Renting out a home can be an excellent long or short term investment.
Whether you're looking to rent out your existing home or planning to invest in a second property, there are a few things any new landlord should know before entering the rental sector.
Some landlords choose to use the services of letting agents, who will manage the property, including finding tenants, collecting references and rent and organising maintenance and inspections on your behalf.
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Whether you want to manage your property yourself or through a letting agent, let's take a look at what you need to know.
How to rent out your home
There are pretty strict rules and regulations around renting out a property that any landlord must follow carefully.
This is to protect both you and your renters, as well as the property itself. So it pays to do some serious reading in the run up to becoming a landlord.
A good place for a quick overview is our guide: 9 top tips for landlords.
In the meantime, let’s get into the nitty gritty.
Do I need a licence to become a landlord?
The answer to this question will depend on the location of the property you want to rent out.
New laws, designed to clamp down on rogue landlords, were introduced in 2006 and some local authorities now have licensing schemes, while others don't.
Check with the local council in the area where you're planning to rent out your property and read the government’s guidance on selective licensing.
If you're renting to more than one household (ie to three or more single people, or more than one couple or family) you'll absolutely need a licence.
This is because rentals of more than one 'household' are known as Houses in Multiple Occupation (HMOs).
As well as a licence, other rules apply to landlords of HMOs (more on this later). Government guidance on renting out an HMO
Deposit protection scheme
The government has strict rules to ensure the money renters put down to secure a tenancy is protected.
The idea is to ensure the deposit money is safe should a landlord go bankrupt.
It also protects landlords who might need to use the deposit for repairs or to cover rent if the renters don’t pay up (breaking their tenancy agreement).
You (or the letting agent managing your property) must put your renters’ deposit into the protection scheme within 30 days of getting it.
Your tenants will get their deposit back if they:
meet the terms of your tenancy agreement
do not damage the property
pay the rent and bills
You can use one of the following schemes if your rental is in England or Wales:
When the rental contract ends, you must return the deposit (or the agreed amount, after money for repairs is taken off) within 10 days.
Landlord checks
As a landlord, you have certain legal obligations to check up on the people who want to rent your home.
After you’ve received a holding deposit from a potential renter, you will need to consider the following:
Right to Rent checks
These are checks on the immigration status of any potential renters.
Landlords need to make these checks under the Immigration Act 2016 and may risk a fine or even jail if they’re not done.
All you need to do is ask the people who want to rent from you to show you a valid passport or proof of residence permission.
If your prospective renters are not British or Irish citizens, their passport or documents must confirm their right to be in the UK.
Find out more about Right to Rent in our guide.
Income checks
One of your rights as a landlord is to ask your prospective renters to prove their income. This gives you reassurance that they can pay the rent.
You have the right to ask to see:
an employment contract or letter from their employer
recent payslips and/or bank statements
proof of benefit entitlement
Find out more about the references and checks needed when renting out a home in our guide. It also examines options for lower earners, such as rent guarantees.
Credit checks
As a landlord, you’re entitled to run a credit check on prospective renters. But, you must ask their permission to do so.
You can only perform a 'soft search,' which means you can only find publicly available information about the individuals who want to rent from you.
Information such as recent bankruptcy, a County Court Judgement (where someone has been taken to court to obtain repayment of a debt), or Individual Voluntary Arrangements (to repay debts) will appear in a soft search.
You will need to go through a credit reference agency to perform checks of this type.
You are likely to be charged a fee for this service, but you are not able to pass this cost onto the renter. So it’s a good idea to account for it yourself in advance.
Reference checks
Landlords usually ask for references to further make sure that the people moving into their home are going to look after it.
You might request a reference from the renters’ previous landlord - or even the one before that, in case their current landlord is keen for them to move on.
You may also ask them to get a written reference from their employer to share with you.
The safety of your property
It is your responsibility as a landlord to make sure your property is safe for your renters.
This includes making sure all your gas and electrics are installed properly and meet the right safety standards (this is different from energy efficiency, which we go into detail on, below).
To meet fire safety rules you must also:
make sure you have fitted and tested smoke alarms and carbon monoxide alarms
check and follow fire safety regulations in flats or conversions
arrange for annual inspections by Gas Safe engineers for all gas appliances and five-year inspections for all electrical ones
The best place to get the latest advice is the government’s website.
Remember there are different safety rules in Scotland and Northern Ireland.
If your rental home is unsafe, your renters have a right to report you to the local council.
