Managing Buy-to-Let Costs: A Guide for Property Investors and Buy-to-Let Landlords
It’s no secret that investing in property involves a lot of money. Beyond what’s needed to initially buy and maybe redevelop the property itself, managing a buy-to-let is going to require the ongoing budgetary management of rents and expenses, as well as a rainy-day fund, to cover unexpected events such as tenant void periods or sudden maintenance costs.
Cash flow, as they say, is king, which is why property investors should concentrate, first and foremost, on rental yield, when they are researching where to invest. We all want to see the value of our investments grow in value but no one wants to run out of money and have to sell early as a result.
Here, we’re going to look at all the costs involved in buy-to-let and perhaps, where money can be saved and cash-flow maximised. Before getting into it, I should point out that this article is written with standard buy-to-lets (such as a family or shared house) in mind, rather than say a unit in a new-build tower block. The reason I make this distinction is that with new-build units, tenant management, marketing and basic maintenance, often come as standard, so there is less that can be said about them.
I’m also not going to talk about mortgages or insurance. Of course, the mortgage deal you get is important and will impact your cash flow but any advice I could give on this subject would be vastly inferior to the advice of a good mortgage broker, so I strongly suggest you seek one out before moving forward. Insurance is another issue, where you need it of course but any advice I could give would be beyond the scope of this article.
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by Robert Jones, Founder of Property Investments UK
With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.
Finding the Right House to Buy
Cash flow can be extended and ongoing costs mitigated by finding the right house in the right area. Of course, you will always be limited by your available budget and your circumstances and preferred investment strategy will be centre stage in the final decision. But a high-yielding property in good condition, in an area with high rental demand and strong economic fundamentals, will minimise the risk of void periods, tenant arrears and maintenance costs and ultimately leave more money in your pocket, month by month.
Costs When Buying
While there are obvious costs associated with buying an investment property such as legal fees, surveys and stamp duty which I shall cover below, there are also more hidden costs, such as your time, which also has value.
Really, you want to approach the issue of researching and travelling to locations, meeting with solicitors and agents and negotiating prices in as streamlined and efficient a way as possible. Time is precious. It’s a resource to be conserved and should be well-managed as much as any other part of your business.
Another important thing to consider is any initial void period. Is the house ready to be let out on day one of your ownership? Are there any jobs that need doing? How long is it going to be before you have a tenant?
For any period of time after you possess the property that it is not rented out, you will have costs but no income. Either making sure that you have tenants immediately or knowing exactly how long the house will be empty for, is going to be essential for your cash flow.
Legal Fees
Legal fees are an essential part of the buy-to-let process, covering the conveyancing and legal aspects of purchasing a property. These fees can vary depending on the location of the property and whether it is leasehold or freehold.
Typically, legal fees for a buy-to-let property range from £850 to £1,500, but they can be higher for leasehold properties.
Some solicitors may charge extra for searches related to the property, such as flood risk or nearby coal mines. It's important to get a quote from your solicitor before appointing them to understand the full extent of the legal fees.
Surveys
When purchasing a buy-to-let property, it is common for lenders to require a valuation survey to ensure the property is suitable security for the mortgage. This survey fee can range from £150 to £500, with some sources stating an average cost of £400.
It is important to identify any structural issues, such as subsidence or dampness, as well as other hidden problems. A more comprehensive survey, such as a building or full structural survey, can cost upwards of £600 and is particularly useful for older homes or properties that may need repairs. This extensive survey can provide detailed advice on repairs and potential repair options, as well as the surveyor's opinion on the potential for hidden defects. While there is no legal requirement to have a property surveyed, it is worth considering the potential benefits and drawbacks of different types of surveys to make an informed decision.
Stamp Duty
Stamp Duty is an important consideration when purchasing a buy-to-let property in the UK. Since April 2016, there has been an additional 3% stamp duty surcharge for buy-to-let properties, which has substantially increased the cost.
This means that the majority of buy-to-let purchases now attract a higher rate of stamp duty, with a lower starting threshold of £40,000. This higher rate applies to all buy-to-let transactions unless the purchaser does not already own other residential property.
It's important to note that stamp duty calculations differ in England and Northern Ireland compared to Scotland and Wales, where LBTT and LTT calculations are used, respectively.
Licensing and Accreditation
Licensing requirements for rental property can differ significantly across the UK. In Wales, for instance, all residential landlords are required to register with Rent Smart Wales. In England, there is no such universal landlord licence although an HMO licence is required for all Houses in Multiple Occupation, as defined by the Housing Act 2004.
It’s essential that you look into the licensing requirements in any area you might be thinking of investing in by looking at the information provided by the local authority. You want to not only be thinking about the current licensing framework but also about what a future framework might look like. Councils tend to be quite open about the options they have available.
So it can be complicated but let’s have a look at the most likely things you will come across.
Selective Licensing
The Housing Act 2004, allows local authorities to introduce Selective Licensing, meaning that all residential landlords in a given area must obtain a licence, which is conditional on certain housing standards being met. This means landlords must also submit to inspections.
The stated aim of these schemes is to improve rental conditions, although there are questions about their effectiveness.
While all local authorities have the power to introduce selective licensing, the majority of towns and cities have yet to do so (though it is gaining in popularity). Licences tend to cost around £500 and tend to be for five years.
HMO Licences
All Houses in Multiple Occupation in England and Wales need an HMO licence. Although this is a national requirement, the licences are administered by the local authorities, meaning the exact processes and costs will vary depending on the area.
Even how an HMO is defined can be different from city to city, at least in a manner of speaking. The 2004 Act states that a property requires an HMO license if five people are living there, from two or more distinct households. However, it also states that local councils are allowed to include "other types of HMO", allowing for broader interpretations of the term in what is known as Additional HMO Licensing.
