Becoming a landlord is something of an aspiration for many homeowners in the UK. It represents a degree of financial security, wherein money seems to be generated passively over time, as well as a sense of freedom from conventional entrepreneurial routes. But letting property is not a risk-free venture, even if it has recently enjoyed something of a golden era. There are many hidden risks to landlordism, but what are they – and how can they be mitigated?
Getting on the property ladder has become more difficult for the average person in recent years, let alone for those hoping to become landlords. Property values increased considerably during the pandemic years, and mortgage rates have since skyrocketed as a result of rising interest rates. With property values set for a precipitous drop, and with profit margins narrower on rental properties with buy-to-let mortgages, research is a necessary first step in making a shrewd decision on early property purchases.
Market concerns are not limited to national property value trends, though. The new landlord also needs to consider regional market movements, not just about property and rental values but also concerning the demand for rental properties. Rental property demand is not universal, even though demand is higher on average.
For example, an area might experience a drop-off in demand due to an excess of supply, as with some of the denser suburbs in university cities. This saturation has two potential impacts: a competitive market in which rent rates fall, and a reduced likelihood of securing a tenancy agreement at all. This represents just one rental market risk and necessitates a careful approach to taking on a rental property.
Cashflow and Emergency Costs
Getting a foothold in the rental market is not the only risk-laden part of the process. Maintaining properties and meeting legal obligations to tenants’ needs bring their risks, particularly when it comes to cash flow. Emergencies such as weather-related property damage or utility failure can command high short-term costs, both in terms of repairs and adequate accommodations for the tenant.
Mitigating the risk of emergency costs cutting into cash holdings is simple enough an endeavour. Landlord insurance is designed as a buffer for such costs, protecting the landlord’s profits and ensuring repair works remain affordable.
The final, and perhaps closest, risk that landlords face takes the form of their tenants. Tenants are an unknown quantity, and in certain circumstances can be an existential threat to the profitability of a rental venture. ‘Bad’ tenants are few and far between, but those unlucky enough to receive them may struggle to remove them – and suffer non-payment of rent on top of material damages.
More generally, the cost-of-living crisis has made living costs untenable for many who rent, and these difficult financial situations can introduce instability, however well-meaning the tenant. There is little that can be done to mitigate these risks, save being a generous and attentive landlord.