In recent years, it’s been tougher for property rental businesses in the UK. Lending criteria has been tightened, regulations have become less generous and rental yields have fallen — but can lessors still have good earning opportunities despite these challenges? Here, we’ll take you through the cases for and against pursuing a property rental business.
Why start a property rental business?
Ultimately, starting a property rental business is a great financial opportunity. In 2017, tenants in the UK paid over £50bn in rents. This helped sustain a thriving market, where the average landlord earns about £60,000 per year.
That’s relatively small compared to how much larger property rental companies can expect to pocket. A good example is The Parklane Group, who started letting properties in Leeds in the 1970s, and today manage over 3,500 bed-spaces with a portfolio worth £114 million.
What’s more, property rental is a relatively low-risk business — especially when considering the potentially high rewards. Properties are usually less likely to depreciate in value compared with other business assets. Average house prices in the UK rose 4.4% in the year to February, and from 1980 to 2015, the average annual change in value was +6.9% — significantly higher than the average annual rate of inflation.
What other benefits are there?
Founding a property rental business can mean very different things to different people, especially based on the number of properties involved.
Some landlords rent out one or two properties as a sideline while working a separate job. There’ll be a significant amount of work to take on at certain times — especially during tenant changeover — but for much of the year, the work should be relatively light-duty. However, taking a year-round view, renting out on a small scale is a great way to earn money at the expense of relatively little time and effort.
Others take their property rental business further by adding numerous properties to their portfolios: employing staff, setting up offices, and forming a company. This approach can bring still-greater financial rewards, notwithstanding the immense challenge and fulfilment that comes with building a large business.
What are the challenges facing property rental companies?
In 2018, starting a property rental company remains attractive. However, be aware that recent regulations have made property rental less profitable for most landlords and companies.
Buy-to-let landlords have long relied on tax relief to cover the interest on their mortgages. In April 2017, the relief available was cut from 100% to 75% of interest and will be reduced to 0% by 2020. Plus, a 3% stamp duty surcharge has been added for buy-to-let properties worth £40,000 or more.
For some property-owners looking to go into property rental, location can also be an issue. The annual rental yield on a property’s value tends to vary geographically, with differences both between cities and within them. As a general rule of thumb, though, university towns and cities often give the best yields.
Getting your property set up right could make all the difference
One of the most important parts of running your own rental property company is actually setting it up. Doing this well will affect the success of your company, and will ultimately guide you when navigating the property rental market.
You’ll need to nail the basic economics of your trade. Is the annual yield on your properties high enough to cover costs and turn a profit? How can you balance that equation in your favour? These questions need answering before you start trading.
Are you set up in a financially advantageous way? If you’re operating on a small scale, the money you take home at the end of the year will likely be higher if you set up as an individual landlord. On the other hand, if you’re going to rent out four properties or more, setting up as a limited company is more likely to be profitable.
In fact, according to The Telegraph, the average sole landlord renting out four properties takes home a net income of £49,374. However, they would have made £49,644 if they had set up as a limited company — and the benefit of operating as a limited company increases with every additional property leased out after the four properties.
With this in mind, setting up as a limited company isn’t the only process you’ll need to pursue when forming. Whether you need a registered address or accounting, we can help take the strain off these tasks.