British expats who move abroad for work purposes may also be looking to make money from their home at the same time by renting it out whilst enjoying a strong growth in house prices.
In addition to earning an income, it’s better to have someone in the property rather than leaving it empty and – this could prove crucial for some – it will also enable the expat to obtain a mortgage more easily in the future as well.As with many landlords new to the private rented sector, it’s very tempting to save money and do everything yourself, which means having to find tenants and also manage the maintenance issues.
Obviously, when living abroad these tasks are not so easy to carry out and while expats may resent having to pay a percentage of their rental income to a letting agent, this could be money well spent.
Among the many reasons for doing so is that becoming a landlord can be a very stressful and time consuming business; it’s much easier to have someone deal with the stress that comes with tenants and having to carry out repairs.
Don’t forget too that if you are moving further away than Europe then you will have to factor in the time difference, which will add to the headaches in renting out property.
While you may make more money cutting out the middleman by having a family member or friend run the property on your behalf, it’s a lot of responsibility to place on someone. Again, there will probably be more work involved than the relative anticipated.
There’s also the problem of finding tenants to move in and dealing with when the tenancy comes to an end. A letting agent will already have a list of potential tenants available or know how to reach out to them.
The expat landlord’s legal obligations
It’s also important that the rent is collected regularly and that all legal obligations are met. This is an often overlooked issue.
Firstly, landlords will need to declare their income for tax purposes. The tax regime is changing for landlords who may find that their rental income pushes them from being a basic rate taxpayer into a higher tax bracket.
In addition, if you are buying a property for the sole purpose of renting it out while you move abroad and you also own a family home, from April 2016 you will be subject to an additional 3% stamp duty charge on the purchase price.
But that’s not all. There are other issues that landlords are legally responsible for including undertaking a gas safety check every year, ensuring the deposit is kept in a legally recognised scheme and providing an energy performance certificate (EPC) when a new tenant moves into the property. A letting agent can ensure all of these tasks are carried out effectively and that the tenancy runs as smoothly as possible.
Another important task that a new landlord really should undertake is to carry out an inventory; this is the process of writing down the details of the property’s condition and of the fittings and also taking extensive photographs. Again, there are inventory clerks who can do this task, or it can be handled by the letting agent.
Experienced landlords will no doubt agree that having an inventory when a tenant moves in will mean that there will be evidence should there be a dispute over the returning of the deposit. The inventory will prove invaluable and necessary since the dispute will be resolved by a third party; generally the organisation holding the deposit.
Expat landlords and 'Right to Rent'
Before leaving this subject of legal obligations, we should mention the issue of ‘Right to Rent’. Don’t worry if you are an expat and haven’t heard of it – a survey by the National Landlords’ Association recently also revealed that 62% of ‘accidental landlords’ had not heard of it either.
Essentially, the ‘Right to Rent’ law puts an obligation on landlords in England to ensure that their property is rented to someone who has the right to live in the UK. The aim is to crack down on landlords providing homes for illegal immigrants. A landlord must now check valid documentation of all new potential tenants against a set list.
The ‘Right to Rent’ issue is particularly challenging if you are living thousands of miles away and cannot get home to go through the checklist yourself. Regardless of who does the check, it is the landlord who faces a hefty fine for non-compliance – and this increases with subsequent failures and the possibility of being imprisoned.
Strict legislation must be followed, so having a letting agent do these tasks on a landlord’s behalf – even when they are charging between 12% to 15% for their services – will seem like money well spent to avoid falling into legal problems.
Expat insurance policies for the rental property
It is important to tell your insurer that you are renting out your property. A standard contents policy will not suffice; instead, you will need to buy a specific landlord’s insurance policy.
An insurance policy for your rental property will help protect you from accidental damage, dealing with default rent payments, or having to evict a tenant. There is also specific insurance available that will help cover unpaid rent.
Before renting out your home, it is a good idea to remove valuable furniture or personal items; tenants may not have the same high regard for the property’s contents as you or your family.
When looking for a letting agent, try to choose one who will abide by a code of practice. This may mean checking whether they are a member of the Association of Residential Letting Agents, for instance. The letting agent should also carry out regular inspections to ensure the property is being looked after, and collect and deliver keys to potential tenants.
Another crucial element that many expats tend to overlook is the need to inform their mortgage lenders about their desire to rent out their property; the lender’s consent will be required. Failure to obtain consent from the lender will generally be in breach of a loan’s terms and conditions.
Also, one of the reasons for expats living overseas for work purposes is to use part of their salary for investing in UK property since this is generally a safe investment, particularly for those who are retirement planning. The rise in UK property prices has seen impressive capital gains being made by those who have rental properties.
However, from March 23rd expats should also understand that obtaining a buy to let mortgage has become more difficult. An EU Directive is redefining buy to let mortgages; this will affect accidental landlords – which is what many expats will be since they will only have one or two properties – rather than professional landlords with a portfolio of rental properties.
In recent months, lending criteria have been tightened and certain mortgages are now defined as ‘consumer buy to let’, which means you must prove that you can afford to repay your mortgage if you are planning to rent your house out. This will inevitably mean that many expats will find it more difficult to obtain a mortgage for a buy to let property than has previously been the case.
However, it appears that buying property in the UK by expats is a hugely popular investment vehicle and there is reportedly a ‘continuing surge’ in demand from expats.
There seem to be three key factors that are driving expats to buy UK property; the first one being that interest rates have now been at an historical low for a long time.
Many investors believe that low interest rates will remain that way for the foreseeable future and when they do increase, the rise will be ‘very low’.
Paying off your UK mortgage
One tip from the world of mortgage brokers – which may prove useful for an expat looking to pay off a UK mortgage in order to own their home outright – is to pay the mortgage down to a small amount and continue paying small amounts to maintain a payments track record.
The question of currency transfers also arises when discussing payment of mortgages.
This question is important because it is more than likely that the landlord will receive their rent in sterling and they may want to transfer the cash into their local currency. This is an opportunity to contact a currency specialist who can help protect expats from volatile trading fluctuations.
James Bennett is the managing director of a financial advice firm for expats; he points out that over the last 10 years there has been a 55% variance between the US dollar and the pound sterling. He said, “this [variance] makes it impossible to budget or calculate for adjustments.”
With every currency fluctuation there is a winner and a loser, but it is difficult to know which side of the equation you will need to be on to ensure you don’t lose any of the value of the sterling transfer of rent every month.
Arguably the best way to address this is by taking a forward position, i.e. to take out a contract which buys the right for a trader to purchase local currency at the prevailing rate for a set period of time. Again, there will be winners and losers here, but it brings peace of mind should the market go against the value of sterling and you will know exactly how much to expect every month.
Another option is to maintain a UK bank account for the rent to be paid into, which will then avoid transfer fees when switching between currencies and countries.
Specific expat financial advice
Don’t forget too that seeking out specific expat financial advice before embarking abroad is highly recommended. Your residency status will also be crucial for tax purposes – for some being non-domiciled will put them in a much better financial position, for instance, but this advice will be based purely on each individual’s circumstances.
Also, it is important to appreciate that just because you are living outside the UK, this does not automatically mean that you are a ‘non-UK resident’. The situation is much more complex than that!
As with all financial decisions, it is always wise to seek expert advice before making a commitment.
Have you rented out your home whilst living abroad? Let us know in the comments!