Amidst soaring interest rates, many landlords now pay 40% more mortgage interest than last year.
This, combined with escalating costs and the ongoing cost of living crisis, makes it more important than ever that landlords are savvy about maximising their profits.
For many landlords, maximising profits isn’t just about making more money; it’s essential for keeping their rental business afloat in today’s challenging economic climate.
It takes more than increasing rent to maximise your profit as a landlord. It involves devising a comprehensive property management strategy that covers everything from cutting unnecessary expenses to enhancing your investment’s long-term value.
In this article, we’ll explore effective strategies for landlords to help reduce costs and boost rental income, equipping you with the knowledge you need to maximise your rental property’s earning potential in 2024.
Minimising landlord expenses
One surefire way to keep more money in your pocket is to reduce your expenses.
Regularly review expenses and compare deals
First, start by writing down a list of all your expenses. The list will probably be longer than you expected! Mortgage fees, letting agent fees, licencing fees, insurance, maintenance and repairs, safety checks, furniture and appliances, utility bills, cleaning costs, tax, and accountancy fees are all typical outgoings landlords pay. It’s important to review your outgoings regularly and shop around to see whether you’re paying the going rate or if you could make savings by switching to a different provider or service. Avoid auto-renewals for services like landlord insurance; instead, set yourself a reminder to compare deals before your cover expires to make sure you get the best rate.
Ok, so this one is less applicable in today’s economic climate, as mortgage rates are currently sky-high. But it’s one to consider in the future. When remortgaging your property, be sure to research what deals are available. Sometimes, switching lenders can help to bring your mortgage rate down. During the current cost of living crisis, when rates are high, tracker deals are particularly popular as they follow the Bank of England’s base rate plus a set margin. This offers landlords more flexibility and potentially lower rates than fixed-rate mortgages.
Reduce tax liabilities
Calculating tax on rental property can be very complicated as there are so many different variables to consider. The tax you pay on rental income can eat up a significant portion of your profits, making it crucial to minimise tax liability to maximise profitability. Over recent years, several changes to tax rules have put landlords in a worse financial position, including the withdrawal of mortgage interest as an allowable expense and the introduction of an additional 3% purchase tax on investment properties in England. If you’re looking for ways to claw back some of your profits from HMRC, then the best way to do so is to consult a property tax specialist to ensure your business is as tax-efficient as possible.
Popular strategies for reducing landlord tax liability include:
- Offset allowable expenses such as mortgage interest, repairs, and letting agent fees.
- Consider letting property through a limited company to benefit from lower tax rates.
- Transfer property ownership to a spouse in a lower tax band.
- Establish a partnership with your spouse or partner to allow profit sharing and individual tax payments on each person’s share.
Minimise void periods
While landlords have little control over many of their expenses, void periods are one expense you can actively work to avoid. Having a strategy to help minimise void periods can dramatically reduce your annual expenses. Of course, it’s impossible to eliminate void periods completely, as life happens, and sometimes tenants must leave unexpectedly. However, there are several steps you can take to minimise the impact void periods have on your profits.
Some of our top tips for minimising void periods include:
- Invest in properties in desirable locations.
- Maintain the property to high standards.
- Make your property stand out.
- Vet tenants thoroughly.
- Have a marketing strategy in place.
- Have a tenant retention strategy in place.
- Offer competitive prices.
Performing thorough tenant vetting, including referencing and credit checks, can help avoid problems with non-payment of rent and improve tenant retention rates.
Maximise rental income
Once your expenses are under control, it’s time to determine how to boost your rental income.
Maintain the property’s condition
First and foremost, look after your property. Well-maintained, attractive properties are in higher demand. Landlords with highly sought-after properties typically experience fewer void periods and can charge higher rent to reflect the value of their property. Keep up with regular property inspections and maintenance jobs to ensure your property offers a high quality of living. Keeping your property in good nick can also help to minimise the frequency with which it requires expensive repairs.
Invest in renovations
Consider renovating your property to increase its value and rental potential. Modernising the kitchen, adding an extra bedroom, or converting an unused outdoor area into an off-road parking space can all add significant value to your property, make it more attractive to tenants, and justify charging higher rent.
Charge competitive rates
It’s important to set the correct rental price for your property. Set it too high, and you risk experiencing prolonged and costly void periods, while under-pricing limits your income potential. Conducting thorough market research and comparing your property with similar ones in the same area will help you to understand local market trends and set a competitive and profitable rental price. Read our guide on setting the right rental price for further tips and advice on determining the most competitive rate for your property.
Make your property stand out
To justify charging a higher rent, your property should offer more value. Think about how you can improve your tenant’s living environment or the service you’re providing to boost the property’s value or increase demand. Adding extra features like off-road parking, super-fast broadband, pet-friendly policies, or work-from-home office space can help your property stand out and enhance its appeal. When considering what extras to add, consider who your target demographic is and what would add the most value for them.
Consider converting the property into an HMO
A house in multiple occupation (HMO) is a property that is let to at least three tenants forming more than one household and sharing toilet, bathroom, or kitchen facilities. Student lets are often HMOs. Because HMOs are let out by the room, they typically yield higher returns than standard rentals. According to the British Landlord Association, HMOs yield an average return of over 7.5%, significantly higher than the modest 3.63% typically seen in traditional buy-to-let investments. Most properties will require some renovation to convert them into an HMO, as HMOs are subject to strict regulations surrounding overcrowding, bedroom sizes, facilities, and safety.
Consider short-term lets
More landlords than ever are embracing short-term lets like holiday lets. In fact, iNews reported that the number of holiday lets in England has increased by 40% over the last three years. One of the primary attractions of short-term lets is that they often command higher rents, particularly for properties located in popular tourist destinations.
Increase capital value
When considering how to maximise your rental property’s profitability, it’s important to consider both long-term and short-term value. Enhancing the capital value of your rental property is key to maximising your long-term return on investment.
In the UK, due to inflation, most properties naturally increase in value over time. However, you can maximise this value increase by maintaining your property’s condition and making improvements. Investing in strategic renovations can significantly boost your property’s value. Focus on high-return improvements like updating the kitchen or bathroom, adding a functional living space, or enhancing the property’s curb appeal. Energy efficiency improvements are also popular as they not only increase the property’s value but also help reduce running costs and make the property more appealing to prospective tenants.
Carrying out our regular property inspections and performing routine maintenance tasks will help preserve your property’s condition and value. Addressing any signs of damage or deterioration quickly prevents them from spiralling into more serious and expensive problems later down the line.
Your property’s aesthetics, both inside and out, can substantially impact its value. Investing in low-maintenance landscaping and modern interior design can help enhance its immediate appeal to potential tenants and its long-term investment potential.
By meticulously managing expenses, maximising rental income, and enhancing the capital value of your property, you can transform your rental property from a modest income stream into a lucrative investment.