What is the cost of letting a property?
Becoming a landlord can offer great investment potential. But how much does it really cost to let a property?
Buy-to-let has long been seen as a profitable way to invest, with the opportunity to generate both a monthly income and a capital return.
And, with the Office for National Statistics reporting that there were 4.5 million households in the private rented sector in the UK in 2017, there’s certainly plenty of potential.
However, while rental yields may still be attractive in many parts of the UK, becoming a landlord still comes with many different costs. Keep reading to find out how much it really costs to let a property.
Read: 7 things to consider when investing in a property
Professional fees and costs
There are several different professional fees or costs that landlords can end up paying.
Letting agents
If you want someone to manage the property on your behalf (to deal with tenants and any issues arising from the tenancy) they can typically expect to pay between 7% and 14% of the monthly rent.
On a £600 per month rental income, this is between £42 and £84 each month.
In addition, if you want to use a letting agent to find a new tenant, you can expect to pay anything from a flat fee of £50 to a percentage of the rent
Accountant
Even if you own just one buy-to-let property, this has to be treated as a property business. You are required to declare your income and expenditure on your tax return, and so you may have to hire the services of an accountant to prepare your accounts for you.
If you run your business as a limited company, you may also have to submit accounts to Companies House. Depending on the complexity of the work you can expect to pay anything from around £200 to over £1,000.
Solicitor
If you’re buying property investment, or you have tenant problems and need to go to court, you may have to hire a solicitor to assist you.
Mortgage broker
If you’re using a mortgage to buy your property investment, it can pay to speak to a mortgage broker. They can scour the market for you in order to find the most appropriate product and a lender that will agree on the mortgage you need.
Many mortgage brokers charge a fee for their services, ranging from £250 to 1% of the loan amount.
Mortgage and borrowing costs
If you have taken out a mortgage to buy your property then your mortgage is likely to be one of your biggest expenses.
A £300,000 interest-only mortgage at an interest rate of 3% will cost £750 per month. You may also have associated charges to pay such as valuation and arrangement fees to the lender.
Tax and associated fees
Any surplus earnings from your buy-to-let property are subject to tax at your marginal rate.
You can deduct certain allowable expenses from any rental income you receive. These expenses include property repairs and maintenance, professional fees, and buildings insurance premiums.
New rules for tax relief on mortgage interest payments came into force in April 2017 and these restrict the tax relief you can claim on these interest payments. From April 2020, only basic rate tax relief will be available.
Landlord Insurance
While buildings insurance is not a mandatory requirement for landlords (unless you have a mortgage, in which case your lender may insist on this), it’s recommended that you protect your property against damage or destruction by taking out suitable buildings insurance.
The cost of cover depends on a range of factors including the size, age and construction of the property, and whether you include extras such as legal protection.
Mandatory requirements
There are various legal requirements that you will have to adhere to as a landlord – and some of these come with costs. Examples include:
- An Energy Performance Certificate (EPC) – you must have an EPC to show how energy efficient the property is. An EPC costs between £60 and £120 and is valid for ten years
- Gas and electrical safety checks – a landlord gas safety check is a legal requirement and must be carried out annually by a Gas Safe registered engineer. You may also wish to get a qualified electrician to carry out an electrical safety check
- Smoke and carbon monoxide alarms – all landlords in England have to supply and install both carbon monoxide and smoke alarms
- Landlord’s licence – in some areas of the country the local council requires a landlord to have a licence. Check with your council whether you need a licence in your location or find out more about landlord licensing.
Repairs and maintenance
One of your major expenses as a landlord will be repairs and maintenance to the property. This can range from redecorating between tenancies to repairs to the structure of the property. There may be other maintenance costs: for example, the installation of a new boiler.
Research by Howsy, the online letting agent, suggests that landlords save 1% of a property’s value for maintenance costs, equivalent to an average of £2,344. The costs increase to £4,746 in London, while properties in the North East require a fund of just £1,328.
Even if your tenants look after the property, you will typically have to redecorate and replace carpets every few years.
Letting your property on a furnished basis might allow you to charge higher rent, but your maintenance costs are also likely to be higher.
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Author: Nick Parkhouse
Source: What House
Date: 28th of January 2020
