A landlord’s ultimate guide to rental finances

Whether you’ve become an accidental landlord through inheriting a property, or you are building up a rental property portfolio as part of a thought-out investment strategy, your core aim will be to generate a stable income and profit from the rent. 

Being a landlord of rental properties can present challenges at times. There is undoubtedly a lot that goes into carefully managing your rental finances, especially if you own an HMO (house of multiple occupancy) and have various tenants to collect rent from. 

Here at CIA Landlords, we have highlighted these vital considerations in our landlord’s ultimate guide to rental finances. We are an experienced landlord insurance brokerage outfit that understands the ins and outs of the best practices landlords must follow to manage their rental finances efficiently.

Image of model house. money, calculator, and notepad on a desk.

Vet prospective tenants 

It makes perfect sense for landlords to want to screen and vet prospective tenants. After all, it’s nice to know who you’re renting to when you’re entrusting people to live and look after a property you own.

Vetting the background of prospective tenants hoping to rent your property is one of the key tenants behind effectively managing your rental finances since it can prewarn you about the likelihood of future issues arising with rent payments.

Remember to bear in mind that it’s against the law for landlords to actively discriminate against tenants with ‘protected characteristics’ in the tenant screening process.

Image of tenants moving into property.

Landlord references and credit checks

Common historical issues with tenants paying rent that landlords can discover during the vetting process include things like late payments, arrears, and a history of receiving evictions from landlords. 

One way to gather such information is to ask for references from former landlords that prospective tenants have rented from. Another way to learn more about their financial history is by carrying out credit checks.

Credit checks can inform you about whether a tenant has outstanding debts, they’ve had problems with paying rent or utility bills in the past, and if they have County Court Judgements (CCJs) against them for any money they owe.

However, remember that landlords must ask each prospective tenant’s permission before a credit check can be conducted. 

How to carry out a credit check on a tenant 

Now, provided you’ve first received their permission, let’s look at how you can carry out credit checks on a tenant before signing on the dotted line of a tenancy agreement and agreeing to allow someone to rent your property.

Firstly, landlords can uncover the tenant’s credit score data from one of the three credit reference agencies – Experian, TransUnion and Equifax. 

Then, based on the data, each person you carry out the checks on will be assigned a credit score which indicates the level of risk posed to you as a landlord if you decide to rent to the person in question.

DBS Checks 

As well as covering your back financially by checking your tenant is financially responsible and will pay you the rent through credit checks, you may want to safeguard other tenants and neighbours by carrying out DBS checks. 

DBS checks on tenants aren’t compulsory measures for landlords. However, you do not want dangerous tenants living in your property and posing a risk to others or even causing damages to your property which are expensive to repair. You can only ask tenants for a basic disclosure DBS check, so spent convictions won’t show up.

How to manage rental payments 

Renting out a property can function as an excellent reliable source of passive income. When everything all goes to plan, the rental income should roll into your account in full from the tenant at the agreed time, without there ever being any blips or bumps along the way.

Yet, new landlords will quickly learn that managing rental payments isn’t always the walk in the park that it should be. Here we go into more detail and provide some tips on how you can manage rental payments.

Image of model house on table.

Ways to collect rental payments from tenants 

Landlords with direct private payment arrangements with tenants regarding rent can decide to collect their rent in person, or, go for the more convenient option of setting up electronic different debit payments. 

Tenants have the right to the ‘quiet enjoyment’ of their home and make use of your rental property without disturbance from you or anyone acting on your behalf. In addition, there are rules around landlord access to a rental property when there are tenants in situ. And you must provide at least 24 hours’ notice before turning up in person to carry out property inspections

Our advice is to set up an electronic payment arrangement to collect rental payments, this way you avoid any potential hassle or aggro that collecting rental payments in person could cause. 

Use a letting agent 

You may decide to use the services of a letting agency to collect the rent from your tenants on your behalf. There are benefits of having the peace of mind of a letting agency managing your property and taking care of collecting your rent for you. 

Just remember that using a letting agent will be an additional financial outlay and full property management costs in this country often come to around 10-15% of the monthly rent collected.

Can landlords require tenants to pay rent in cash? 

Yes, you can ask your tenant to pay you the rent in cash. However, it’s best practice to provide each tenant with paper receipts every time they pay the rent so that there’s a paper trail providing recorded proof of all rent payments for you and your tenants to keep hold of. 

When should tenants pay rent? 

