Good Landlording

Hot on the tails of Keir Starmer’s controversial assertion that landlords aren’t “working people”, as it’s passive income, like income from shares, Suzanne Smith and Richard Jackson discuss objectively the extent to whether income from residential rental properties can be considered “passive”.

Stepping back from the political debate, they examine “passive income” means, and contrast it to what landlords need to do to earn money from their rental properties. Although property “gurus” claim that rental income is passive, there is a trade off between outsourcing and profit. It’s also the wrong mindset.

>> Blog post: Can landlords make passive income from rental property?

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Different types of landlords

There are two key types of residential landlords: part-time landlords who manage properties alongside a full-time job, and professional landlords who manage their property portfolios as their main occupation. Richard emphasises that even part-time landlords work very hard, juggling their careers with property management.

Suzanne adds to this by discussing the responsibilities and engagement required, even for those landlords who might have fewer properties. Landlords who manage properties themselves do not earn passive income – it is a job.

On the other hand, income from landlords with full repairing commercial leases is more passive.

What does “passive income” actually mean?

HMRC considers passive income to be investing in assets, and not from running a trade or a business, or being an employee. They give examples such as interest payments from bank accounts, annuities, and dividends from money invested in the stock market, and don’t refer to rental income.

Forbes frames it as income that doesn’t need a significant commitment of time or effort to earn, with only minimal monitoring on an ongoing basis. They say that rental income doesn’t fall within the definition of passive income as it requires a large up-front investment, as well as ongoing maintenance and management of the property.

Despite what the “property gurus”, earning rental income as a landlord isn’t the same as getting interest from money in a bank account, or dividends from stock market investments.

However, is it right to say that landlords really earn money with minimal effort?

How do landlords make money from rental properties?

Landlords earn money from rental income and capital growth.

Landlords need cashflow from rent in order to pay the bills while they are waiting for capital growth, unless they are going to dip into their savings.

Capital growth is never guaranteed. Although property prices boomed in London in the past, anyone who bought a flat in London over the last 5 years will know that capital growth is not a given. Suzanne barely broke even on her flat in Cambridge in 7 years, despite it being a fantastic flat a great location.

What do landlords actually do to earn money?

But before landlords earn anything, they need to find, finance and buy a new rental property, which is time-consuming and expensive. Then they need to refurbish the property (unless it’s a new build), make sure it’s compliant, and then find suitable tenants to rent the property.

Once tenants move in, they will need managing, and the property will need ongoing repairs and maintenance to keep the property in great condition, and compliance with landlords’ various legal obligations like the annual gas safety certificate. There is always a lot of work when tenants change over. It is running a business.

If landlords outsource these activities, the income can be more passive, but that will reduce margins. There is a trade-off between a landlord’s involvement and the level of profits. Outsourcing comes at a cost, and will depend what the landlord wants to do and what’s right for them at their stage of life and their aspirations.

If a landlord has another full-time job, they may want to outsource, and if they go into property full-time, they may want to take more control, maybe even hiring a part-time property manager, to get economies of scale.

>> Related episode: #28: How to manage tenants and keep them happy

>> Related episode: #10: Tips to help landlords self-manage their buy to lets

Landlords’ legal obligations

Being a landlord comes with a lot of legal responsibilities. The buck always stops with the landlord, even if they use agents. It’s also going to get more complicated with the Renters’ Rights Bill, with the fines increasing, rent repayment orders, and things. And, you know, being a landlord comes with a lot of legal responsibility.

Suzanne believes it’s irresponsible and misleading to use the term passive income as that it plays down the fact that being a landlord involves risk and responsibility for the safety of their renters.

This means that landlords need to have the knowledge to be able to supervise their agents as well. Landlords need to “skill up”, and be on top of their legal responsiblities.

It should never be a question of “let and forget” from the landlord’s perspective if they use agents to manage the property. Instead it should be “let and check”. Landlords need to supervise letting agents to make sure they’re doing a good job. It doesn’t go without saying.

Other strategies

The new Renters’ Rights Bill will be increasing the liability on landlords who enter into rent-to-rent arrangements due rent repayment orders and the abolition of Section 21, to the extent that this will be even less of a viable strategy for landlords who are looking for passive income.

Supported living and leasing a property to a social housing provider, on the other hand, will be less risky from a Renters’ Rights Bill perspective as there will be new Section 8 grounds for possession for both.

>> Blog post: #22: Making a success of supported living with Lisa Brown

Final thoughts

To be a landlord, you need to have an entrepreneurial spirit, and be comfortable with hard work and risk. Otherwise people would be better off putting their money in a bank, the ultimate passive income.

Suzanne says that landlords must get rid of the mindset of it being passive income as it’s not. Instead, we’ve got to think about how much involvement do we want, and how much control do we want.

The days of being amateur landlords has gone. To succeed, landlords need to have a more professional approach.

Being a landlord, while potentially profitable, involves significant active management by someone (whether or not it’s a letting agent) and should not be considered passive income.

Credits

Music: “Paradise Found” by Kevin MacLeod of Incompetech. Licensed under Creative Commons: Attribution 4.0 License.