As the nights draw in and winter approaches, the introduction of new government restrictions to curb the spread of the coronavirus and the forthcoming end of the furlough scheme signal troubling times ahead for the residential lettings market.
It was recently reported that approximately 1.5 million private renters are furloughed and it is predicted that up to 20% of workers enrolled on the JRS could be made redundant when the scheme ends at the end of October. 730,000 people have already lost their jobs and this figure is expected to rise sharply in coming weeks. As a result, market demand among renters is going to take a serious hit and many landlords are likely to see current tenants terminating contracts early or falling into arrears due to loss of income.
With the government’s ‘rule of six’ dominating headlines, as an antidote to investor despair we have developed an alternative ‘rule of six’ by coming up with the below tips for buy-to-let landlords looking to reduce costs. Though all forecasts indicate that significant challenges lie ahead, our practical advice will help you cut costs and identify valuable savings when managing your portfolio.
1. Don’t compromise on tenant quality.
If your property has sat vacant for several weeks and there are limited signs of interest on the marketplace, it can be tempting for landlords to relax the criteria they use to filter prospective renters. It is easy to understand the often irresistible financial logic behind such a decision. As the expensive costs associated with prolonged void periods add up, it can seem as though there is no alternative other than to secure a badly needed revenue stream by accepting the first offer regardless of the renter profile.
This approach is to be avoided at all costs. While it makes sense to review certain criteria you once held dear - such as ‘no pets allowed’ - to expand the applicant pool, you should never compromise if there’s a question mark over either the character or income of the renter. Void periods may be costly, but evictions and arrears are a significantly greater expense.
The protracted process of eviction prior to the onset of coronavirus was already costly and time-consuming. However, additional requirements prior to eviction introduced to protect renters from losing their home during the pandemic mean that it takes significantly longer to regain vacant possession. For example, there is now a 6-month minimum notice period required in most cases (with this dropping to 4 weeks’ notice only after over 6 months’ arrears have accumulated) before landlords can seek possession through the courts. There is also a significant backlog of cases, meaning that when hearings resume the most serious cases involving anti-social behaviour and criminal activity will be prioritised.
All prospective renters need to be referenced even more thoroughly than usual to ensure that whoever you let the property can afford the rent for the duration of the fixed term. This will spare you significant expense in the long term and allow you to mitigate risk by accessing rent insurance policies.
2. Always investigate before sending in the professionals.
Landlords can save themselves hundreds of pounds in contractor fees simply by taking a bit of time to investigate in person whenever renters report an issue. It is quite often the case that many of the issues reported to landlords actually turn out to be fairly rudimentary problems with a simple enough fix. However, well-meaning renters often won’t take the initiative and attempt to fix the problem themselves for fear of causing further damage and incurring greater costs. This is particularly the case with students and young tenants who are new to the private rented sector.
If you live locally, visit the property yourself to investigate and see if the issue can be repaired on the spot. If you aren’t able to visit in person, ask your renters for plenty of pictures and videos so that you can do your own research before deciding the appropriate next steps.
Be sure to attend to any issues promptly, both to ensure that your renters are comfortable (happy renters stay longer) and so that a quick fix doesn’t escalate into a more difficult job.
3. Take advantage of a positive lending environment to remortgage.
With the Bank of England base rate currently sat at the historic low of 0.1% and billions of pounds pumped into the economy through various quantitative easing measures, the current lending environment is very positive for investors. The overall number of buy-to-let mortgage products available on the marketplace has been steadily increasing since May and there are many deals available for landlords looking for more competitive rates.
Landlords should take advantage of these low interest rates and an expanded range of mortgage products to recalculate their portfolio financing, reducing costs wherever possible.
4. Use government grants to subsidise improvements to the property.
It is often necessary to undertake work to improve or maintain the condition of the property and make it attractive to prospective renters. From the end of September until March 2021, the government’s Green Homes Grant will subsidise two thirds of the cost of energy-efficient home improvements up to the value of £5,000. The scheme is open to both landlords and private homeowners and vouchers can be redeemed to finance one primary measure and a number of secondary measures.
