5 Lessons Learnt from 5 Years As An Accidental Landlord
Statistics show* that people with one buy-to-let property tend to have the lowest property yields of all investor types. These are typically “accidental landlords”: people who are renting out a property through circumstance rather than intentionally getting a buy-to-let.
This is not surprising as they have “fallen into” the buy-to-let world, so are unlikely to have the same level of knowledge and wiles as more seasoned property investors. They probably did not have the rental market in mind when buying and may have less time available to minimise their expenses by doing things themselves.
As an accidental landlord myself this makes me feel better, knowing that I’m not alone in making a few doozy decisions. We’ve been renting out a flat since 2016, the year when new tax policies kicked in in the UK to make the private rental market less profitable and first-time buying more accessible.
I knew nothing about this world when I started – I wasn’t even aware of the policy changes and the impact they would have. Over the last few years however I’ve picked up enough knowledge to be able to identify a few things that I’d do differently if I could start over.
I’m no expert now, but am sharing this in the hope that it’s useful for other people who are new to the scene or thinking of starting out.
As always, please do your own research as I am not a property expert (in case this isn’t obvious).
How we became accidental landlords
I bought a flat in London through shared ownership in 2011. I had a 25% stake in a flat valued at £375,000 and paid rent on the part I didn’t own. As a single person at the time I would not have been able to buy in the area I wanted to be if buying outright, so I don’t have regrets about going down this route.
As luck would have it I got together with my partner a few months later and after a year or so we decided to pool our resources and “staircase” up to a mortgage on 100% of the property. We were very lucky at the time as it was valued just before the property market recovered so it was worth about £100k more than the purchase price within months of buying it.
When we started to think about having a baby we decided to move out of London to Edinburgh and were lucky enough to be able to stay with family in Scotland at the start. We initially held onto the flat because we didn’t have rent to pay in Scotland and it felt a bit rash to let go of it in case the move didn’t work out, so we rented it out.
Before making the move we had been saving hard for fertility treatment after our free NHS round of IVF in London had failed. Shortly before moving up to Edinburgh I found out that I had fallen pregnant naturally which meant that we suddenly had the beginnings of a house deposit. We also saved what we would have spent on rent during the first 18 months in Edinburgh. When it came to buying I was fortunate enough to inherit some money and added to our own savings this meant we could put a 15% deposit on a house without selling our London flat.
Learning 1: Thinking through the cost of Additional Dwelling Supplement (second property stamp duty)
We felt so fortunate to have our first “investment” that I didn’t really weigh up the true costs of it and whether it was the best place for our money. For example, we needed to pay Additional Dwelling Supplement on top of our normal stamp duty, which amounted to £23,200 (£54,550 of stamp duty for the property in total). That’s well over a year’s rental income and multiple years of profit.
If we had sold the flat, we would have all of our equity plus £23,200 to put into the deposit on our new house, or split between that and investments. This would have allowed us to have at least 60% equity in the house and qualify for the best mortgage rates from the start. We could have taken 10 years off our mortgage, keeping the monthly payments the same as they are now, or paid £800 less a month than we do now, keeping the mortgage term as it is.
I’m not saying that it was definitely a mistake to keep the flat. After our costs (including our interest only mortgage) and taxes it gives us about £450 profit a month and we are also benefiting from capital growth. What I regret was not doing the sums on how selling the flat could have impacted our current mortgage so that I could make the choice with my eyes open: given the choice of having some extra income and gaining mortgage freedom ten years earlier I think I would have chosen the smaller mortgage.
I realise by this point some may be thinking “are you completely clueless?”. I think it’s fair to say that I wasn’t as interested in personal finance at the time or the idea of gaining back time freedom. I certainly wasn’t comfortable yet with the idea of investing, so the opportunity cost of not putting that equity somewhere else, potentially more profitable and lower maintenance, wasn’t on my radar.
Learning 2: Calculating the profitability of the rental
Another thing that it took me a good few years to do was to calculate the profitability of the rental. I had a hunch at the start that it wouldn’t be too high as there is a high service charge which we as landlords cover. Rental income has also decreased year on year, starting at £1700 in 2016 and going down to £1500 now.
Our gross yield works out at 4.5% which appears to be overperforming compared to the average yield in London of 2.83%.
However our net yield is significantly lower.
Our net yield is 1.95%. It’s difficult to get reliable benchmarking figures for this as property outgoings vary so much and are not easily accessible figures. However, I know this is low because our service charge is relatively high (almost £300 a month) and the rental market in London has been going steadily down since we started renting out the flat.
If I had done these calculations from the outset I may have considered taking some of the equity and getting a buy-to-let in a more profitable city, ideally on a flat with a lower service charge.
Learning 3: Minimising management costs
We started off paying full management fees to agencies because we were already busy with setting up our lives in a new city and looking after a new baby. I was also intimidated by the unknown, worried that I wouldn’t know what to do if we had issues with the tenants.