You can decide whether you want your tenants to pay rent weekly or monthly. The majority of landlords ask tenants to pay monthly since that’s when most people get paid. 

It’s also common practice for private landlords to ask tenants for at least one month’s rent in advance. This means that at the start of the tenancy, tenants can find themselves having to pay for one month’s rent as well as the deposit fee all in one go. 

How to manage tenants’ deposits 

Deposits are also part of managing rental payments, and your tenants should have their deposits reimbursed when they leave, provided they haven’t caused any damage you’ve had to pay out of your own pocket to repair. 

As a landlord, you must ensure you outline any justifications for deposit reductions in the tenancy agreement. For obvious reasons, deposit reductions can be a bone of contention between you and tenants, so, providing your tenants with a breakdown of any repairs you’ve paid for by keeping receipts and invoices for repairs etc is a wise idea.

These days, legally you must put tenants’ deposits in a government-approved tenancy deposit scheme (TDP) if you’re renting out a home on an assured shorthold tenancy basis.

In England and Wales, you can register tenant deposits with one of the following schemes:

How much rent should I charge tenants?

The size and condition of the property, local wage levels, and the balance of supply and demand for properties in the local area should all have an impact on the rental price you charge tenants. For instance, in places where local wages are particularly low, it may be unrealistic to expect tenants to come forward and pay high fees to rent a property. 

Before investing in purchasing a buy-to-let home, it is important to do your research on the average rental prices in the area to have an accurate figure in your mind of how much you can expect to earn from rent. 

Location, location, location 

Like with many things related to property investing, how much rent you should charge tenants will be based on the old saying, location, location, location. Some urban areas in the UK will have completely different average rental prices compared to others, and it is vital to educate yourself on this.

Re-evaluate your rental rates regularly 

We live in turbulent times, and things such as recessions and energy price crises can have a real impact on how much money people have left over at the end of the month. Therefore, it is sensible to re-evaluate your rental rates regularly. 

You don’t want to be unwittingly over or undercharging your tenants for a long period due to not having kept on top of things and re-evaluating the rental rates you charge frequently enough.

How to deal with rent arrears 

When you’ve invested in a buy-to-let intending to generate a healthy consistent income from the rent, tenants entering into rent arrears and falling behind with payments or not paying the rent at all is a headache. 

So, how do you go down the road of evicting tenants not paying rent? Well, the law in England and Wales states that when a tenant fails to pay at least two months’ rent in an assured tenancy, you can serve them with a section eight notice for possession of the property, giving them 14 days to leave. If the tenant does not leave on the specified date, you can seek a possession order from the courts and may even need to send in the bailiffs. 

Renting a property to tenants on a rolling month-by-month basis instead of a fixed-term agreement? To evict tenants on a rolling tenancy, you must serve them with a Section 21 notice. However, you aren’t allowed to take out a Section 21 during the first four months of a tenancy.

Can the police evict a tenant? 

No, the police cannot step in to help you evict tenants, only court bailiffs are permitted to do that. On the flip side, the police will step in and help tenants if they feel they’re at risk of being evicted illegally. 

Is a buy-to-let property a good investment? 

You can earn a good, steady income from being a buy-to-let landlord, however,

like with all investments, acquiring and renting out a buy-to-let property is not an investment completely void of risks.

Becoming a buy-to-let landlord for the first time is a big deal if you haven’t dabbled in it before. So, you must do your research on the neighbourhood, local economy and wages, rental prices, property trends, and the supply and demand of rental properties in the area. Being a buy-to-let landlord is not a get-rich-quick scheme, and therefore carrying out the necessary research is all part of ensuring it is a financially worthwhile investment for you. 

Buy-to-let mortgages 

You will most likely need to take out a mortgage to help you buy the property you want to rent out to tenants in the first place. Therefore, part of your financial considerations when deciding to invest in a buy-to-let property will be how much the mortgage costs and whether you are in a position to be able to afford to pay the money back. 

In your calculations, you need to offset the rental income you will earn from the property against the cost of paying the mortgage.

In order to get a mortgage on a buy-to-let property, you must prove to lenders that you have the financial means to do so. You have to meet the following criteria to be eligible to take out a buy-to-let mortgage: 

  • Earn at least £25,000 a year
  • Already be an outright homeowner or part way to paying off your mortgage
  • Pay a deposit of somewhere between 25% and 40% 
  • Usually, you need to be over 21 when you apply (some may permit 18-year-olds)

As you may have seen on the news, mortgage rates have increased recently. But why have mortgage rates increased? The answer is that in an attempt to curb inflation during difficult times and the energy crisis, the Monetary Policy Committee of the Bank of England has been raising bank rates, causing higher borrowing costs for mortgages. 