Costs can vary significantly but expect to pay around £1,500 and often the process (and payments) is split into steps.
Article 4 Directions
Article 4 Directions, while not licenses but part of planning law, are worth touching on anyway. They tend to be very locally applied and are used to limit certain types of property development.
For example, a lot of the UK's historic city centres apply Article 4s in conservation areas. What this means is that, if you have a house in such an area, instead of being free to change the outward appearance of your house at will, you are instead required to apply for planning permission, which can be denied.
However, Article 4 Directions are also sometimes used to control the number of HMOs in an area, meaning that in order to change the use of a property from a single-family home to an HMO, requires planning permission, which both costs money and again, can be denied.
Accreditation Schemes
Landlord accreditation schemes can be local or national and they take different forms. They might involve doing a course or simply signing up as a member of a landlord association, where there is an observed code of conduct.
They are always voluntary but the costs are low and they can provide advantages for landlords. For example, a university-led accreditation scheme may be a pre-requisite for a landlord to be recommended by a university, through their website or mailing list. Or being a member of a council-run accreditation scheme might mean a landlord is entitled to a discount on their HMO license.
Fundamentally, being a member of a landlord association or completing an accreditation scheme is something that a landlord can use to signal that they can be trusted; is something they can use to market themselves and their property.
Letting Agents
There's no requirement for a landlord to use a letting agent but self-managing the day-to-day on a rental property can be time-consuming and requires that a landlord live relatively close to their investment property. Once a landlord has a few properties in their portfolio, self-managing them will quickly turn into a full-time job.
Typically, a letting agent will ask between 10-20% of the rental income, depending on the level of service they provide. A base level of service would involve, all correspondence with the tenants, including collection of rent, basic property maintenance and doing legal and administrative tasks.
On top of this, there will often be additional services provided, that come with additional costs. For instance, there might be a tenant finder's fee (often half of the first month's rent) or £100 to take a full inventory. There might be fees for conducting background checks on tenants, an option for garden maintenance (maybe £50 or £100 a month) or an option for end-of-tenancy cleaning.
It is important to have a clear idea about what exactly your letting agent is doing and what it is going to cost you. Having your agent do something that you didn't realise incurs an additional cost is bad but finding that they didn't do something that you thought was included in your package, can be even worse.
Experience is also important. Managing a family home is very different to managing an HMO of young professionals and the relationship that your agent maintains with the tenants will play a critical role in your tenants' level of satisfaction and therefore, your bottom line. You need to be confident in your agent's ability to deal with the issues at hand.
Redevelopment and Furniture
Buying a rental property that needs redeveloping or significant refurbishment can be a very profitable strategy and is something I have done many times over. But it is too big a subject for our article here and doesn't fall under my aim of describing the normal costs involved with buying and managing a buy-to-let.
However, your rental property will need fixtures and fittings and for a good relationship with your tenants, needs to be of a certain standard.
What's needed and the costs that will be involved will depend, as always, on the type of property but there are a few universal truths the first of which is, that it's not your house to live in. A mistake a lot of landlords make is pouring their sense of style and taste into their property. By doing so they not only create a less marketable space (insofar as their quirks might be appealing to some but off-putting to others) but also find themselves getting carried away and over budget.
Don't Sleep on Maintenance
Small problems can become big problems very quickly and your role as a landlord is not only to protect the future of your asset but to keep your tenants happy and feeling positively connected to the space they are living in.
If leaks aren't fixed, if mould is allowed to grow, if structural deficiencies aren't dealt with, if there is broken furniture and if the paintwork isn't refreshed, then not only does your asset slide in marketability and ultimately value but the satisfaction of those living there declines which both increases the risk of tenant void periods and the chance your tenants won't respect the property (either).
Problems will always snowball.
Ideally, you should have the 'right' kind of relationship with your letting agent and they should have the 'right' kind of relationship with the tenants to mean that problems are identified and dealt with quickly.
And yet it all comes down to you, the landlord, to pay for all of this. Monthly fees to an agent provide an insurance policy that things like plumbing work will be reported, fixed and inspected and that general upkeep will be attended to but there will always be choices for landlords concerning what should be dealt with right now and what gets kicked further down the road.
My advice is it's always to deal with problems now, not later. But in order to do that, you need to have planned to do it in your budgeting.
Big Surprises
When you are dealing with houses and dealing with people who live in those houses, things can go very wrong. Of course, you will have insurance that will cover your roof blowing off in a storm and probably cover that will mean you can replace a boiler or something similar but big problems, that mean you can't have tenants for a while, mean a cutting off of rental income that you must be prepared for in your budget.
Catastrophes aren't always structural, they can happen to people too. A perfect tenant who has paid rent with no problems for years can have things happen that mean they stop paying. In these scenarios, not only is eviction a long process, where you're not likely to receive what's owed in lost income but it is emotionally challenging too. Compassion and mediation are key when things like this happen but forward budgetary planning, from knowing that such things happen, should come first.
An Exit Strategy
It's an important thing to ask yourself with any investment, how does this end? Owning a property is a business. You have incoming cash and outgoing expenses and if incoming is less than your outgoing, you go bust.
But it's not only a business, there is also an asset involved and in the UK, with very few exceptions in certain areas, house prices will continue upwards. More than that, you are using this asset to provide people with a home, that has both a legal imperative and a social responsibility attached to it, beyond other asset classes.
In short, you need to know how and when you are going to get out. The questions you need to ask yourself are, who will I sell this to? will my tenants be respected? how long will it take? how long, in scenario X have I got before my expenses overwhelm my income and I'm made broke?
The truth is, in property, you can have a rising value asset and still bankrupt yourself on expenses. Be diligent and make a plan. Ask yourself about different scenarios that can and will happen, and put your books together accordingly.