EXIT DOORS FOR LANDLORDS

New rules could force owners out

GETTING a call from your tenants about a leaky lean-to roof is the last thing you want when your sick toddler’s temperature has spiked to almost 40 degrees Celsius and you’re rushing panic-stricken to Caredoc. So too is a call to replace a fridge freezer — when you’ve already replaced the fridge for the same tenants four times in the space of two months but for some bizarre reason, their brand new fridges keep breaking down.

These are exactly the kind of calls I dealt with when I rented out a property for four years. My husband and I decided to rent out our first home after we moved house during the recession. The property market was in a downturn at a time, so rather than sell that property at a loss, we figured it would be better to rent it out — until the market recovered. The four years that we rented out that property coincided with some of the busiest years of our lives. We had very young children — one of whom was regularly sick, a new home which was turning into a constant renovation project, jobs to hold down, and a daily commute which we had underestimated.

Our tenants were reliable, always paid their rent on time and never damaged the property. We did the best job that we could as landlords and always dealt with any problems which our tenants brought up.

However we had enough on our plate without managing tenants and the upkeep of a second property, so we sold that property as soon as prices recovered — and it was a huge personal, as well as, financial relief. We never made any money as landlords. In fact, we made a loss: although the rent covered the mortgage repayments, it didn’t cover the cost of the property upkeep and rental income tax bill.

The only advantage of renting out our first property was that doing so allowed us to sell that property when the market recovered.

The Government’s plans for tougher sanctions on landlords — including fines of up to €15,000 plus legal costs — make me even more relieved to be out of the landlord game.

I was never a ‘rogue’ landlord and while I agree that action should be taken against unscrupulous landlords, I also understand how small-time landlords might unwittingly break the rules around renting. Landlords already could have to pay up to €20,000 in damages for breaching their obligations. Had I been hit with such a bill, I would not have had a chance in hell of paying it — I don’t have that kind of spare cash and neither do many small-time landlords.

“The problem for all landlords is the complexity of the legislation [around renting out property] — it is confusing, intricate and difficult for professionals who abide by it on a daily basis, so it is absolutely horrendous for the 92pc of landlords who own less than three properties,” said Stephen Faughnan, chairman of the Irish Property Owners Association (IPOA), which represents landlords.

Of course, the soaring rents of the last few years means it is possible to make a lot of money from renting out property. So when does it make sense to stay in the landlord game — and when does it not?

STAY IN THE GAME

A buy-to-let property can be a good investment — particularly if you are buying with cash.

As you own the property outright, you won’t have mortgage repayments eating into your rental income — and so you are more likely to cover your costs as a landlord and to make a profit.

Cash buyers also are free of the debt worries and woes which heavily-indebted landlords have.

For cash buyers, the total return on an investment property could be 10pc or more, according to John McCartney, director of research with Savills. That 10pc plus return includes a typical income return of around 4.5pc on a rented property — and the capital gain on the property. (The income return is the return made from the rental income on a property. The capital gain is the return made as a result of the property increasing in value.)

“The returns are there with buy-to-let — for people who have a significant amount of capital,” said McCartney.

There is a strong demand for rental accommodation today, and rents have soared in recent years — and continue to do so.

This is another reason a buy-to-let investment can make sense. Should you have a mortgage on a rented property and be able to meet the mortgage repayments, it may make sense to continue renting it out — if your long-term plan is to sell that property when it reaches a good price, or to use the rental income as your pension.

“Some of the landlords who have a mortgage on a property are hanging on — on the understanding that house prices are going up,” said McCartney. “They take the view that they can live with a negative cashflow initially because over time, they’ll sell up and get the benefit then. If this is your view, be sure to look at the transaction fees [for buying and selling the property] and the Capital Gains Tax bill you’ll face — and know too that you’re making an assumption that house prices are going to continue to rise.”

It’s important to be on top of your finances if renting out a property — and to be able to cover your costs. Ideally, your rental income should cover the full costs of renting out the property, including tax, any mortgage repayments, and running costs. “Typically, 20pc of your annual rent is what would be typically set aside for running costs such as insurance, tenancy voids, wearand-tear expenses, and so on,” said McCartney. “If you are thinking of taking out a mortgage to buy an investment property, carefully weigh up the cash-flow situation.”

GET OUT OF THE GAME

It could make a lot of sense to get out of the landlord game if you are heavily indebted and struggling to meet the mortgage repayments on the rented property.

“Many of the people who took out a mortgage to buy an investment property are struggling to make a profit from the rented property,” said McCartney. This will particularly be the case if your loan-to-value ratio (LTV — the percentage of the price of the property that you’re borrowing) is high. Once the LTV of your rented property is more than 40pc, you’ll find it hard to break even — and are likely to be making a loss, according to McCartney.

“Landlords are telling us that they cannot cover the costs with borrowings of over 30pc of the value of the property, unless they are subventing the property from other income,” said Faughnan. Another disadvantage of buyto-let is that it is an investment which can be hard to sell quickly — particularly during market downturns when you may be under financial pressure to sell up.

Like all investments, buy-to-let has its risks. You may, for example, have unreliable tenants who fail to pay their rent or who damage your property, you could have difficulties securing tenants, and you could find yourself in negative equity if you borrow to buy the property.

Being a landlord can be stressful. Although you could make your job easier by hiring a letting agent to manage the tenancy, you will still need to make decisions around managing your tenancy and rental property.

Remember, ultimately the only person you can trust to look after your property as you would like it looked after is yourself — not an agent. “Ask yourself do you really want to be a landlord?” said McCartney.

“As a landlord, you’re dealing with people’s homes. Your tenants will be attached to their home and they have rights attached to it. Landlords also have rights — and sometimes these spheres can come into conflict. If you would find the whole experience of being a landlord stressful, it might not be for you. Life is precious — avoid spending it doing things you don’t want to do.”