Should I rent out my house if I can't sell it?

If you are faced with the prospect of becoming an accidental landlord, here’s what you need to know before renting out your property

Should I rent out my house if I can't sell it? Pictured of row of houses in the UK with TO LET sign

If you have a property that you aren’t living in, whether you moved out to relocate, moved in with a partner, or inherited it, the last thing you want is for it to sit there empty becoming a financial drain. Being stuck with an empty house or flat can be costly, racking up bills including council tax, utility standing charges and mortgage payments, while running the risk of falling into disrepair. It would also be put to much better use as someone else’s home. So if you have exhausted all the different ways to sell your house and you still aren’t having any luck, one way to keep the costs from weighing you down to rent it out.

As many buy-to-let property investors will tell you, it is very possible to make good money renting out houses, but it’s not a decision to be taken lightly. First time landlords who are naive about the costs and responsibilities associated with letting out a property can find themselves facing stressful situations such as problems with tenants, void periods, high maintenance bills, extra taxes, and even fines that they are completely unprepared for.

So before jumping in and advertising for a tenant, read on to find out more about the costs, responsibilities, regulations and taxes that affect landlords, and other options that might be open to you if you feel that you don’t have a choice in the matter.

What is an accidental landlord?

An accidental landlord is someone who rents out their property but did not buy it specifically for that purpose. Instead, their circumstances mean they have either chosen or been forced to rent it out, at least temporarily. A survey by YourMove discovered that as many as 29% of all landlords in the private rented sector never planned to be one.

Unlike professional buy-to-let property investors, who carefully select certain areas and types of properties that will be profitable, an accidental landlord has to make the best of what they already own. Many professional investors lay down significant capital to make properties attractive for renters and reinvest continuously in their assets, but accidental landlords often can’t make the same kind of financial commitment. When the house barely covers its own costs, its upkeep often gets neglected and it can quickly turn into a headache for both the landlord and their tenants.

Your responsibilities as a landlord

There are some who will have you believe that letting out a property is a great form of passive income, as it requires little to no ongoing effort and you just get a nice rent payment land in your account every month. This is, at best, misleading. While you might not trade your time for money in the same sense as having a full time job, renting out your house is akin to running your own business. Just as a business cannot function without paying customers, your rental property relies on it being occupied by paying tenants. This brings with it a host of ongoing responsibilities, including:

  • Dealing with tenants (your customers)

  • Keeping track of income and expenses (profit and loss)

  • Ensuring you comply with the correct regulations and procedures

  • Advertising and arranging viewings

  • Referencing and due diligence

  • Ensuring payments are received and following up on arrears

  • Carrying out inspections and logging reported issues

  • Arranging contractors and/or carrying out maintenance yourself

  • Making payments to your suppliers

  • Keeping track of documents and their renewal dates

  • Filing your annual tax return

Aside from the day-to-day admin that comes with owning a rental property, you have a duty of care towards your tenants. Remember that your rental property is not just a house to them – it’s their home. This isn’t just a moral duty either. You have a legal obligation for ensuring that the house is safe, secure and fit for human habitation throughout the entire length of their tenancy. This means keeping up with maintenance, fire safety standards and ensuring a qualified professional carries out the required annual gas safety checks. There can be harsh penalties for landlords who neglect their responsibility to tenants, including fines, rent repayment orders and even imprisonment.

Some of the more administrative responsibilities, such as collecting rent, carrying out inspections, organising repairs and reissuing certificates can be outsourced to a management company. Most charge between 10-15% of your monthly rent for this service. If you do choose to pay a management company, remember you will still need to check in on them. When push comes to shove, if anything goes wrong, the responsibility for compliance, keeping the property well maintained and ensuring the rent is paid still falls to you.

Taxes on rental property income and capital gains

If you make money from renting out your property, you’ll need to declare it on a self assessment tax return every year. You will only be taxed on your profits, which is your rental income minus your expenses, which is why you need to maintain accurate bookkeeping. Expenses can include maintenance, letting agent fees, insurance, and other allowable deductions. However, one of the biggest expenses of owning a property – your mortgage interest payments – are being phased out as a tax deductible expense, leading to recent increases in tax bills for many landlords.

Rental income is added to any other income you receive and taxed at the same rate as your salary which could mean you end up in a higher tax bracket. Income from renting out a property will also affect any means tested benefits you may otherwise qualify for.

One other cost you might not have thought about is capital gains tax when you eventually do sell the house. You wouldn’t normally have to pay any tax when you sell your house, as long as it's your primary residence, but if you have been renting it out it’s a different story, and you could be faced with a hefty tax bill. What’s more, if you buy another property before you have sold this one, you will likely need to pay an additional 3% second home surcharge on its stamp duty.

Renting out a house with a mortgage

If you have previously lived in the property and have a mortgage on it, chances are you have a standard residential mortgage which does not permit you to let the property out. If you want to put a tenant in, you’ll usually need to switch to a buy-to-let mortgage, although some mortgage lenders will give you consent to let on a temporary basis while keeping your existing mortgage. Either way, you need to let your lender know as you could be in breach of your mortgage terms and conditions if you rent it out and don’t tell them. The worst case if you rent the property out without permission from your lender is that it could be seen as mortgage fraud and they could demand immediate repayment or repossess the property.

Similarly, you will also need to let your buildings insurer know if you are renting it out, or even if the house is empty. This might affect your premium but it could be far worse if anything were to happen to the property and you are unable to make a claim.

Selling your house after its been rented out

Consider how long you will be renting the property out for and what you plan to do with it in the future. Do you have a future plan for the property, like moving back into it or giving it to your children when they are old enough, or are you just kicking the can down the road to try and sell it again in the future? Depending on the reasons why you can’t sell the property now, you may not be able to sell it later either. The future market conditions and value of the house are unknown, and won’t necessarily be any better if you try again later.

You may also want to think about the condition of the property after it has been rented out for a while. The risk that your tenants will wreck the place is small, particularly if you have done your due diligence and taken good care of them, but you can at least expect a little wear and tear. This means you may need to spend some money on repairs and redecorating before you put it back on the market.

When the time comes, you’ll need to decide whether to sell the house as vacant or market it to other landlords who may be happy to take on your tenants. The former might mean you have eviction costs to cover, and once the tenants have left, if it sticks on the market, you’ll have to fork out for the bills with no rent coming in until it sells. The latter might mean accepting a lower price as there is a smaller number of potential buyers, and investors often expect to buy properties at a discount. Once you have factored all of this in, along with your capital gains tax, you may find yourself no better off and wish you’d saved yourself all the trouble.

What are your other options?

There are four things you can do with a house you own to prevent it becoming a burden; sell it, let it, live in it or gift it to someone else. The issue for a lot of people is when the preferred option – selling it – is more difficult than expected, renting it out feels like the only viable route.

Betterplace provides a flexible way to sell your home that can help people who don’t want to become landlords but feel they don’t have any choice. By putting together a tailored purchase plan that looks at your individual needs and challenges, we can take on all the costs, responsibilities and uncertainty that are weighing you down.

Here's just one of the flexible ways we might be able to help:

Betterplace - Thinking of renting our a house you can't sell? Here's our flexible solution infographic

If you would like to know more about how we can help, please call us on 024 7736 0020

or fill out our quick contact form.

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