Nine costs landlords need to consider

Investing in property directly can be very profitable. And yet with it comes substantial drains on both a landlord’s finances and time.

A recent survey revealed that each year over half of all landlords have at least one month when their property is empty and not earning income, while the average spend on repairs and maintenance is £700.1

The survey also found that 62% of landlords had to spend money on refurbishing a property after a tenancy came to an end, and that the average cost of setting up as a landlord is £2,000.

With these figures in mind, here’s our list of the costs that many landlords and aspiring investors should include when they consider their first – or next – property investment.

1. Safety

The law requires landlords to install and test at least one smoke alarm on every storey of a property, plus a carbon monoxide alarm installed in any room where solid fuel is used, and landlords are ‘encouraged’ to install them in rooms which contain gas appliances. These must all be tested at the beginning of each tenancy. If a landlord fails to comply with these regulations, a fine of up to £5,000 can be levied.

Landlords must also keep gas appliances, the supply pipes and their flues maintained safely. This includes a yearly gas safety check which should be carried out on each appliance and flue by an approved engineer, and a certificate supplied to the tenants within 28 days of its completion.

2. Regulations

Energy Performance Certificates (EPCs) for rented properties have been around since 2007, and after 2012 landlords have had to produce an EPC for a property before it can be marketed. From April 2018, the law states that properties offered for rent must achieve at least a rating of E before a new tenancy can begin. If a property is one of the two lower ratings, the landlord must pay to reduce the energy consumption of the property.

An increasing number of councils across England and Wales are also now requiring landlords and properties to be licensed, particularly in the major cities. For example, Nottingham recently introduced a compulsory licensing system that requires landlords to register each of their properties at a cost of £600 every five years.

3. Mortgage interest

Landlords who bought properties with a mortgage used to be able to deduct the cost of their mortgage interest at their own personal tax rate – so, for example, higher rate taxpayers could deduct 40% of their mortgage finance costs from their personal tax bill. This is being slowly phased out and by 2021 landlords will only be able to deduct the finance at the basic rate of tax. This means many landlords will face higher tax bills.

4. Insurance

Often, a significant amount of money is invested in a buy-to-let property, and it should be in any landlord’s interest to protect this investment should the worst happen. Not only will landlords’ building insurance cover damages caused by fire and flood, but it will also protect the income you receive in monthly rent from your tenants while the repairs are being made. Many landlords choose to take out property owners’ liability insurance to cover injury to a tenant while in the property, or any damage to a tenant’s property caused, for example, by a water leak.
Contents insurance is also worthwhile, especially when renting a fully-furnished property, as landlords are exposed to a higher risk of theft and damage to contents.

5. Repairs and maintenance

Nottingham Building Society research found the average cost of repairs and maintenance for a property to be £700 per year.1 This can be much higher when major items such as white goods, gas boilers, furniture, carpets, door locks or windows need replacing.

6. Costs of finding a tenant

Most traditional letting agents in the UK will usually charge between 60% – 100% of one month’s rent to find a tenant or set of tenants. We found one national chain of letting agents which charges a full month’s rent but with a minimum charge of £700.

7. Legal costs

According to the Residential Landlords Association, 27% of landlords had to remove or evict a tenant last year.4 The court costs of an eviction can total £790 while, although variable from firm to firm, legal fees charged can exceed £2,000.2

8. Arrears

70% of those removals and evictions last year were down to either rent arrears or abuse of the tenancy. One recent study also revealed that nearly 10% of all rented households are in rent arrears.5

9. Time

If you are a one-property landlord, you can expect to spend a couple of hours a month organising repairs and dealing with tenant queries – and maybe chasing late rent payment. If you run a larger property portfolio, you can spend many more hours tending to your properties and tenants.

Some landlords employ the help of lettings agencies to remove this burden on their time, although this will add to your costs and eat into your profits. Some agents will charge a flat fee, and others will charge a percentage of the rent – often between 10% – 15%.

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1 Nottingham Building Society research, November 2016.