The costs of being a landlord
If we had a pound for every time we’ve heard someone say that being a landlord and investing in property is a way to make easy money, we’d be sitting very pretty indeed. The truth is that although returns on a buy-to-let property can easily outstrip anything you’ll find in terms of savings interest, there can be huge gaps between earnings predicted and those actually achieved.
The reason is simple. Predicted returns rarely include all the costs landlords incur and certainly don’t give enough weight to the possibility of problems. That’s not to say you can’t make money in property – you can and you can also build up equity while you’re doing it, but this is a business you need to go into with your eyes open. You need to create a business plan, shop around for good deals, negotiate and plan for contingencies. If you’re trying to operate on a shoestring, you’ll need to be both very smart and very lucky.
Costs can be broken down into three main groups – the unavoidable, the possible and the unpredictable. Let’s look at these in turn.
These include things that are mandatory requirements for landlords. Although you may be able to secure a good deal, you have to purchase an Energy Performance Certificate (and renew it after ten years or if you upgrade the property’s insulation). You’ll need to pay for annual gas-safety checks (and to make safe or replace any gas appliances that fail the tests). You’ll need to install smoke and carbon monoxide alarms. None of these costs are huge, but they start to mount up, and in year one of your operation, when you’ll have lots of other discretionary expenses, you need to ensure these essentials are within your budget.
Then there’s the taxman. He’ll want either 20% or 40% of your income, depending upon the overall level of your earnings. And don’t think you can quietly forget about mentioning your buy-to-let to HMRC. They’re using all the info they can access – including things like Tenancy Deposit Protection schemes – to find those landlords who aren’t paying their due.
Some local authorities require landlords to be licenced and some will charge a fee for that licence.
If you use a letting agent, expect to pay a substantial percentage of your rental income for their services. Obviously, it’s up to you to negotiate a deal that fits your needs, but depending on the level of service and support you choose, you could easily be paying 10 or 15% of rent straight to them. Agents also charge for finding a tenant, for sorting agreements and for renewing them. Make sure you know exactly what you’re getting for your money. If a deal seems too good to be true, it probably is and could end up costing you more in the longer term.
Mortgages for buy-to-lets typically have a higher interest rate than for owner-occupied dwellings so make sure you factor that into your calculations. And be prepared for interest-rate hikes – this long period of stability we’ve had in the mortgage market could well change.
Budget for insurance too. If your property is mortgaged you’ll probably find Buildings Insurance is a condition of the loan, but don’t forget other cover – for fixtures and fittings, for emergency repairs, legal expenses and rent protection.
Then add to your budget the cost of void periods. You won’t be earning if you don’t have a tenant, but you’ll still be covering things like council tax and standing charges on utilities.
What we wouldn’t give for a crystal ball!
There are so many things that could cost you money. Your roof might look sound, but a freak storm could dislodge the slates. The washing machine you’ve installed, new, could become a lemon the day after its warranty expires. The boiler may blow up and the tree in the garden blow down. The tenant that promised they’d never smoke indoors could have left you with nicotine stained décor that costs more than their deposit to repair. And to keep your property profitable, safe and desirable to rent, you’ll have to carry out the repairs.
Of course, you might have a good run of luck, but if you do, salt away some of the surplus for the times when one problem follows another because we all have times like that. A legal issue could arise, your rent disappears and a huge maintenance bill crops up.
Not quite a gold-mine, but still a sound investment
Enough of this doom and gloom. Property still offers plenty of potential for good returns and an appreciating asset value. It’s not quite the easy way to riches that some might think, but with a bit of common sense, sensible budgeting and a plan for the inevitable contingencies, it’s still a sound investment.