It is vital you have a thorough understanding of the types risks associated with becoming a landlord, and the likelihood of these risks actually occurring. It�s worth doing some planning to estimate the potential financial impact should one of these risks occurs.
Firstly, one of the biggest risks is an unexpected drop in property prices, leaving you in negative equity. If you have to sell you buy to let investment, you may not realise a capital profit goal. However, if a regular rental income is your aim, a property price crash in year 5 of a 25 year mortgage, may not impact you at all!, (as prices trends rise in the long term). The only way to really minimise this property investment risk is to hold off from making your investment until property prices have corrected themselves in the short term.
Secondly, a more practical risk of property letting is that you find suffer rental voids � while mortgage payments and other overheads continue to drain cash. Tenants may unexpectedly serve notice because they have lost their job, got divorced, become ill etc. To minimise the impact, landlords can take out rent guarantee insurance.
Some letting agents might include a form of rent guarantee equivalent to three months property rental income, in the event of not finding tenants. You should assume some realistic void periods between tenants, in your financial plan, before you make your buy to let investment.
Thirdly, another real risk is that mortgage interest rates rise. To minimise the risk you could adopt a fixed rate mortgage rate product. The worst-case financial impact is that your property mortgage repayments exceed your rental income.
Fourthly, there is a risk that your new tenants refuse to pay rent. Non or late payment of rent is the most common cause of dispute between landlords and tenants. Alternatively, squatters may enter the property during a void period. The worst-case financial impact is the cost of employing legal professionals. To minimise this risk, legal expenses insurance cover may pay for any legal costs incurred in pursuing the tenant for any breach of the tenancy agreement.
Fifthly, tenants cause severe damage your rental property (either accidentally or deliberately). Remember that you or your agent will have credit checked them, obtained a deposit and rent in advance - all before letting them access the property. So the tenants should be highly motivated to protect their deposit. In order to minimise this investment risk, it is worth investing in legal expenses insurance. This may pay for legal expenses insurance which needs to be resolved through legal means. In addition, you may consider adopting an emergency assistance policy to minimise the cost and hassle of emergency repairs.
Lastly, it is critical that you comply with statutory regulations designed to protect the safety, well-being and basic rights of your tenants. If you fail to do so, you could risk facing fines and or criminal proceedings.