What I found out relatively soon was that we were paying about £80 a month for an agent to forward the energy bill to the tenant and to arrange repairs if needed. We didn’t have that many repairs, but the bills to fix things always seemed high, which made me suspicious that the agents were using expensive preferred suppliers because the contracts had favourable terms (or kickbacks?) for them. At the very least, they weren’t incentivised to seek out competitive rates the way I would be.
Three years ago I decided to come off the full service contract and to deal with issues myself. The few times that I have had to deal with something I’ve been able to find good tradespeople who have dealt with the issue quickly and charged me a fair price. I have now built up my own directory of contacts I’d go to in the future.
My hunch about the inflated prices through the agency was reinforced when they recently told me I needed to get a new Energy Performance Certificate and they could do this for me for just under £150. Finding a reputable assessor myself couldn’t have been easier as a government website lists accredited suppliers with their contact details. After spending less than 30 minutes researching this and sending out a few emails I booked somebody to do the assessment that weekend for £50. Of course, the agency is justified to charge an uplift to arrange this for me, but I am happy to do something like this myself if it saves me £100, even pre tax (and I get a little buzz being self-sufficient in this way).
It’s times like this that I realise the benefits of scaling up, as I’ve already invested the time in building up a little black book of tradespeople.
Learning 4: Thinking twice about paying down the mortgage
For a while after renting the flat out I was still paying down the mortgage. We had kept our residential mortgage and had obtained permission to let the flat indefinitely. I had seen interest only mortgages as being risky and was worried about not owning the asset at the end of the mortgage term.
I wasn’t thinking about the flat as a business and was still treating it like my home.
Over time I started to realise that I didn’t necessarily want the property in the long term and that if I sold it I’d still have a decent amount of equity. Having more equity also wouldn’t mean that I received a larger proportion of the capital growth. The flat also already had a low Loan-to-Value ratio, so I could already get the best mortgage rates.
After a couple of years when we had bought our new house I switched to interest only and used the profit towards down our main house mortgage instead so that I could get it down to a better Loan-to-Value ratio. Once I reached that goal I realised that our net worth was very focussed on property and I wasn’t taking advantage of our ISA allowances, so the profit is now going towards our Stocks and Shares ISAs.
If, in 15 years time, we do still want the flat we will have the option of using some of our ISA to buy it (or maybe even our pension lump sum by that point).
I don’t completely regret paying it down as much as I did. It makes it a lower risk investment now as the mortgage is so low, meaning we’d be impacted less if the flat had void periods. I just wish I had understood more about the other places we could have put the money.
Learning 5: Think about mortgage deals when you are setting tenancy periods
This may be a particularly obvious one, but it’s a mistake I have made so I’ll throw it in there. Make sure that you factor in when your mortgage product runs out when you agree the length of tenancies and break clauses. This is so that you do have the flexibility to put the property on the market if you want to rather than spending months on standard variable rate or being forced to sell it with tenants in situ.
We were seriously thinking about selling recently but didn’t in the end because we didn’t have a break clause in the contract (woops) and still had about six months left with the tenants.
What will the next 5 years bring?
We have contemplated selling the property and either paying down a big chunk of our main mortgage, or using the equity for deposits on a couple of local rentals that we could manage ourselves.
This may be “sunk cost fallacy” but given that our initial outlaw on Additional Dwelling Supplement when we bought our house, I’m reluctant to sell the flat until it has given us more income.
We also have great tenants who have signed up for another two years after their initial three year lease. They are self-sufficient and only get in touch when something breaks and are always there to meet the tradespeople. They also keep the flat in as good condition as we would ourselves. They have also continued to pay rent throughout the pandemic. We did agree below-market rent with them, and have kept it the same for 4 years but it’s worth it to have good tenants.
I’ve also been trying to educate myself more on property investing, particularly through Rob Dix’s podcast and books. This is helping me to think more commercially and be more ambitious. For the first time I’m thinking about property as a viable exit strategy from the 9-5. At the moment as we are higher rate tax payers our “take home” from the rental after tax is half what it could be if this were my only income. I also need to educate myself more about the pros and cons of setting up a limited company for the rental.
All in all
If I knew what I know now I probably would have sold the flat, got a smaller mortgage on our new house and focussed on building up our stocks and shares investments. But we’ve got good tenants now and a reliable cash flow, and this gives us diversification in our portfolio, so we’re ok to keep things as they are. We are expecting the area it’s in to become more desirable over the next few years which will hopefully push up rents or the value of it.
At least I’ve grown as an investor and understand more about what I need to factor in, rather than just listening to a relative saying “ooh a flat in London, you should never sell that”. I’m not sure that after 5 years I can still call myself an accidental landlord though. By this point, inaction is action.
I’d love to hear from other people with rentals, whether accidental or deliberate ones. What are the main lessons you’ve learnt, and what are your plans for the future?
*You’ll have to trust me on this. I’ve seen the “statistic” but can’t find it again.