Fund your retirement with rental income– the only assured continuous cash flow stream
Rental income refers to the money made by landlords through letting out their homes and businesses to tenants. It is the regular payment that property owners receive in return for allowing others to use their property for a specific amount of time. Rental income can be a significant source of passive income for individuals or businesses. It's a reliable source of income and could even boost your wealth through appreciation.
The United Kingdom has a higher percentage of renters than home owners compared to other European countries. In the UK, rental housing plays a key role. Among the 23.5 million households, private or social renters make up more than one-third. Although the share of renters has stayed largely stable over time, there has been a noticeable shift away from renting through local governments or housing organisations and towards private landlords.
Actual rent payments made by tenants in the UK between 2000-2021
The home rental market has grown rapidly over the past two decades, with continued price increases anticipated until 2026. Based on the data collected, it is expected that residential rental rates in the UK will grow by more than 18% by the year 2027. The demand for rental housing is anticipated to continue. The continually low average void durations, which have been below 30 days nationwide since November 2020, provide more support for this. This is caused by number of new households outpacing construction of new homes as well as continued house price increases.
The State Pension Age in the UK at present is 66 years for both men and women. According to research, the number of retired individuals in the UK last year was 3.1 million. Most of these people have savings of less than 5,000 British pounds. This creates an urge among retirees to have a second source of income. Rental income attracts them the most because they are freed from the hassles of all the work related to property management, tenant management, etc. when they join hands with anasset management company like Novyy. Novyy can help retirees by offering a unique 360-degree property investment solution whereby the company takes care of all aspects of investment and management.
What is passive income?
The term "passive income" describes revenue produced with little or no active work from the earner. Typically, it entails generating income through initiatives, investments, or assets that produce steady cash flow without necessitating ongoing personal involvement or active participation. Rental income from real estate, earnings from investments, interest from savings accounts, royalties from intellectual property, and revenues from automated web enterprises are all examples of passive income. Individuals who engage in passive earning can make money while concentrating on other pursuits or looking for additional sources of income.
Types of passive earnings:
There are three types of passive earnings. They are:
Self-charged interest is a practise in which a person makes a loan to themselves or their own company and adds interest to the balance. As a result, non-deductible personal expenses can be changed into deductible company expenses, generating passive income through interest payments.
Rental properties involve owning real estate assets and leasing them out to tenants in exchange for rental income. This form of passive income provides a steady cash flow and potential long-term appreciation through property value growth. It requires initial investment and some level of management, but can be a lucrative source of passive income. The North East and Yorkshire and Humber reported a 6.3 percent residential real estate rental yield in the third quarter of 2022 in the United Kingdom (UK). The lowest rental yields were observed in Outer and Central London, at 5% and 5.1%, respectively.
'No Material Participation' in a Business:
This refers to making an investment in a company as a passive investor, meaning that the investor does not take part in the management or daily operations of the company. Instead, they provide money or resources in exchange for a cut of the revenue or dividends. Investors can profit from business profits with this kind of passive income without having to shoulder the duties and time commitment of actively managing the business.
How to make passive earnings from rental properties in the UK?
Buying a property with the goal of renting it out to renters is known as "buy-to-let." Rent payments that cover more than the cost of the mortgage and the property can help investors produce passive income. It's crucial to conduct thorough market research, pick the ideal location, and take into account aspects like rental demand, prospective yields, and property management.
HMOs (houses in multiple occupations)
Homes with multiple unrelated families or persons sharing common areas like kitchens and toilets are known as HMOs in the UK. HMOs have the potential to provide better rental yields than conventional buy-to-let properties. However, they can call for more licencing and adherence to particular rules. To ensure profitability, proper administration and maintenance are essential.
Serviced accommodation refers to the short-term rental of fully furnished homes, usually for vacations or business trips. Bookings may be managed and guests can be attracted using platforms like Airbnb. Higher rental returns may be available with serviced lodging, particularly in well-known tourist or commercial hubs. However, it necessitates more active administration, including upkeep, cleaning, and communication with visitors.
Commercial real estate
Purchasing commercial real estate, such as office buildings, retail stores, or industrial sites, can generate passive income from rent received from tenants. Compared to residential properties, commercial property leases are long-term, offering stability and maybe better rental rates. Commercial properties, however, could have a higher initial investment and distinct market dynamics to take into account.