This could trigger an inspection and you’ll then be made to carry out work or you may lose your licence.
We know you’d never let it get to that point, but it’s good to know your obligations.
Energy efficiency requirements
It is the legal responsibility of owners of rented homes to meet certain energy efficiency ratings.
These ratings are managed via Energy Performance Certificates or EPCs.
If the property you want to rent out currently has a rating of F or G, you need to improve it to a rating of E before you can let it out.
If your home doesn’t comply the government can fine you up to £5,000 per property.
Because the UK housing stock is some of the oldest in the world, making period properties energy efficient poses particular – and sometimes expensive – challenges.
The good news is this is something renters want because it both reduces their bills and carbon footprints.
What do I need to know about HMOs?
If your property is accommodating more than five people not in one family then different safety rules apply.
These types of rental homes are known as Houses of Multiple Occupation or HMOs.
It can be a great idea to rent out to couples, or three or more individuals, as this makes the shared rent affordable for them and potentially maximises your income.
But there are practical things to think about to make your property safe in these circumstances.
For example, installing fire doors or making sure there are enough bathrooms.
The rules vary, but your council will usually carry out a Housing Health and Safety Rating System risk assessment after receiving your HMO licence application.
If the council finds any safety concerns during this risk assessment, you will be asked to fix them in order to maintain your HMO licence.
The money part of being a landlord:
We can be desperately British about money (and don’t like to talk about it).
But it’s important to know all the essentials up front. So be sure to think about the following:
How to work out your rental yield
Yield is the income you get from the rent expressed as a percentage of the property’s value.
To work out a yield, you calculate the amount of income you generate per year in rent, divide it by the price you paid for the property and then multiply it by 100.
It’s generally accepted that a good rental yield is anything above 5%.
In the past, low interest rates and cheap mortgages meant the potential yield for a rental would far outstrip what you’d make in a savings account or pension.
These days, with higher mortgage rates, you need to think carefully about the long term potential, rather than just the yield.
So, if you know your rental is in an area that's up-and-coming, your strategy could be to make money on the property value over the longer term.
But as always, the market is unpredictable. So it’s a gamble.
Take professional advice from an independent financial advisor and ask local estate agents.
Mortgages for a rental
If you're buying a second home, you'll need a minimum deposit of 25% of the property's value to secure a mortgage for it.
Buy-to-let mortgage rates are often more expensive than traditional homeowner mortgages, in terms of both arrangement fees and interest rates.
Most landlords tend to choose interest-only mortgages for buy-to-let properties, to keep the repayments down. However, that does mean you'll need to repay the mortgage in full when the mortgage term is up - or switch to another mortgage.
Find out more in our guide: Buy-to-let mortgage rates
Even if you rent out your own home, you’ll need to switch your existing mortgage to a buy-to-let specific mortgage.
Lenders will require the rental income generated to be at least 125% of the mortgage interest payments for lower-rate taxpayers.
Lenders also have strict and variable terms through which they will lend to prospective landlords, so make sure you read the small print.
If you already have equity in the home you own, then this should stand you in good stead for getting a buy-to-let mortgage for it.
It might be useful to first ask your existing lender about their policy for switching to a buy-to-let mortgage and then follow up with a mortgage broker or high street banks to see if there is a better deal.
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Extra stamp duty
Stamp Duty Land Tax is payable on any property over £250,000 in England and Northern Ireland (unless you’re a first-time buyer).
If you already own a home, you pay an extra 3% in Stamp Duty on any second or additional homes, including buy-to-let.
The surcharge tax applies to all investment properties over £40,000. The 3% is charged on the entire property price, not just the value over a certain tax band.
We’re flagging this so you can factor in the surcharge if you are renting out one home and buying another at the same time.
Oh and there are other taxes you should be aware of, so check out this complete guide.
Stamp duty calculator
How much stamp duty will you need to pay? Let our calculator do the maths. Here's how stamp duty works.
Landlord insurance
You don’t legally have to take out landlord insurance, but it’s a good idea.
This type of insurance is designed to protect both your renters and you, as well as your property.
Ordinary home insurance doesn’t cover rental activities. Sometimes your mortgage lender will make it a requirement for you to take out landlord insurance.
Landlord insurance usually includes buildings and contents insurance but it also extends to cover loss of rent and other issues specific to a rental property.
It also covers your liability against claims of compensation from either a renter or a tradesperson or visitor for any injuries sustained on the premises.
As always, do your homework and take expert advice.