A property investment involves more than just the up-front costs. Find out about buy-to-let running costs and how you can plan for a profitable business.
Overheads are inevitable for any business. Yet, buy-to-let investors often underestimate their running costs. Studies have suggested that one in eight landlords overlook their running costs completely.
Yield figures help to assess buy-to-let profit
Property investors use a simple calculation to determine the ‘gross yield’ of a property. This figure is the annual rent divided by the cost of the property as a percentage.
For example: a rental unit worth £200,000 fetches £800 in rent per calendar month. The average annual rent (£9,600) divided by £200,000 is 0.048. Thus, the gross yield is 4.8%.
Gross yield is useful for making quick comparisons between properties based on their market value and rent. But it does not help determine how profitable an investment is. For this, ‘net yield’ is more appropriate, as it takes into account the running costs detailed below.
What are the running costs of a rental property?
Buy-to-let running costs fall into two categories: occupied and unoccupied costs.
Occupied costs occur when a tenant inhabits the property. Some are obligatory. Others might be optional or advisable extras, or required only in certain circumstances.
Costs that are mandatory for all occupied properties are:
- Energy performance certificates (EPCs). EPCs show how energy-efficient a property is. Landlords must order an EPC before they market their property. At the time of writing, EPCs are valid for ten years.
- Gas safety checks. Gas appliances in a rental property must, by law, be safe to use. A Gas Safe registered engineer must check every appliance, flue and pipe once per year and issue a record of each check.
- Landlord insurance. Tenants are responsible for insuring their own belongings. But landlords are responsible for insuring both the building and the contents that come with it, such as carpets, flooring, curtains, white goods and any furniture provided. If the property is leasehold, the freeholder may already have buildings insurance in place.
- Mortgage repayments. Finance repayments are often a landlord’s biggest expenditure. Many landlords switch their mortgage every few years to ensure that they are getting the best deal. Enquire about your next buy-to-let mortgage.
- Repairs and replacements. Minor repairs are unavoidable, as is the need to replace fixtures and furniture. Landlords should set aside some of their rental income for refurbishment and upkeep.
Other occupied costs include:
- Accountant fees. Many landlords like to use an accountant. They keep accurate financial records, take care of tax affairs and can help with tax planning.
- Bank charges. Standard bank charges include account fees, transaction fees, overdraft interest and charges for stopped cheques.
- Council tax. Council tax is normally a tenant’s responsibility to pay. But under some circumstances, landlords must pay council tax for an occupied property.
- Electrical safety inspections. Periodic inspections are legally required for houses in multiple occupation (HMOs). But all landlords must ensure that the electrical installations in their properties remain in a safe condition. Experts recommend hiring a registered electrician to conduct a check every five years.
- Ground rent and service charges. Ground rent and service charges may apply for a leasehold property.
- Legal fees. Solicitors will charge fees for their services. They will also charge for ‘disbursements’ (costs they incur in the execution of their services). Landlords may need to hire solicitors for conveyancing, drawing up contracts or to pursue a claim for damages or unpaid rent. See our landlord forms section for a selection of free-to-use forms and documents.
- Letting agent fees. Some landlords use letting agents to find tenants or manage their property (or both). Agents usually charge a percentage of rental income for full management, and often charge one-off fees too.
- Rent guarantee insurance (RGI). RGI is not mandatory, but can help landlords recoup losses if their tenant defaults on their rent.
- Other expenses. Small but unavoidable business expenses will always crop up. Key-cutting, postage, telephone calls and travel are just a few examples.
Unoccupied costs occur when the property is not tenanted
Expenses incurred during ‘void’ periods include:
- cleaning the property before and after a tenancy;
- council tax;
- gardening, if applicable;
- referencing prospective new tenants; and
Many buy-to-let running costs are proportional to the size and value of the property. A healthy rental income should thus be adequate to cover day-to-day expenses. But not all costs are planned, and it is always wise to have a contingency fund in place.