posed by regulations discussed in this article are knowledge and actively staying up to date with the sector.
“Landlords have a responsibility to keep themselves informed,” says Tessa. “Ignorance isn’t a defence. There are plenty of services out there to help, so be sure to keep your eye on what’s happening. To put it simply, if you don’t keep yourself informed you are at risk. The key to mitigating regulation changes is to be proactive rather than reactive.”
According to Chris, governments generally publish consultations on such matters prior to legislation coming into effect, sometimes by as much as 12 to 18 months, meaning that the savvy landlord has access to a valuable source of information.
“All landlords should consider themselves professional, as they are providing a large part of the population with their homes,” Peter adds. “Any prospective landlord needs to fully understand how to run their business.”
From a landlord’s perspective, Mark notes the importance of professional bodies and market forums as an indispensable way of keeping up to date: “We are members of the National Landlords Association (NLA) and iHowz, both of which provide really useful and timely updates. There are also a number of landlord forums that are filled with useful information. But aside from that, every landlord would do well to not forget that they have Google – it’s really important to stay ahead of what’s changing in the industry any way you can.”
Tessa’s Landlord Law advice service at landlordlaw.co.uk is another useful source of information, while Tessa answers member questions on the forum herself.
If you’d like to find out more about the landlord insurance options available to protect your buy-to-let property, give our specialist team a call on 01603 216399.