Managing rising costs: How landlords can protect their margins

One of the biggest challenges for new landlords and those expanding their portfolios is finding a rental property that will deliver the margins and profits they’re looking for. And once a property is up and running, you need to continue to monitor yields, cashflow and returns to make sure the investment keeps delivering what you need.

As house prices and the cost of legal compliance have risen over the years, landlords have had to invest more capital into buy-to-let from the start, squeezing the rate of return on investment. And when interest rates spiked a couple of years ago, many landlords who were coming off fixed mortgages suddenly found their repayments increased significantly, which had an immediate impact on their profits.

There is still good money to be made from letting, but it’s important to understand the potential risks and ‘stress-test’ your figures against costs rising.

Here are five steps you should take to help protect your margins:

1. Make sure you are always charging the best possible market rent

Rental income is the lifeblood of your investment, so do what you can to ensure you’re able to charge at or close to the maximum market rate for the area. That means:

•    Keeping up to date with tenants’ wants and needs so you can provide the kind of accommodation that will attract the best ones, willing to pay the highest rent.
•    Maintaining the accommodation at a good standard so you retain tenants and can re-let quickly when required.
•    Reviewing the rent every year.

It’s important to note that with the Renters’ Rights changes, you will only be able to increase rent once per year, and you will only be able to accept up to the rent advertised and no more.

2. Maintain the property well

There should be a maintenance schedule in place for things like checking the exterior, redecorating and upgrading fittings, so budget accordingly and set aside some profits each month to cover periodical works. Make sure your property manager carries out an inspection every 6-12 months and reminds your tenants to report any damage or issues so repairs can be made before the problem becomes bigger and more expensive to fix.

Maintaining the property well ensures you attract and retain good tenants and also protects the capital value and your equity returns.

With the Renters’ Rights changes coming in soon, any mention of damp and mould will require landlords and agents to investigate and find solutions as a matter of urgency.

3. Review costs every 6-12 months

Even when the cost of products and services is rising, you can always find a good deal from a company that’s keen to keep existing customers or attract new business. So it’s worth taking the time to review your regular outgoings every six months or so.

4. Work with a buy-to-let specialist broker 

Your mortgage repayment is likely to be your biggest monthly outgoing and even a reduction of a quarter of a percent on the interest rate can make a positive difference to your cash flow. A good broker will periodically review your mortgage to make sure you’re always on the most appropriate deal and let you know when it might be time to switch. Even so, it’s worth checking in with them 6 months before any deal is coming to an end, to give them and you time to find the best new product.

If you would like any mortgage advice, you can contact the team of buy-to-let specialists at our sister company, Mortgage Scout.

5. Take out appropriate landlord insurance

As the cost of labour and materials has risen sharply since the beginning of the Covid pandemic, so the cost of repairs has increased. So, although insurance premiums are also rising, having appropriate financial cover in place in case your property suffers damage can save you huge amounts of money down the line.

It’s also well worth considering rent guarantee insurance, which will continue to provide you with income in case a tenant stops paying. This will become even more important once the Renters’ Rights Bill passes, Section 21 is abolished and the proposed changes to the Section 8 rent arrears ground come into force.

If we fully manage your property, we will take care of rent increases and property maintenance on your behalf, and ensure you benefit from the best rates from our trusted team of contractors.

If you would like to discuss upgrading your service to Fully Managed, or wish to discuss any aspect of managing your costs and maximising your returns, our buy-to-let experts are always here to help – just get in touch with your local branch.