Being a landlord can be a beneficial investment to have but many first-time property investors do not realise the full costs of being one. The mortgage payment is the most obvious cost, but it’s not the only one. Knowing the whole financial truth is essential to stay profitable and avoid bad surprises.
With properties, as it is housing for people to live in (notably you or your tenant!) there will always be on-going maintenance required — whether that’s a boiler breaking down, leaky roof tiles needing replacing due to bad weather or things having simply worn out. Landlords are required to provide tenants with a safe living environment. You should also plan to allocate 10-15% of your gross annual rental income towards the maintenance and unexpected repairs. Skimping on this can result in larger, more expensive issues sooner or later.
Safety Certificates and Compliance
Legal compliance isn’t optional. Gas safety certificates every year, electrical installation condition reports (EICR) every five years and energy performance certificates. However, these certificates can run into hundreds of pounds each year and are not optional. For advice from Cheltenham Letting Agents, visit https://www.meandyouestateagents.co.uk/lettings/
Insurance
Homeowners insurance does not protect rental properties. Landlord insurance, which generally costs more than the standard homeowner policy will also include buildings (plus contents if let on a furnished basis), owners liability and loss of rent. You may have to shell out higher premiums.
Letting Agent Fees
If you use an agent, they include fees in between 8-15% of your rental income for full management services. While this is an additional expense, professional management can pay for itself very quickly: having to deal with one less headache alone may justify the cost (especially if you own more than 1 property or live far away from your rentals).
Void Periods
The most well-located new buildings have void periods when they’re empty between tenants. And while this is happening, you are paying the mortgage and other costs without any rental income coming in. Always expect to have one month void per year in your potential net returns.
Taxes
Rental income is taxable and deductions for mortgage interest from rental income have been removed in recent years. Instead, you get a 20% tax credit. This has made profits fall considerably for a higher rate taxpayer. There could also be capital gains tax when selling the property at a later point.
Tenant-Related Costs
You have deposit protection schemes, right to rent checks, tenant referencing and inventory reports. Should there be a tenant who is responsible for damages that have exceeded their deposit – you potentially are paying to recover the losses.
Insurance cover every landlord should budget for
Insurance is one of the running costs that new landlords often underestimate. Landlord buildings insurance covers events such as fire, theft, storm and flood, and a lender will usually require it if the property is mortgaged. Contents cover can be added for items you supply, such as locks, white goods, flooring and furniture, but it does not protect tenants’ own belongings, which they need to insure themselves.
Boiler cover keeps tenants supplied with heating and hot water and means a breakdown can be fixed quickly. Rent guarantee, a form of tenant default insurance, lets you recover unpaid rent if tenants fall into financial difficulty or fail to pay after an eviction notice has been served.
Loss of rent insurance is different. It pays an income while the property is being repaired if it becomes uninhabitable and tenants have to move out. A standard landlord policy will usually cover malicious damage by intruders, but damage deliberately caused by tenants needs a separate malicious damage policy.
Keeping void periods and upkeep costs down
Empty periods are one of the quickest ways for a rental property to lose money, so looking after tenants is part of controlling costs. Tenants appreciate being able to speak directly to their landlord, and losing good ones through neglect can turn a sound investment into a loss. If you use a managing agent, check the level of tenant care they provide, because a void means paying agency fees with no rent coming in. Local agents also bring useful knowledge of the area.
Location affects how often a property sits empty. One-bed flats and studios in cheaper areas often have high tenant turnover. Family homes in good school catchment areas cost more to buy, but they can command higher rents, families tend to look after a property, and they are less likely to move once children are settled. Student lets work best in a town you know well.
Maintenance is the other ongoing cost. Coastal flats, for example, can need frequent repainting and window cleaning, and small problems left alone soon become expensive ones.
Planning for costs before you invest
The best protection against hidden costs is to treat each rental as a business from the start. Estimate the rental income accurately and set it against every outgoing, including mortgage or loan payments, insurance, taxes, maintenance and management fees. A property should give a good return and a positive cash flow. Most landlords also assume they will lose around a month’s rent each year to vacancies, turnover or eviction.
Location drives both demand and long-term value. Check how close a property is to public transport, main roads and schools, research local rents, and think about who your tenants will be. In a university town, for instance, distance from campus matters to students. Do not overestimate what a property will let for, or you risk long empty periods.
Start small. A one-bedroom flat is easier to manage and less risky than a larger property, and avoiding homes that need major repairs stops you overstretching. A property manager can handle complaints and tenant selection, at a cost worth budgeting for.
