Guide to Buy to Let Running Costs
It may be difficult to identify all the costs associated with letting a property before purchase, particularly if it has not been let before. Some expenses may have to be estimated and a rent level calculated from limited information.
The exercise is nonetheless essential if you are to quantify the income-generating potential of your proposed investment. Remember that it must make a reasonable profit after all deductions to produce a favourable income. Failing to do this could mean squandering time and effort on an unproductive venture.
Occupied Running Costs
'Occupied' running costs are items you will have to pay with tenants living in the dwelling. These include:
- Mortgage payments.
- Lender's authorisation fee (letting is usually prohibited by mortgage lenders but permission may be given subject to a charge per tenancy term).
- Accountant's fees.
- Bank charges.
- Legal charges if a solicitor deals with the tenancy agreement, otherwise the cost of purchased forms (allow £50 a year).
- Tenant referencing.
- Stamp duty payments (allow £10 per year for two six month tenancies if rent is likely to be in excess of
- £5,000 per term).
- Minor repairs (allow 10% of rent over 12 months as a mean average).
- Council tax if the property is a HiMO.
- Water charges (normally paid by the tenant but some water companies impose the charge on the landlord; check with the water company for your area).
- Replacements and renewals for carpets, furnishings, fittings and equipment (allow 10% of rent over 12 months).
- Building insurance (some policies do not offer cover to let property and block policies offered through service charge payments rarely provide adequate protection to landlords).
- Landlord's contents insurance (some policies do not offer cover to let properties or between tenancies or for those considered to be a high-risk, for example HiMOs and student lets).
- Any management or service charge payable (the owner/ long-lessee is always liable, it is rare for management companies to provide for the sub-tenant to meet such charges).
- Gas-safety inspections which are legally required and must be conducted by a CORGI (Council of Registered Gas Installers) engineer.
- Electrical safety inspections (ideally conducted prior to each tenancy term or otherwise annually). A five-year check of wiring and system installations is considered good practice.
- Other expenses, such as the use of a car to get to and from the property, telephone, postage, stationery, photographs for inventories, copying keys and photocopying manuals and documents.
Unoccupied Running Costs
'Unoccupied' running costs are items you will need to pay when the dwelling is empty. These are likely to include:
- Gas and electricity charges for heating and lighting (heating will be needed in cold weather and lighting will be required for viewings and/or whilst undertaking maintenance). Allow two monthly payments per year.
- Council tax (at a reduced rate for empty properties). Allow two monthly payments per year.
- Interior decorating and exterior painting (a considerable expense if a contractor is hired).
- Cleaning (labour and materials); allow for pre-tenancy and post-tenancy cleaning. Allow for professional carpet cleaning every two years.
- Gardening (when the property is empty). Add an element for the upkeep of any garage, outbuilding, fencing or walls.
- Tenant advertising (or tenant-find agency charges).
- TV licence (if a television set is provided).