Funds must be used for at least one primary measure before the voucher can be applied to secondary measures, and the amount you receive towards the cost of secondary measures cannot exceed the cost of primary measures.
Primary measures are considered to be anything related to insulating the property or installing low carbon heating.
- Insulation in the roof, cavity or solid walls, under floor, the loft etc.
- Solar thermal heating.
- Air or ground source heat pumps
- Biomass boilers.
Secondary measures include:
- Double/triple glazing used to replace single glazed windows.
- Hot water tank thermostats and insulation.
- Heating controls.
- Draught proofing
- Energy-efficient external doors.
If you are planning any of the above improvements anyway, then you should definitely consider applying for a grant to reduce the costs. If you aren’t currently planning to undertake any improvements, it may be worth considering what energy-efficient improvements your property might benefit from while funding is available. Many of the works covered by the initiative will make your home more attractive to renters by reducing the monthly utility costs and improving the overall quality of life in the property.
Minimum energy efficiency standards in the private rented sector are under constant review. In order to legally let your property it must have an EPC grade of E or above. However, it cannot be taken for granted that this will remain the case indefinitely. New legislation aimed at improving the quality of rental accommodation is introduced on a regular basis and enforcement is ever more stringent, with the cost of compliance (and non-compliance) steadily increasing. Therefore, it might be prudent to remain ahead of the curve by completing energy-efficient upgrades now - while the funding is available - before the minimum required standards are raised and the cost of compliance is greater.
5. Use proptech to reduce marketing spend and streamline operations
Now is a great time to streamline your operation with new and innovative proptech solutions.
Landlords can reduce marketing and operating costs by avoiding costly agency fees. With less high street foot traffic and more renters completing their property search digitally even before the pandemic, the branch model approach of traditional agencies is much less relevant in the current market. That makes it even harder to justify the extortionate tenant find fees, renewal charges, and other hidden costs common with traditional agencies.
DIY landlords can drastically reduce their costs by using online marketing platforms to gain direct access to the major listings portals. However, landlords using low-cost online DIY platforms to market their portfolio need to be aware of all of their compliance obligations, including the service of all required documentation. If not, you could find yourself penalised with hefty fines that entirely negate the purpose of the cost-saving exercise.
At Home Made, we offer a hybrid solution for hands-off landlords who want a hassle-free end-to-end service. We deliver similar cost savings and operational efficiency to DIY proptech platforms and software while also adding value with exceptional customer service, innovative marketing solutions, accompanied viewings, and fully compliant tenancy administration. Using smart technology we can offer citywide coverage in London from one central location, allowing us to offer clients annual fee savings of 50-90% (compared with traditional agencies) while also letting properties faster by cross-selling to a far greater audience. In a renters’ market, you need to work harder and smarter to maximise the reach of your advertising and avoid lengthy void periods.
In addition to cutting costs, Landlords can also use proptech to mitigate financial risk with deposit replacement services. These services often offer greater financial protection against unpaid rent and breaches of the tenancy agreement than traditional deposits, which are capped at 5 or 6 weeks’ rent. Offering 0% deposits can also help to reduce voids by lowering the upfront payment threshold required for renters to secure your property, making it more attractive in a competitive market where incomes are being squeezed. There are no costs involved for the landlord, as replacement services are funded by a subscription model with renters using either a one-off or monthly fee.
6. Don’t forget compliance!
As mentioned above, the costs associated with breaching your compliance obligations as a landlord are significant. You are legally required to provide renters with valid gas safety, EICR, and EPC certificates prior to the commencement of the tenancy to confirm that your property is safe. Failure to meet the minimum required standards and provide the relevant documents as required by legislation can potentially net you thousands of pounds in fines.
It is also essential to ensure that you have purchased any necessary licences to let your property (such as an HMO licence where appropriate if there are multiple unrelated tenants) and perform Right to Rent checks to confirm that occupants have the legal right to live in the UK. Read our comprehensive pre-tenancy compliance checklist to keep on top of your obligations and avoid any costly penalties for non-compliance.