Creating a property business requires the acquisition of numerous properties and portfolio management of them. This strategy enables scaling and diversity. Owners of real estate businesses can produce passive income through rental income, capital gains on properties, and potential tax benefits. Effective property management, tenant relations, and financial planning are nevertheless necessary for operating a real estate firm.
Other benefits of having rental income as passive income for retirees
Enhanced Financial Security
Rental income gives retirees a steady and regular stream of cash flow, enhancing their financial security throughout retirement. It helps retirees meet their ongoing financial demands and take care of expenses by acting as a reliable alternative to other retirement income sources, such as pensions or savings.
Flexibility to Optimize Timing of Property Sales
Retirement-age homeowners who own rental homes have the freedom to sell at a time when it is advantageous for them. If they need a large sum of money upfront or the market is in their favour, they may decide to sell a piece of property. Retirees can change their investment plans in light of shifting financial objectives and conditions.
Potential for Property Value Appreciation
Rental properties have the potential to appreciate in value over time. Retirees profit from their investment's growth as property values rise. Their overall wealth and net worth may be significantly increased by this appreciation, giving them a long-term financial edge.
Increased Portfolio Diversification
Retirees' investment portfolios are diversified when they include rental properties. It lessens their exposure to changes in the stock market or other investment vehicles by spreading their investment risk across a variety of asset classes. Retirement investors may be able to protect their assets and build a stronger financial base with the aid of this diversification.
How to make sure rental income from properties remains truly passive for retirees?
Tax considerations for rental properties in the UK
When you earn money in the UK, you have to pay certain taxes to the government. Let’s take a quick look at it.
If you are running a property business
You have to pay Class 2 National Insurance if your annual profits increases £12,570
Your business will be counted as a running business if:
- Your main job is being a landlord
- You have rented out multiple properties
- you’re buying new properties to rent out
If your annual profits are below £6,725, you can make voluntary Class 2 National Insurance payments. This will ensure that you get the full State Pension.
If you own property personally
Your first £1,000 of rental property revenue is tax-free. This is considered your "property allowance.
You must Contact HM Revenue and Customs (HMRC) if your annual rental income from property is between £1,000 and £2,500.
If your annual rental income is:
- £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses,
Consider reporting it on a Self Assessment tax return.
Mistakes to Avoid When Generating Passive Income from Rental Properties:
Poor investment decisions might result from a lack of extensive study about the market, the location of the property, the rental demand, and any relevant risks. Making wise investment decisions requires accurate information gathering, market trend analysis, and consideration of elements including property condition, neighbourhood, and rental prices.
Keeping insufficient money might be a costly error. Unexpected costs, vacancies, or repairs could occur and call for quick access to cash. Without sufficient cash reserves, landlords could find it difficult to cover these costs, which would affect their capacity to produce passive income and possibly result in financial issues.
Underestimating the Required Effort
It's possible to have irrational expectations if you assume that investing in rental properties will be simple and fully passive. Time, effort, and efficient planning are needed for property management, tenant screening, property maintenance, and managing tenant complaints. Rental property management success depends on being ready for these tasks and having backup plans in place.
Ignoring legal and financial standards
Ignoring legal and financial standards might result in legal problems, fines, or even difficulties with eviction. Understanding landlord-tenant legislation, acquiring relevant licences or permits, drafting suitable leasing agreements, and keeping precise financial records are all essential. Neglecting these factors might lead to financial and legal issues that have an influence on the rental properties' profitability.
For retirees in the UK and abroad, rental income from properties can be a beneficial source of passive income. Retirees can benefit from increased financial stability and portfolio diversification due to the rising demand for rental accommodation as well as the possibility of property value appreciation. Retirees can make sure that their rental income is truly passive by using professional property management services and doing extensive research. Avoiding typical errors including insufficient research, a lack of liquidity, underestimating the required effort, and ignoring legal and financial factors is vital. Retirees can use rental properties to build a steady and lucrative passive income stream that will support their retirement goals and provide them peace of mind by carefully navigating these concerns. Novyy is working with several family offices from Asia and the Middle East who are increasingly seeking to deploy their capital into yield portfolios and would like to work with a 360-degree asset manager like Novyy.