Of course, rising mortgage rates will have an impact on landlords, so they’re something to bear in mind when you’re managing the finances of your rental property. 

What expenses am I allowed to charge tenants? 

Landlords or letting agents acting on their behalf are no longer allowed to charge tenants for anything apart from the rent, the tenancy deposit and a holding depose As a result, landlords cannot ask tenants to cover the costs of referencing. check-in, inventories, cleaning or admin fees. 

On the other hand, you are allowed to charge tenants to cover the costs for repairs you have had to sort out due to any property damage they have been directly responsible for.  

Regular property maintenance 

Carrying out regular property maintenance is your responsibility as a landlord. 

Tenants have the right to live in a property that’s properly maintained by the landlord and fit for living in. Therefore, you cannot charge tenants extra rental money or make deposit reductions for you having to pay for repairs and maintenance which fall under the ‘regular wear and tear’ of the property. This is your duty. 

Examples of regular property maintenance landlords are responsible for include ensuring the home is well-ventilated, checking the safety of electrical appliances, changing smoke alarm batteries, keeping gardens or outside areas in a reasonable state, and much more.

To keep up a strong reputation as a reliable and trustworthy landlord, tenants want to see you making the effort to carry out regular property maintenance and minor repairs. After all, they want to ensure they are receiving a satisfactory service for the rental fees they pay you. 

Do landlords have to pay council tax?

You need to factor taxes into your rental finances. If the entire property is rented under a single tenancy agreement, for instance by a couple, two friends, or a family, then tenants will be responsible for paying the council tax bill.

However, if you rent out an HMO  property with several tenants from different households with individual tenancy agreements, e.g. a student property, then you will be responsible for paying the council tax.

How landlords can manage rental payments in the cost of living crisis 

The cost of living crisis now means that everyday utility bills such as electricity and heating will be higher for your tenants. A way you could help them out and lower bills is to move away from gas and oil and install energy-efficient eco-friendly technology in your property, such as heat pumps or efficient-energy household appliances (dishwashers, washing machines, and so on). 

Nevertheless, you still need to ensure you’re able to make profits from renting out your property. With this and rising energy prices in mind, you should have a serious think about whether you want to include utility bills in the rental fees you stipulate in the tenancy agreement. 

If you decide to include household bills in the rent, you need to ensure the increase in rent matches the increase in energy prices, or you could be considerably out of pocket. Many landlords choose to leave it to the tenants to sort out home utility bills.

As a landlord, try being as understanding and empathetic as possible with your rental tenants during the cost-of-living crisis we’re living through, times aren’t easy.

Image of a woman look at a smart energy metre.

Keep up-to-date record books of rent payments 

It is certainly good practice to make sure you keep organised up-to-date records of rent payments. Otherwise, you may fail to notice if a tenant has fallen short with their rent and gotten themselves into arrears. 

You can keep records of tenants’ rent payments digitally, or by using old-fashioned paper receipts. 

How to declare your rental income to HMRC 

Just like any other form of income, you will need to declare the rental income you make from tenants renting your property to HMRC for tax reasons. You can call them on 0300 200 3300 or get in touch online. 

Keep your personal and business accounts separate

A top tip to make things easier when declaring your rental income to the tax office is to make tenants pay rent into your business account, and keep your personal and business accounts separate from one another. That way, it makes things clearer for the tax authorities, and you won’t end up constantly getting confused about where your income is coming from.

Why you need landlord insurance

Landlord insurance is a key backup to help you manage and safeguard your rental finances. Damages, theft, loss of rent, and natural disasters are all things that landlord insurance will help to cover your back. So, taking out landlord insurance is a no-brainer for responsible landlords. 

Want to have an in-depth comparison between buildings, contents, and flat insurance policies from different providers? Get a quote from CIA Landlords today. We are landlord insurance brokers with 20+ experiences years of industry experience and offer customers the best, most competitively priced packages. 

Contact us today to get the ball rolling and find a reliable landlord insurance policy that will give you the peace of mind you need during these uncertain times. Call us on 01788 818 670 or email info@cia-landlords.co.uk to find out more.