Even though the UK government continues to increase the cost of acquiring and running a buy-to-let business there will be a massive shortfall in private rental properties across the UK for many years to come. As a consequence, while margins have been impacted by various personal tax changes there is still significant potential to create a very profitable income stream from buy-to-let operations going forward. We will now look at five ways to reduce upfront capital expenses for landlords which will obviously improve cash flow from day one.
While we have seen reductions in the tax benefits applicable to buy-to-let landlords, there is still great benefit in taking out a mortgage even if you have the funds available to pay for a buy-to-let investment in cash. Even though the government has reduced mortgage relief for buy-to-let investors, many are now acquiring their properties in companies where the tax situation is different. So, while the UK government seems determined to make life as hard as possible for private landlords there is the option to switch to a company ownership structure which could prove significantly more tax effective when it comes to offsetting costs against income.
There is no standard figure when it comes to the split between mortgage/cash investment but many buy to let investors will go for a 50/50 split where possible. This not only reduces their initial capital outlay but will also ensure they have enough money “in the pot” in the event that more opportunities were to emerge in the future.
2) Leasing furniture
As a landlord of a new rental property or serviced apartments that needs to be fully furnished, one significant outlay of capital that cannot be avoided is the purchase of furniture. Whether you are talking about furniture for the living area, bedroom or dining, the amount of capital required for investment can very soon add up. However, there is now another option for those looking to reduce their upfront capital expenditure (hence improving their cash flow), with the added perk of some tax benefits too.
Landlords are now able to lease furniture via specialist property industry leasing companies. While you need to be conscious not to “go over the top” when selecting the amount of furniture you might need, there is now a very useful option to pay a monthly fee and avoid the large upfront capital payment. And do not forget that these leasing costs are 100% tax deductible, which is another reason to seriously consider going down the leasing route!
Leasing can give you access to furniture and fittings which perhaps may have been out of your price range (and access to ranges of better quality) if full payment was required upfront and can obviously make your property more attractive to a would-be tenant. Any service which can improve the quality of your property while reducing your initial capital outlay should be considered because these options can prove extremely valuable. Landlord Smart not only offer this service but champion this option for landlords. They provide a wealth of helpful videos and a very useful online calculator to explain more about the option of leasing and allow you to check out what realistic monthly figures might be for your next project.
3) Don’t overdo renovations
When acquiring a new buy-to-let property it can be very easy to consider a total renovation of the property to give it your own “style”. This can be extremely expensive and in many cases the cost of the renovations do not compare favourably to any potential increase in the value of the property. You also need to be fully aware of your tenant pool and what they will and won’t expect from their future home. Don’t forget that you will not be living there, so don’t try to design it as you would your own home. Creating a good quality effect with durable furnishings, kitchens and carpets whilst keeping a tight reign on the costs is the best way forwards. Many private landlords have overdone renovations leading to costly capital expenditure and in many cases it can have a significant impact on their short to medium term cash flow.
It is all good and well ensuring that your property can be showcased to a potential tenant but you need to appreciate the area, what is expected and above all what a potential tenant in the area can afford. There is absolutely no point in spending thousands of pounds on renovations only to find out that the tenant pool in your area might not be able to afford your rental requirements to at least pay back your renovation costs in the longer term. In simple terms, all buy to let investments should be considered in their own right, taking into account the local area, type of tenant available and maximum rent.
4) Utilising your equity
Whether you have a family property or perhaps you have a portfolio of buy-to-let investments, at some point other opportunities will come your way. Very often the temptation is to utilise the mortgage industry which can prove very useful, giving you leverage in the longer term. Many buy-to-let landlords fail to utilise equity in their existing properties, ignoring the opportunity to remortgage a property at a higher level than the original acquisition cost.
At the end of the day if you have equity in a property then unless you are able to utilises this in some way it is simply dead money until you decide to sell the property. You may be able to use an existing property which has been “paid off” as collateral for a mortgage on a new property and under normal circumstances this would help to reduce the standard mortgage rate available. In simple terms, the more protection mortgage companies have on a new arrangement, especially secure collateral, the safer the investment from their point of view.
5) Modern properties
The comparison between modern property and older property is not always appreciated by new buy-to-let landlords. In a perfect world many people would prefer an older property which has its own particular character and can stand out from the crowd. The only downside is that very often remedial work may be required on an older property which you are looking to rent out and this cost could be significantly greater than that of a more modern property. The cost of maintaining an older property can also grow significantly in the longer term which may impact your required rental return.
Modern properties are often made from different materials compared to their older counterparts and while they may not have the “character” they tend to be extremely efficient, safe and on the whole require little in the way of remedial and maintenance work prior to letting to a tenant. These upfront capital expenses can very soon add up and, depending on the local rental ceiling, it can be difficult to recuperate these expenses going forward.
For more tips and guidance on how to save money and be ‘landlord smart’, visit our dedicated money-saving forum here.